If you're a business owner considering raising capital through crowdfunding, you might be wondering about the differences between the various crowdfunding exemptions — specifically Regulation Crowdfunding (Reg CF), Regulation A (Reg A), and Regulation D (Reg D). Each of these exemptions has unique requirements when it comes to financial disclosures, and understanding these rules is crucial for any company looking to raise funds from general public.
Here, we’ll break down the financial statement requirements for each of these three crowdfunding methods, helping you navigate the complexities of raising capital while remaining compliant with SEC regulations.
1. Regulation Crowdfunding (Reg-CF)
Regulation Crowdfunding allows companies to raise capital from the public through online platforms, but it comes with specific financial reporting requirements. Reg CF is aimed at smaller businesses and startups, and the SEC has put in place guidelines to protect investors while also accommodating the limited resources of these companies.
Financial Statement Requirements for a Company doing their first Reg CF are:
Raising Less Than $107,000: If a company raises less than $124,000 in a 12-month period through a Reg CF offering, it only needs to provide tax returns for the most recent fiscal year, along with financial statements that have been certified by the company’s CEO or CFO. These statements do not need to be audited or attested by a third party.
Raising Between $124,000 and $1,235,000: Companies raising between $124,000 and $1,235,000 must provide financial statements that are reviewed by a public accountant who is independent of the company. A review is less rigorous than an audit but still requires a certified accountant to verify that the company’s financials follow generally accepted accounting principles (GAAP).
Raising More Than $1,235,000: If a company is seeking to raise more than $1,235,000, it must provide audited financial statements. These financials must be prepared in accordance with GAAP and reviewed by an independent auditor. This is one of the more stringent requirements of Reg CF and often presents a challenge for smaller companies with limited budgets for professional audits.
In addition to the financial statements, companies must also file a Form C with the SEC, which includes information about the business, its officers and directors, and the use of proceeds from the offering.
2. Regulation A (Reg A)
Regulation A is often seen as a “mini-IPO,” allowing companies to raise funds in two tiers — Tier 1 (for up to $20 million) and Tier 2 (for up to $75 million) — and is available to both private and public companies. The key difference between Reg A and Reg CF is the larger fundraising limits and the fact that Reg A offers more robust disclosure requirements, which can be more appealing for companies looking to scale.
Financial Statement Requirements for Reg A:
For Tier 1 Offerings (Up to $20 Million): Companies raising capital under Tier 1 of Reg A must provide financial statements that are audited by an independent auditor. These statements should comply with GAAP and include balance sheets, income statements, cash flow statements, and changes in equity. The audit ensures that the financials are accurate and reliable for investors, and it offers a level of transparency similar to what is required in an IPO.
For Tier 2 Offerings (Up to $75 Million): Tier 2 offerings have slightly more stringent financial requirements. In addition to the audited financial statements required for Tier 1, Tier 2 companies must also submit reports to the SEC, including unaudited financial statements. They are also required to file annual reports (Form 1-K) that include a management discussion and analysis (MD&A), which offers insight into the company’s financial condition, operations, and forward-looking plans.
Tier 2 companies also benefit from more flexibility in how they market the offering, as they are not restricted to accredited investors in the same way as Reg D offerings are.
3. Regulation D (Reg D)
Regulation D offers a more flexible path for raising capital compared to Reg CF or Reg A, especially for larger companies or those that already have established relationships with accredited investors. Reg D provides a series of exemptions for private offerings that allow companies to raise capital without having to register their securities with the SEC. However, Reg D does not allow public solicitation in the same way that Reg CF and Reg A do.
Financial Statement Requirements for Reg D:
General Rule for Reg D Exemptions (Rule 504, 506(b), and 506(c)): Reg D does not require specific financial disclosures to be filed with the SEC, but companies must provide financial statements to investors upon request. The level of detail and verification depends on the size of the offering and whether the investors are accredited.
For Offerings Up to $2.5 Million: Companies raising up to $2.5 million in a 12-month period are generally required to provide financial statements that are unaudited. The offering document, or private placement memorandum (PPM), should include a description of the business, its financial condition, and the use of the proceeds from the offering.
For Offerings Over $2.5 Million: If the offering exceeds $2.5 million, companies are required to provide audited financial statements unless the investors are accredited, in which case the company may not be required to have the financials audited.
Unlike Reg CF and Reg A, Reg D does not have specific requirements for ongoing reporting after the capital raise. However, companies that do raise funds under Reg D are still required to file Form D with the SEC to notify them of the offering.
Please note that the rules and conditions outlined in this blog post are subject to change over time. Securities regulations and financial reporting requirements may be updated or amended by the SEC, and the information provided here may no longer reflect the most current legal standards. Therefore, it is always advisable to consult with a qualified attorney or securities specialist before proceeding with any crowdfunding or capital-raising activities. They can offer tailored guidance to ensure compliance with the latest regulations and best practices specific to your business.