Reg CF or Regulation Crowdfunding is a securities exemption that allows a company to raise up to $5 million from both Accredited and Non-Accredited investors. To pursue a Reg CF offering, a company must file documents with the Securities and Exchange Commission (SEC). The documents are a notice filing and not qualified by the SEC. The issuer must work with a FINRA-regulated Funding Portal or Broker-Dealer to raise money online. Once a funding round has completed, the company must still provide documents to the SEC – most importantly a Form C-AR or annual report updating on its progress. Unfortunately, many of these firms are NOT submitting these documents and are thus out of compliance. An issuer must file Form C-AR no later than 120 days after the issuer’s fiscal year-end.
According to the SEC, an issuer must provide financial statements certified by the principal executive officer of the company. If, however, the issuer has available financial statements prepared in accordance with generally accepted accounting principles (US GAAP) that have been reviewed or audited by an independent certified public accountant, those financial statements must be provided
and the principal executive officer certification will not be required.
While many of these firms are very small and may struggle to produce the mandated reports, and some insiders believe the requirement is too cumbersome, it is still required by law.
At one point, the SEC chastised several Reg A+ issuers for failing to comply with the exemption. Some industry insiders worry the same may happen to Reg CF issuers that don’t submit the required documentation.
CI connected with Chris Lustrino, the CEO and founder of crowdfunding data firm KingsCrowd. Not too long ago, KingsCrowd acquired LawCloud, a Regtech supporting private securities issuers, which they quickly rebranded the platform to raisepapers. One of the services raisepapers provide is to help Reg CF issuers file their Form C-AR. Lustrino shared with CI that the number of issuers who have not filed the form with the SEC is over 40%, describing this as a widespread issue for our industry as these companies are not compliant.
Lustrino said their service can simplify the process of filing the Form C-AR, sharing that outside of providing key business updates, updating disclosures, and providing self-certified (not CPA reviewed) financials is all they really need.
Lustrino explained:
“If you have not filed a Form C-AR how this may impact the company. You can’t raise under CF or A+ until you do so. You are quite literally out of compliance with SEC rules so it certainly puts you at risk should they decide to fine or come after issuers who dont do this.”
While the SEC is certainly aware of the shortcomings, and probably a good number of Reg CF issuers are no longer in business, they probably have bigger issues to deal with. Delays in filing the Form C-AR are probably not an act of fraud but more about small companies not having the bandwidth or perhaps the money to comply. It could also be that they are not aware of the requirement.
Scaled disclosure to match the size of the firm and simplifying the process of capital formation is a goal of the agency. The Commission could review ways to streamline the process or maybe forward a note to companies that have not yet filed. There is certainly no reason to go hot and assess a monetary penalty or costly lawsuits, as this would probably force any delinquent firm into bankruptcy. Then, everyone loses out.