CrowdCheck’s Analysis of the New Exempt Offerings Rules: Reg CF Financial Statements

Big news out of the SEC yesterday with the adoption of its amended rules covering various types of offerings exempt from registration under the Securities Act.[1] These rule changes impact the way in which issuers will be able to use Reg CF, Reg A, Reg D, and their ability to communicate about funding requirements without having to rely on an exemption at all until they are ready to raise funds. There is a lot to unpack in these rules, and we will put down our thoughts in a series of blog posts.

This first blog post covers a change that is a bit of a no change. Since the start of the COVID-19 pandemic, the SEC has recognized the increased funding needs of small businesses. As the medical community has come to further understand the impact of the virus, it has been made clear that the virus will be with us for an extended period of time. As such, the SEC used the opportunity to extend its temporary relief to the financial statement requirements under Reg CF until August 28, 2022.

This rule change continues the current relief for offerings up to $250,000. Rather than requiring financial statements that have been reviewed by an independent accountant, companies are only required to provide financial statements certified by management of the company, along with certification of certain tax information about the company.

Issuers should still be certain they provide financial statements in accordance with US generally accepted accounting principles (“GAAP”). GAAP helps standardize the presentation of financial statements for investors to be able to directly compare the performance of the issuer to other companies. Typically, this means that issuers are not able to simply print out their QuickBooks numbers. Instead, they will need to compile their statements into GAAP format.

Issuers should be certain they are doing everything needed to make their statements compliant with GAAP. This includes preparation of notes to the financial statements. Notes that are particularly important when making offerings of securities are those relating to past issuance of securities, related party transactions, and subsequent events. Omitting important information in the notes could create legal uncertainty for an issuer regarding whether it complied with Reg CF, or if investors may have claims for misrepresentation.

The SEC intends for this relief to only be available for smaller offerings. If an issuer is seeking to raise an amount above $250,000, no relief is available and the financial statements of the issuer will either need to be reviewed by an independent accountant, or audited, as required under Reg CF.

Preparing disclosures for investors may be a completely new activity for many companies, and CrowdCheck is here to help with different due diligence and disclosure solutions available.

[1] Note, the rules do not become effective until 60 days after publication in the Federal Register, which typically takes around a week after approval by the SEC.

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