When it comes to Regulation A and Regulation CF, the SEC puts a lot of focus on the financial statements being provided to investors. And that makes sense. Financial statements can tell a lot about a company, and the financial position of that company could be one of the primary reasons for investing (even if that means there is no financial history and investors are taking a risk).
Recently, we have seen a lot of would-be issuers get tripped up by the requirement to provide financial statements related to real estate they intend to acquire. Sometimes, they also received bad advice that they can form a new company and only provide audited statements for that new entity. While those new company statements are required, if the real estate has had any previous leasing history, then audited financial statements of the property are required as well.
The SEC does its best to lay out this requirement in the instructions to the Form 1-A for Reg A offerings. Under Part F/S, the SEC specifies that the financial information meeting the requirements of Rule 8-06 of Regulation S-X must be provided for real estate operations acquired or to be acquired. This means audited statements and pro forma historical statements for the property. Full statements from the previous owner are not required, just results directly relating to the property.
What does that mean if the previous owner only used cash basis accounting and kept receipts in a shoebox? It likely means an audit will not be possible. In that instance, we have seen issuers acquire the property either through an affiliate or directly into the issuer, and then hold it for at least nine months before auditing the financial statements for the period it has been in control of the property. For cash strapped issuers, this path may not be possible, but it is the price of going out to the public under Reg A.
Readers may have noticed that I mentioned Reg CF in the first paragraph. This gets a little trickier and requires a specific analysis of the issuer entity. Under Reg CF, financial statements and the corresponding discussion must be provided for the issuer and any predecessor of the issuer. If the issuer is acquiring property that has been in previous operations, and taking over those operations, that could trigger the previous property owning entity being a predecessor under Reg CF. Facts and circumstances will matter here.
Fundamentally, issuers should take a moment to put themselves in the shoes of potential investors. As an investor, would you want to have audited financial information about the previous performance of a property prior to investing in an offering to acquire that property? You will likely come to the place that you would want that information, and it would be important to your investment decision.