Many entrepreneurs that successfully raised money using the newly enacted Regulation CF (or Reg CF for short) have likely tried to put the tiresome process behind them and are focusing on company operations and executing on their business plans. However, all successful issuers need to be aware of the Form C-AR filing deadline, which is fast approaching.
In addition, companies with currently outstanding offerings may need to file updated financial statements on a Form C/A as well. Many companies do not know about these requirements tucked away in the 600+ page rule release, but the failure to comply would not only be a violation of federal securities law but could prevent the company from being able to raise money in the future.
Pursuant to Rule 203(b) of Regulation Crowdfunding, companies that have conducted successful crowdfunding offerings are required to file a Form C-AR or “annual report” providing certain updated information since the time of their offering. These reports are due within 120 days from the end of the issuer’s fiscal year. Most issuers have a December 31 fiscal year end and thus will need to file their Forms C-AR on or by May 1 of this year (you get an extra day because April 30th falls on a weekend).
For issuers that have conducted successful raises:
Form C-AR is very similar to the Form C disclosure document required in the initial offering, except that it does not include offering specific details and must be updated with the most current information. In addition, although it requires GAAP financials to be attached as exhibits, the financial statements do NOT need to be audited or reviewed by an accounting firm, regardless of how much money the issuer raised. The Form C-AR must be filed with the SEC and posted on the issuer’s website.
For issuers with ongoing raises:
All open deals must have financial statements for the immediately preceding fiscal year dated within 120 days from the end of that fiscal year. Thus, issuers with December 31 fiscal year ends, must provide financial statements for 2016 in their offering exhibits by May 1 of this year. These updated financial statements will be filed as a Form C/A. The updated financial statements must be of the same review level as the ones initially filed. Thus a company raising $250,000 would still need to file “reviewed” financial statements for 2016. The Form C itself does not need to be amended, unless a material event has transpired.
A question arises as to whether the updated financial statements are material and require the reconfirmation of all current investors. While the SEC has said that it is a company specific determination and will not provide guidance, certainly if the financial statements are wildly different from prior statements or what was projected by the company, this would rise to the level of “material” and require reconfirms. If an issuer has an outstanding offering but has reached its minimum amount, it should consider whether continuing the offering and preparing another set of reviewed financial statements and potentially getting reconfirms from all investors is worth it, versus closing their deal early and filing the Form C-AR which does not require reviewed financial statements and will not require investor reconfirmations.
The basic rule of thumb is that:
- Successfully closed deals need to get their Form C-AR filed by May 1, 2017.
- Open deals need to have the immediately prior year’s financial statements attached as exhibits by May 1 (many recently launched deals may already have 2016 financials in which case no action needs to be taken)
It is important to ensure that entrepreneurs engaged in Reg CF crowdfunding do not unintentionally run afoul of the regulations and jeopardize their ability to operate their businesses and raise money in the future.
Georgia P. Quinn is a Senior Contributor for Crowdfund Insider. She is also the CEO and co-founder of iDisclose, an adaptive web-based application that enables entrepreneurs to prepare customized institutional grade private placement documents for a fraction of the time and cost. iDisclose users may file Form C’s and Form C-AR automatically with the SEC. Georgia also serves as of counsel at a leading law firm in crowdfunding, Ellenoff, Grossman & Schole, specializing in facilitating financial transactions and compliance with JOBS Act regulations.