Regulation Crowdfunding: What You Need to Know about Financial Statement Requirements

Shocking, I know, that I’m writing yet another blog about equity crowdfunding. But what can I say—there just seems to be an endless amount of information to share from the SEC’s 685-page final ruling document to implement the requirements of Title III. This knowledge sharing could continue for a while, so put your learning caps on.

An interesting item to note is the term Regulation Crowdfunding being used in the final rules. I’m assuming this is the SEC’s way of differentiating the opportunities under Title III of the Jumpstart Our Businesses Startups Act (JOBS Act) from the various other equity crowdfunding formats that existed prior to May 16. I like it. It’s been very difficult to talk about equity crowdfunding and specify which exemption you’re discussing without getting into legislation specifics.

Of course, as an auditor of financial statements, I found the most interesting section of the rules to be related to the financial statement filing requirements. A portion of this information has been included in past blogs, but those were not the final rules! A few changes have been made, and a lot more detail is available. I did my very best to break it down into the key information that business owners and their advisors will need to know.

Financial statement requirements

General requirements depending on fundraising goals:

• < $100,000
  • Disclose the following from issuer’s federal income tax return:
    • total income
    • taxable income
    • total tax
    • Note the following:
      • Submission of actual tax returns is not required
      • If the offering occurs prior to the issuer filing the applicable year’s tax return, the prior year tax return information can be used
      • If an issuer hasn’t filed a tax return yet and isn’t required to file a return before the end of the offering period, then the tax information is not required
  • In addition to the income tax return information, financial statements certified by the issuer’s principal executive officer are also required
  • UNLESS reviewed or audited financials are already prepared and available—then this information will replace the financial statements certified by the issuer’s principal executive officer
• $100,000 to $500,000
  • Disclose reviewed financial statements
  • UNLESS audited financials are already prepared and available—then this information will replace the reviewed financial statements
• > $500,000 to $1 million offered for the first time
  • Disclose reviewed financial statements
  • UNLESS audited financials are already prepared and available—then this information will replace the reviewed financial statements
• > $500,000 AND the issuer has previously sold securities through Regulation Crowdfunding
  • Disclose audited financial statements

Content required in financials:

• Balance sheets
• Statements of comprehensive income
• Statements of changes in stockholders’ equity
• Statements of cash flows
• Notes to the financial statements
• Any financials not audited must be labeled as unaudited
• Description of issuer’s financial condition and any material changes or trends known to management in financial condition and results of operations since the period end of the financials provided

Basis of accounting:

• US Generally Accepted Accounting Principles (GAAP)
• Issuers are allowed to delay implementation of new accounting standards as permitted by non-public business entities, but:
  • Must disclose choice
  • Must apply choice to all standards
  • Choice may not be elected after initial filing—it has to be elected from inception
• Issuers will be considered public business entities as defined by the Financial Accounting Standards Board (FASB) and ineligible to rely on any alternative accounting or reporting standards for non-public business entities

Periods covered:

• Two most recently completed fiscal years OR
• Period since issuer’s inception (whichever period is shorter)

Timing of issuance:

• In the first 120 days of an issuer’s fiscal year, offerings can use financials for the fiscal year prior to the most recently completed fiscal year if the financials for the most recently completed fiscal year are not available
• For example, a calendar year-end issuer conducting an offering in April 2016 can include comparative financial statements for December 31, 2014 and 2013
• Or as another example, a calendar year-end issuer conducting an offering in May 2016 would be required to disclose comparative financial statements for December 31, 2015 and 2014

Public accountants (such as Marcum):

• Must comply with Commission’s independence rules OR
• Independence standards of the American Institute of CPAs (AICPA)
• Must also meet standards of Rule 2-01(a) of Regulation S-X
• Not required to be a Public Company Accounting Oversight Board (PCAOB)-registered firm

Review and audit standards:

• Reviewed statements—must be in accordance with Statement on Standards for Accounting and Review Services (SSARS) issued by AICPA
• Audited statements—must be in accordance with US Generally Accepted Auditing Standards (GAAS) issued by AICPA OR standards of PCAOB
• If an audit is conducted in accordance with the standards of PCAOB, it is also required that the audit comply with US GAAS

Reports:

• Audit—only an unqualified opinion will qualify
• Review—only a report without any modifications will qualify
• However, explanatory language in either report in relation to the issuer’s ability to continue as a going concern is not, under current standards, a qualified opinion or a modified report and would still qualify for the filing requirements

It’s a lot…I know! And this is my abbreviated version of the content available on the SEC’s website. But that’s why Marcum is here to help. If you’re considering raising money through Regulation Crowdfunding under Title III of the JOBS Act, please reach out to us about your financial statement filing requirements. We would be happy to work with you on this compliance requirement, as well as help you build and grow your business. I look forward to talking with you.

Do you have questions about Regulation Crowdfunding under Title III of the JOBS Act or other financial issues? Contact Marilea Campomizzi, CPA, at 440-459-5700 or email m[email protected].