After discussing the activity of the Regulation Crowdfunding (Reg CF) market, the Securities and Exchange Commission (SEC), Small Business Capital Formation Advisory Committee (SBCFAC), has decided to recommend raising the threshold for reviewed financials from $124,000 to $350,000.
Currently, reviewed financials cost around $5000 to $10,000. In a Reg CF securities offering, this can represent a significant portion of the funds raised, depending on the target amount. Add other costs to pursuing an online funding round, and a greater portion of funds will go to activities that deviate from executing a business plan. In the end, the investors will pay for the cost of the offering.
Additionally, very young firms tend to have little data about operations. In some cases, the exercise may be superfluous.
While the final recommendation should be forthcoming in the coming weeks, the Committee took a vote, and minus one individual who abstained from supporting the recommendation, a consensus was reached that the threshold should be increased to $350,000. The final language may incorporate a desire to have the threshold reviewed every two years. Once finalized, the recommendation will be submitted to the Commission.
The cost of completing a financial review has been a sticking point for issuers and platforms regarding when financial information like a review is required and if the benefit outweighs the cost. Note that the exemption still requires that an issuer file a Form C-AR [annual report] once a year, which should include financial performance.
Jennifer Zepralka, a partner at the law firm of Mayer Brown, commented on the Committee’s opinion the threshold should be changed:
“The Committee’s recommendation with respect to the target offering amount that triggers the requirement for reviewed financial statements, if adopted, could definitely reduce some of the barriers to accessing capital for the smallest issuers. Because the Commission previously increased the threshold for reviewed financial statements on a temporary basis, it has data available to it about how that temporary relief impacted the use of the exemption and the characteristics of the issuers that took advantage of it, including their outcomes and compliance with the rules. That gives the Commission a great starting point to consider the benefits and investor protection implications of making such a change.”
While the SBCFAC was created to advise the SEC on supporting smaller firms, the Commission rarely acts on its recommendations, usually pursuing its political goals over common sense support of smaller firms.
