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This article delves into the financial reporting requirements associated with Regulation Crowdfunding and Regulation A offerings under the Securities Act. Unless stated otherwise or as the context requires, this article’s references to financial statements mean the balance sheet and statements of comprehensive income, cashflows, and stockholder’s equity, prepared according to U.S. generally accepted accounting principles.

Regulation Crowdfunding

Regulation Crowdfunding (17 CFR § 227.100 – 504), or Reg. CF, is an exemption from the traditional IPO registration process that provides a company with the ability to raise up to $5 million on a rolling 12-month basis from both accredited and non-accredited investors. Reg. CF also allows companies to offer bonus incentives or perks to investors and allows the use of Crowdfunding Vehicles. Additionally, the regulation’s financial reporting requirements (17 CFR § 227.201(t)) will be the least burdensome and most cost-effective for certain categories of businesses, such as recently formed entities and those with smaller capital funding needs. The following table contains the financial statement requirements under Reg. CF:

• If available, the company must file financial statements for the two most recently completed fiscal years instead of financial statements for the two fiscal years before the most recently completed fiscal year.
• If provided, the company’s principal executive officer will need to certify the three values.
• If available, the company must provide any reviewed or audited financial statements to the extent they are available (with a preference for audited financial statements).
• If available, the company must file audited financial statements for the appropriate periods instead of reviewed financial statements.

Reg. CF’s financial statement timing requirements also depend on a company’s date of formation. For example, a company conducting a Reg CF Offering from its inception to 120 days following its initial annual balance sheet date will only need to file a balance sheet from inception till the balance sheet date. Conversely, when a company conducts a Reg CF Offering more than 120 days after a company’s first annual balance sheet date, the date of the most recent annual balance sheet sets a precedent for the period the financial statements must cover. To illustrate, consider a company with a December 31 fiscal year-end that begins a Regulation Crowdfunding offering in May 2023. Depending on its date of formation, this company would provide the following financial statements:

Regulation A

Regulation A (17 CFR § 230.251 – 346), or Reg A, is another exemption from the traditional IPO registration process that provides an avenue to raise significant amounts of capital, especially compared to Reg CF Offerings. As an added benefit, Reg. A also allows for selling shareholders to resell securities held by them alongside the issuing company’s primary offering. However, the heightened offering limits and other benefits bring additional disclosure burdens from a financial reporting standpoint.

Under Reg. A, Tier 1, and Tier 2 contain different financial reporting requirements and maximum offering amount limitations. For example, under Tier 1, a company can raise $20 million on a 12-month basis with unaudited financial statements. Under Tier 2, a company can raise $75 million on a rolling 12-month basis but must include audited financial statements. While there are potential cost-savings to using Tier 1 given the ability to utilize unaudited financial statements, we recommend utilizing Tier 2 since Tier 1 offerings are subject to state review, which often delays the Reg A Offering making the time and cost saving of not having to audit financial statements immaterial.   The financial statement timing requirements under Reg. A are as follows:

Like Reg. CF, Reg. A also allows companies formed within the two years before filing or qualification to use financial statements beginning with inception. Therefore, a company conducting a Tier 1 or Tier 2 offering from inception to three months following its initial annual balance sheet date only needs to file a balance sheet from inception until a date within nine months of the filing. To demonstrate this point, imagine a recently formed company with a June 30 fiscal year-end that conducts a Reg. A offering in July 2023. Depending on the company’s date of formation, it would provide the following financial statements:

Deciding on the right capital-raising method for your business often depends on several factors, including its growth stage, financial condition, fundraising targets, and future business plans. Moreover, as demonstrated, each option carries different financial statement reporting obligations that could influence a company’s fundraising strategy. When your company is ready to access the U.S. capital markets, it is important that you hire outside counsel that specializes in securities offerings under the federal securities laws.

If you are interested in learning more about Regulation Crowdfunding, Regulation A, or other capital funding methods, please contact Patrick G. Costello at Patrick@bevilacquapllc.com or (202) 869-0888 (ext. 130). You can also reach us at our general information email at info@bevilacquapllc.com.