Startups raising money through a funding portal under Regulation Crowdfunding must put financial statements in Form C. What level of assurance applies depends on how much the issuer is raising, and a CPA firm that takes the engagement needs to get the scope right before the offering opens. A report that does not satisfy the rule puts the offering at risk. The requirements are in Rule 201(t), 17 CFR 227.201(t).
The three tiers
Rule 201(t) sets the financial statements by the aggregate target offering amount in the preceding 12-month period, including the offering at issue:
- $124,000 or less. The issuer provides total income, taxable income and total tax from its most recently filed federal tax return, plus financial statements, both certified by the principal executive officer as true and complete in all material respects (and, for the tax data, as accurately reflecting the return). If reviewed or audited statements by an independent public accountant are available, the issuer must provide those instead.
- More than $124,000 but not more than $618,000. Financial statements reviewed by an independent public accountant. If audited statements are available, they must be provided instead.
- More than $618,000. Audited financial statements by an independent public accountant. There is one accommodation: an issuer that has not previously sold securities in reliance on section 4(a)(6) may provide reviewed statements if the target is more than $618,000 but not more than $1,235,000. If audited statements are available, they must be provided instead.
Instruction 1 to paragraph (t) requires the issuer to aggregate amounts sold in reliance on section 4(a)(6) within the prior 12 months with the offering amount, and to use the maximum offering amount if the issuer will accept proceeds above the target. An issuer may voluntarily meet the requirements for a higher tier. The offering ceiling itself is $5,000,000 in a 12-month period under the rule's limits on aggregate amount sold.
What the statements must contain
- U.S. GAAP financial statements with balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders' equity and notes. Unaudited statements must be labeled "unaudited."
- The two most recently completed fiscal years, or the period since inception if shorter. For an offering in the first 120 days of a fiscal year, the statements may be for the two years before the most recently completed year.
- An issuer may delay adopting new or revised accounting standards that apply to non-issuers until the date private companies must comply, but the election must be disclosed and applies to all standards.
Standards for the reports
- Reviews. Instruction 8 requires reviews to follow SSARS issued by the AICPA's Accounting and Review Services Committee. A signed review report must accompany the statements, and the issuer must notify the accountant of the intended use of the report in the offering. The issuer does not comply with the reviewed-statements requirement if the review report includes modifications.
- Audits. Instruction 9 permits audits under AICPA generally accepted auditing standards or PCAOB standards, with a signed audit report. The issuer must notify the accountant of the intended use of the report in the offering, and an audit report with a qualified opinion, an adverse opinion or a disclaimer of opinion does not satisfy the requirement.
- Independence. Instruction 10 requires the accountant to meet the independence standards of either 17 CFR 210.2-01 (Regulation S-X) or the AICPA, and to be a CPA in good standing under the laws of the place of residence or principal office, or in good standing and entitled to practice as a public accountant there. Confirm independence before accepting the engagement, including any bookkeeping or valuation work the firm has done.
Scoping the engagement: a worked example
A first-time crowdfunding issuer plans to raise a target of $650,000 with a maximum of $800,000.
- The maximum offering amount drives the tier: $800,000, because the issuer will accept proceeds above the target.
- $800,000 is above $618,000, which would normally require an audit.
- The issuer has not previously sold securities in reliance on section 4(a)(6), and both the target and the maximum are not more than $1,235,000, so reviewed statements suffice.
If the same issuer later returns for a second Regulation CF offering of $700,000, no accommodation applies and audited statements are required. Tell the client at the outset, because it affects whether to build audit-ready records now. Also see review report modifications, since a modified review report is not acceptable here, and the PBC process the client will need for an audit.
Second example: prior sales count
A startup that sold $300,000 under section 4(a)(6) eight months ago plans a new offering with a target of $200,000 and no oversubscription.
- Aggregate: $300,000 sold within the preceding 12-month period plus $200,000 in the new offering, or $500,000.
- $500,000 is more than $124,000 and not more than $618,000, so the statements must be reviewed by an independent public accountant.
- Had the new target been $350,000, the aggregate would be $650,000. That is above $618,000, and because the issuer has already sold under section 4(a)(6), the first-time accommodation is unavailable, so the statements must be audited.
The issuer for these purposes includes entities controlled by or under common control with it and its predecessors (17 CFR 227.100(c)), so sales by an affiliate count too.
Common errors
- Sizing the tier on the target only, when the issuer will accept more. Instruction 1 uses the maximum.
- Ignoring section 4(a)(6) sales in the prior 12 months, or sales by affiliates and predecessors.
- Delivering a review report with a modification, or an audit report with a qualified, adverse or disclaimed opinion.
- Leaving off the "unaudited" label on statements that are not audited.
- Using the first-time accommodation for an issuer that has sold under section 4(a)(6) before.
- Missing the cash flow or changes in stockholders' equity statement, which the instruction requires along with the balance sheet, comprehensive income statement and notes.
Questions clients ask
Which years of statements are needed?
The two most recently completed fiscal years, or the period since inception if shorter. If the offering is conducted in the first 120 days of the fiscal year, statements for the two years before the most recently completed year may be provided, but the two most recent years must be provided if they are otherwise available. If the 120th day is a weekend or holiday, the next business day counts as the 120th day.
What if the issuer has not yet filed its tax return?
For the lowest tier, Instruction 6 lets the issuer use the prior year's return information, provided it supplies the return for the most recently completed year when filed during the offering period. An issuer on extension does not provide return information until the return is filed, if filed during the offering period.
Engagement checklist
- Offering terms: target, maximum, prior 12-month sales under section 4(a)(6).
- Tier and engagement type documented in the acceptance memo.
- Independence check and fee arrangement.
- Prior-period statements and opening balances. See first-year audits and opening balances.
- Timeline matched to the portal's launch date, and a clean report with no modifications.
Sources
- Legal Information Institute, 17 CFR 227.201, Disclosure requirements (paragraph (t) and instructions): https://www.law.cornell.edu/cfr/text/17/227.201
- Legal Information Institute, 17 CFR 227.100, Crowdfunding exemption and requirements: https://www.law.cornell.edu/cfr/text/17/227.100
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