Reg CF continues to grow in popularity as a securities exemption utilized by smaller firms to raise much-needed growth capital. Reg CF is the smallest of the three different crowdfunding exemptions but has perhaps garnered the most popular interest due.
An issuer must utilize either a FINRA regulated Funding Portal or a Broker-Dealer to sell securities under Reg CF. But along with certain disclosure requirements is the need to file an annual report to remain compliant under the law.
Lawcloud, a Legaltech firm that facilitates Reg CF offerings, has distributed an email reminding issuers to file these reports and not be lax in doing so. To quote Lawcloud:
“The crowdfunding industry at large has developed a negligent attitude toward complying with this critical SEC requirement with widespread violations in meeting the simple requirements to file. Issuers may fail to file annual reports with sufficient updates about their company, supply investors with poor quality financial reports or, as is most often the case, simply choose not to file an annual report at all under the assumption that there are no negative repercussions for violating securities law.
This is discouraging as the SEC requirements are not difficult to comply with when compared to requirements for publicly traded companies. The SEC’s decision to lighten crowdfunding annual reporting requirements was specifically made in an effort to ease the burden on the less-sophisticated businesses expected to utilize crowdfunding for raising capital.”
Lawcloud believes that issuers view these reports as a nuisance rather than an opportunity to communicate with their investors. The company points to a letter posted by several state Attorneys General that slammed Reg CF and an apparent lack of compliance for many issuers using the exemption.
The AGs stated:
“The pattern of noncompliance with Reg CF’s disclosure requirements may provide an environment in which fraud and manipulation flourish. Coupled with data that the SEC has engaged in very limited enforcement activity against Reg CF issuers or the portals who host them, this evidence raises concerns about whether investors are actually receiving the protections Reg CF currently mandates. The SEC should engage in meaningful enforcement of the disclosure requirements to incentivize issuers to provide this critical information to investors.”
Not all policymakers are supportive of Reg CF, or investment crowdfunding in general. Lawcloud, along with other industry participants, are concerned that skipping mandated filings may give detractors an opportunity to harm the emerging online capital formation ecosystem that helps smaller firms.
The four AGs say there have been “red flags” regarding issuers while apparently ignoring any positive that has been generated by the exemption. These individuals have called for the SEC to “proactively enforce Reg CF’s disclosure requirements.”
Lawcloud encouraged platforms, as well as issuers to adhere to the requirements of the rule as the “growing size of the equity crowdfunding market, will likely result in more scrutiny across the board for issuers, platforms, and the individuals involved as it relates to disclosure and compliance issues.”