Look, I’m the CEO of an equity crowdfunding company, so believe me when I say that I want Regulation Crowdfunding [Reg CF] to work. But I’m deeply concerned that an apparent recent trend of non-compliance with SEC filing requirements could erode investor trust and pose a grave risk to CEOs using crowdfunding, as well as to their companies.
What’s Going On
Regulation Crowdfunding was established under the JOBS Act of 2012 with rules created by the Securities and Exchange Commission (SEC) to allow companies to raise up to $5 million annually from the public at large. The idea is to democratize access to capital beyond historic gatekeepers like VCs. But with that come important reporting obligations to ensure transparency and investor protection. One such obligation is the filing of Form C-AR – an annual report that must be submitted to the SEC and shared with investors. Among the crucial updates contained in the report are the company’s financial condition, business operations, and use of the crowdfunded capital.
Now, I want to underscore this point: Form C-AR is a required report, yet in the last two years, vanishingly few companies have filed it…
- Based on my team’s calculations, an estimated 1,548 Form Cs were filed in 2022, signifying the start of new Reg CF offerings.
- From that group, we further estimate that 810 companies that filed Form C-U – this typically indicates a successfully completed Reg CF funding round.
- So, how many mandatory Form C-AR’s were filed the following year? We estimate that of the approximate 1,548 Form C filings, only 361 filed Form C-AR’s; and of the 810 successful rounds, as few as 253 completed the filing on time.
That’s a 23% and 31% completion rate, respectively – and in my view, often even these are not done compliantly. This should be alarming to everyone in our industry.
When companies fail to file the Form C-AR, the SEC may deem any shares they issue to be unregistered securities. This can lead to serious legal and financial repercussions, including personal liability for CEOs and other company executives who are responsible for ensuring adherence to securities law. Moreover, we founders who rely on crowdfunding to capitalize our businesses owe it to investors to provide those annual updates – or risk losing investor trust.
What Can Be Done
To resolve this problem facing our industry, we need first to understand its causes.
For one, many small businesses lack the resources to navigate complex regulatory landscapes. So, the administrative burden of preparing the detailed financial and operational disclosures in the Form C-AR can be daunting for startups. There may also simply be a lack of understanding around the importance of the Form C-AR and its necessity for compliance.
In light of the problem’s twofold nature, I think the industry needs to tackle it with a two-pronged approach: Platforms facilitating Reg CF offerings and the SEC should play a more active role in educating founders about their reporting obligations. In fact, I see a substantial opportunity here for Reg CF platforms themselves to facilitate Form C-AR filings as a service to founders to increase compliance.
My partner Ron and I founded our crowdfunding platform in 2015 because we believed investment crowdfunding constituted a paradigm shift in the way founders could access capital and grow their businesses. I still believe that’s the case today and that, by taking smart steps to improve compliance and investor trust, the industry can make that vision a reality.
Howard Marks is the former co-founder of Activision Studios and is currently the founder & CEO of StartEngine, one of the largest equity crowdfunding platforms in the US. StartEngine was launched in 2015 with the mission to help entrepreneurs achieve their dreams while enabling everyday people to access private investment opportunities. Combined with its recent acquisition SeedInvest ($470M in historical funding), today StartEngine has a joint community of 1.8 million that has collectively committed over $1.2 billion in startups.¹ Beginning in 2020, Shark Tank’s Kevin O’Leary also joined StartEngine as a strategic advisor and spokesperson.²
StartEngine Crowdfunding, Inc. is not a broker-dealer, funding portal, or investment adviser. StartEngine Capital, LLC is a funding portal registered with the U.S. Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA). StartEngine Primary, LLC is a broker-dealer registered with the SEC and FINRA/SIPC. StartEngine Secondary is an alternative trading system regulated by the SEC and operated by StartEngine Primary. To raise funds, invest or trade on the StartEngine platform, visit www.startengine.com.
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Includes $760M in funds raised as of May 9, 2023, via Reg. CF and Reg. A+ combined through StartEngine’s funding portal and broker-dealer, StartEngine Capital, LLC and StartEngine Primary, LLC, respectively, as well as StartEngine’s own raises. Also includes $470M in funds raised previously through offerings conducted on www.seedinvest.com outside of the StartEngine platform. In May 2023, StartEngine acquired assets of SeedInvest, including email lists for SeedInvest’s users, investors and founders seeking to raise funds.
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Kevin O’Leary is a paid spokesperson for StartEngine. View details here: https://www.startengine.com/17b.