One seemingly critical difference between conducting a Regulation A offering under Tier 1 or Tier 2 at the federal level is the requirement to provide audited financial statements. The SEC does not require audited financial statements for Tier 1 offering, whereas audited financial statements are required for Tier 2. However, this difference is merely a red herring. Nearly every Tier 1 offering will require audited financial statements, because it is likely that at least one state in which the issuer intends to offer its securities requires audited financial statements.
In our review of the statutory and administrative rulings of state securities regulators, 27 states have on their books a requirement that an issuer obtain an audit for any offering that would rely on Regulation A of the Securities Act. This figure may be even be under-representative. A state that imposes the Merit Review standard may not have a statutory audit requirement, but may still require an audit in order to determine whether to qualify the offering.
One possible reason an issuer would want to avoid the audit requirements under Tier 2 of Regulation A and deal with the state audit requirements under Tier 1 is the potential expense of meeting the auditing standards requirement. Again, this is a less of a concern than many issuers realize. Since the Regulation Crowdfunding rules were first proposed in late 2013, a number of CPA firms have stood up to provide audit services to small issuers. With the amendments to Regulation A, those firms are also offering audit services that meet the standards for Tier 2 of Regulation A and are charging reasonable rates – far below the 1.65% of offering proceeds included in the SEC’s Economic Analysis estimate.
Nevertheless, the ultimate decision of whether to pursue an offering under Tier 1 or Tier 2 will be made by issuers on a case by case basis. There are many considerations to take into account when making the decision. The audit requirement should not really be one of them.