If a company raises capital under Reg CF, it must file a form with the Securities and Exchange Commission (SEC) along with additional documents to use the exemption. If the company successfully raises money, the requirement to provide information to the SEC (and investors) does not end there – if they are still in business. You need to file an annual report.
According to an email from Crowdfund Capital Advisors (CCA), there have been 2,232 issuer that have raised up to $5 million under Reg CF as of December 31, 2021; 54% have NOT filed at least one annual report (FORM C-AR) nor a notice to terminate reporting. So effectively, these companies are out of compliance with the federal rules.
As far as we know, the SEC is aware of these delinquent reports but has done little to pursue these missing documents – probably because they have bigger fish to fry and the sums raised under Reg CF are relatively small. At the same time, a failure to file could potentially impact future funding rounds as a firm would want to be completely in compliance if they pursued another Reg CF, Reg A+, or Reg D offering.
CCA states:
“Noncompliance is not only a business risk but a detriment to the industry. Ongoing disclosures strengthen investor protection. Annual reports are not only mandated by the law but keep investors informed on the well-being of their investment. Without them, investors are in the dark, which isn’t just unfair but unjust.
In addition, since these securities are freely tradable after one year, if the industry wishes for a secondary market to develop, ongoing disclosures are necessary since they are expected to facilitate better-informed investment decisions and enhance the informational efficiency of prices of crowdfunding securities.”
So if you raised money in an online round using the Reg CF exemption and you are still in business, you best hurry up and file your documents. You never know when the Feds will move to encourage you to follow the rules.