Issuers Are Not Filing Annual Reports
One of the biggest issues discussed was the ongoing reporting requirements for issuers relying on a Reg CF exemption. Specifically, Reg CF issuers are required to file an annual report within 120 days of the last day of their calendar year, which for almost all companies is December 31. 120 days after December 31, 2016 was April 30, 2017 which means every Reg CF issuer who had sold securities last year was supposed to file their annual report with the SEC by now. Ms. Hanks estimated that out of the over 100 issuers that had sold securities, less than 40 have filed their annual reports. That means that unless those issuers were granted an extension by the SEC, the vast majority of Reg CF issuers could have violated Federal Securities laws and lost their exemption under Reg CF.
Investors Could Have Right to a Permanent Put
According to Ms. Hanks, by failing to provide the required annual report, an issuer could be in violation of Section 5 of the Securities Act because the issuer would no longer be able to rely on the Reg CF exemption and thus be selling unregistered securities. A violation of Section 5 of the Securities Act gives a plaintiff, in this case, any person who bought securities from the issuer, the right to rescind the purchase. That means that investors would essentially have the right to sell their securities back to the issuer for the amount they paid (plus interest) or what Ms. Hanks called it: a “permanent put”. This has the potential to be a considerable liability for issuers selling securities under Reg CF as it could greatly impair their available capital and their ability to raise subsequent capital, among other negative consequences.
This could have huge implications for the viability of Reg CF going forward. A lot has already been made about the exemptions shortfalls and lack of attracting quality issuers. If we continue to see issuers failing to meet the requirements of Reg CF, fewer and fewer issuers might consider the exemption for their capital raising needs.
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