We are doing a new series on Investor Alerts, focusing on what investors should pay particular attention to when investing in early stage companies. Today’s issue is whether a company is in Good Standing. The SEC has highlighted this issue as one of the red flags that the offering might be scam.
Every company must file and pay annual taxes in order to maintain its good standing in the state in which it was incorporated. If a company is not listed as active or in good standing, it could have wide-ranging implications, including not being able to enforce its contracts, and not being able to issue shares.
We analyzed companies that had launched a Reg CF offering between September and December of last year, which still had offerings open today. Of those companies, 14.2% were not in good standing. This potentially means that for every 10 companies you view on a Reg CF platform, one might not be in good standing.
You can check whether or not a company is in good standing by looking up the company’s name in the state’s publicly accessible online database of companies. You should be wary of the company if it’s not listed as active or in good standing.