As we have previously discussed, the Regulation CF disclosure requirement for the financial condition of the issuer has the potential to get inexperienced companies in trouble. It is in this section of the disclosure that optimistic entrepreneurs may provide misleading information by not providing the full details of performance measurements, or by not including information on the assumptions underlying any financial projections. Such statements may be misleading in their own right, or may omit information necessary to make the provided information not misleading – also known as securities fraud (see paragraph (c)).
As we have also previously discussed, financial information presented to investors must be prepared in accordance with generally accepted accounting principles (“GAAP”). This applies even to financial statements that are merely certified by the management of the company.
The SEC recently articulated in a series of Compliance and Disclosure Interpretations just why financial information should be presented according to GAAP. While the SEC’s interpretations are specifically applicable to public companies, the analysis applies equally to companies raising funds under Regulation CF. The short and sweet of it is that financial performance measures that are non-GAAP can be misleading unless steps are taken to ensure the information presented is done consistently and with a full explanation of the measurement.
For instance, the SEC cites the example of presenting a performance measure that excludes normal, recurring, cash operating expenses. Such a measure could be misleading to investors and result in liability to the company (and the intermediary).
Other examples of commonly used non-GAAP practices that could be misleading are when charges or gains are adjusted in one accounting period when that adjustment was not made in other accounting periods, as well as adjustments for non-recurring charges when there were no adjustments for non-recurring gains. These practices, identified by the SEC, are commonplace among early stage companies looking to publicize month-over-month growth figures, or other eye catching figures that are not fully supported by GAAP measurements.
For any company, when it comes time to discuss financial results in your Regulation CF disclosure, is the gain of disclosing non-GAAP measurements without complete disclosure worth the risk of securities fraud liability? Similarly, for any platform, is the risk of allowing these measurements worth it?