As the end of the year approaches, triskaidekaphobia (fear of the number 13) is starting to be felt at many venture firms. It is my hope that the following primer on Schedule 13Ds and 13Gs and Form 13Fs will help fund managers and chief financial officers get over this fear.
Schedules 13D and 13G are public filings to report beneficial ownership of publicly traded companies. Forms 13F are quarterly reports of investment discretion over publicly traded securities. Occasionally the recognition that a fund family should be filing, or should have filed, Forms 13F is discovered at the end of the year when the beneficial ownership compliance review takes place, and amendments to Schedule 13G are being prepared.
Forms 13F are not a regular form for many smaller fund families or for funds that are prompt in distributing their publicly traded securities, but every so often a required Form 13F filing can sneak up on a fund as a result of a delayed distribution of securities or a portfolio company going public and the shares being held in the fund because of IPO lock-up restrictions. Below for fund managers and their staff is a primer on Section 13 filings.
Schedule 13D
The general rule, subject to some exceptions noted below, is that if a fund and its affiliates have acquired more than 5% of a registered class of securities of a public company, then the fund and affiliates must file a Schedule 13D to disclose their beneficial ownership. Beneficial ownership means either the power to vote the shares or the power to sell or direct the sale of the shares. Therefore, it is possible for more than one person or entity to have beneficial ownership of the same shares, and this expands the number of possible Schedule 13D filers.
To complicate matters, those who have options, warrants or other convertible securities must include in the shares they beneficially own any shares they could acquire within the next 60 days from their filing date. Accordingly, when determining beneficial ownership, filers must consider any preferred stock or director options that are held by the fund or its general partners who serve as directors of public companies.
The Schedule 13D must be filed within 10 days of becoming a greater than 5% beneficial owner of any class of a company’s registered stock, and must be amended promptly when a material change in the information occurs. Any change of more than 1% of the total class of securities held is deemed material unless it results from merely a change in the total number of outstanding shares of that class.
A common misperception is that Schedules 13D need only be amended annually. There is one category of filings—many but not all Schedules 13G—that need only be amended once per year.
A common misperception is that Schedules 13D need only be amended annually.”
Schedule 13G
A Schedule 13G is a less burdensome filing than a Schedule 13D, and it is worthwhile investigating whether the fund family can file Schedules 13G rather than Schedules 13D. Less information is required, and the amendment requirements are less burdensome.
A 13G is an option for a fund that holds less than 20% of a class of public company stock, and the beneficial owner has no intention of influencing control of the company. Having a fund general partner on the board of the company, or seeking to place a general partner on the board, is considered directly influencing control. Thus, maintaining or seeking such directorship usually disqualifies the fund from using a Schedule 13G. However, merely holding less than 20% of the outstanding class of securities would comport with this filing status.
Certain special categories of holders are eligible to file Schedules 13G without regard to the percentage of the class they hold. Those special holders are usually considered passive institutional holders, such as banks, savings and loan institutions, certain registered investment companies and certain qualified retirement plan custodians.
Probably the most applicable Scheduled 13G filing category for venture funds and private equity funds is what is commonly referred to as the “Exempt Filer” category. A fund is in this category if the fund is an owner of greater than 5% of the voting securities of a public company, which securities the fund acquired prior to the company going public. For example, if a fund invested in rounds of private placements of preferred stock, subsequently the company went public, and the preferred stock converted to common stock in the IPO, then the fund did not technically “acquire” any registered stock—it merely continued to own the unregistered stock it purchased privately. The class of common stock was subsequently registered in connection with the IPO.
Under the original 13D rules, these types of holders did not have a filing obligation at all, but in 1978 Congress amended the Securities Exchange Act to close this perceived loophole. Currently, if a fund that purchased its securities before the company’s IPO, and the fund purchased no further shares in the public markets, even if the fund owns more than 20% of the outstanding voting shares, and even if the fund has a general partner on the board of the company, the fund need only file a Schedule 13G.
This special status of “Exempt Filer”—a term used by practitioners that is not used in the statute or the rules of the SEC—can be lost if the fund acquires more than 2% of the outstanding voting securities of the company in any 12 month period. This usually includes options that can be exercised within 60 days by any of the fund general partners. Schedules 13G filed by Exempt Filers usually only have to be amended within 45 days after the end of the calendar year in which there was a change in the information reported. There are certain exemptions to this general rule, but as can be seen, the Schedule 13G can be significantly less burdensome to file than the Schedule 13D.
Form 13F
Probably the most applicable Scheduled 13G filing category for venture funds and private equity funds is what is commonly referred to as the ‘Exempt Filer’ category.”
Form 13F differs from Schedules 13D and 13G in that Form 13F is not about reporting beneficial ownership at all. It is about reporting the power to exercise investment discretion over $100 million or more of what are called “Section 13(f) securities,” which generally are exchange-traded stocks, equity options, warrants and certain convertible debt securities. Mutual fund and ETF shares are not Section 13(f) securities.
Thus, if a fund or its managers have investment discretion over more than $100 million of such Section 13(f) securities (not including the shares owned individually by the fund manager for his or her own accounts), then the fund or its partners may have a requirement to file Forms 13F on a quarterly basis for so long as those conditions are met.
Only institutional investment managers having investment discretion of more than $100 million of Section 13(f) securities must file a Form 13F. An institutional investment manager is defined broadly to include those entities that buy and sell securities for their own account (for example, banks, insurance companies and broker-dealers), and any person or entity that exercises investment discretion over the account of another.
Thus, fund general partners having investment discretion over the securities in their limited partnerships that hold publicly traded securities could confer institutional investment manager status on the fund managers. Investment discretion is merely the power to determine which securities are bought and sold for the accounts under management.
Most venture funds would only inadvertently stumble into institutional investment manager status if they failed to promptly distribute publicly traded securities. Therefore, for a venture fund to hold that level of publicly traded securities would be unusual. In order to aggregate to more than $100 million of non-distributed publicly traded securities, there would have to be an extraordinary period of liquidity for at least a few investments in the fund’s portfolios. Fund families with multiple series of active funds are the most likely candidates to reach a $100 million level of undistributed publicly traded securities.
Forms 13F require disclosure of basic information about the issuer of the securities, a description of the class of securities held by the institutional investment manager and the fair market value of the securities listed as of the end of the calendar quarter. The filing is due within 45 days at the end of the calendar quarter in which the $100 million filing threshold was met.
Thomas C. Klein is a Partner with the law firm Wilson Sonsini Goodrich & Rosati. He may be reached at tklein@wsgr.com
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