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The SEC Crowdfunding Proposed Regulations: Overview of Issuer Financial & Disclosure Requirements

In a crowdfunding offering, the financial information the issuer (the company that is raising capital) is required to disclose will be determined in part by specific requirements built into the JOBS Act, and in part by SEC regulation.  The proposed crowdfunding regulations include the following financial disclosure requirements: 

  • A description of issuer's financial condition similar to the management's discussion and analysis of financial condition and results of operations (also known as "MD&A") required for registered offerings.
  • Financial statements, which vary, depending on the size of the offering, generally as follows:
    • Offerings of $100,000 or less (including the amount sold in all other crowdfunding offerings in the preceding 12 months): income tax return filed for the most recently completed year (if any), with all personally identifiable information (such as social security numbers) redacted; and compiled financial statements certified by the principal executive officer to be true and complete in all material respects.
    • Offerings of more than $100,000 but not more than $500,000 (including the amount sold in all other crowdfunding offerings in the preceding 12 months): financial statements reviewed by an independent public accountant, using the Statements on Standards and Review Services issued by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants.
    • Offerings of more than $500,000 (including the amount sold in all other crowdfunding offerings in the preceding 12 months): financial statements audited by an independent public accountant, using auditing standards issued by either the American Institute of Certified Public Accountants or the Public Company Accounting Oversight Board.

In each case, financial statements should include a balance sheet, income statement, statement of cash flows, statement of changes in owner's equity, and notes to the financial statements, all of which must be prepared in accordance with U.S. generally accepted accounting principles (also known as "U.S. GAAP"). The financial statements must cover the shorter of the two most recently completed fiscal years or the period since inception.

The proposed financial reporting requirements are favorable to issuers, in that they permit issuers to work with smaller CPAs who are not licensed to perform audits for publicly traded companies. The financial statements may be prepared using general public accounting standards, rather than the more rigorous standards that apply to publicly traded companies. This should help keep audit and review costs down.

  • The proposed financial reporting requirements are unfavorable to issuers, in that:
    • They require issuers who are recently formed to provide financial statements per the foregoing requirements. We question the value of requiring an issuer to incur this cost when the issuer has not yet engaged in any business activity.
    • The SEC is not providing any relief from the statutory thresholds for requiring reviewed and audited financial statements. We continue to be of the opinion that the benefits of requiring audited financial statements for such small offerings is not worth the cost. Offering proceeds used to pay for the audit would usually be of greater value to investors if used to further the issuer's business activities.

Please contact Iris Linder (517-371-8127 or ilinder@fosterswift.com) for more information.

Categories: Crowdfunding, Venture Capital/Funding


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