Crowdfunding CPA Services
The JOBS Act of 2012 spawned Title III, Crowdfunding, and Title IV, Regulation A+, which are securities laws that allow small business owners to solicit investments from main street instead of just relying on big institutional investors and Wall Street Initial Public Offerings. These new securities laws have given small business owners an opportunity to get easier access to capital. The SEC adopted Regulation Crowdfunding (“Regulation CF”) to implement the requirements of Title III. Under these rules, eligible companies are allowed to raise capital using Regulation CF starting May 16, 2016.
Regulation CF allows you to raise up to $1,070,000 in a 12-month period from investors at all levels of income, subject to certain limitations. The capital raise can be structured as either equity or debt. For investors with a net income or net worth less than $107,000, they are limited to investing $2,200 or 5 percent of the lesser of the investor’s annual income or net worth. For investors with a net income and net worth greater than $107,000, they are limited to investing 10 percent of the lesser of the investor’s annual income or net worth. During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation CF offerings may not exceed $107,000, regardless of the investor’s annual income or net worth. Spouses are allowed to calculate the net worth and annual income jointly in determining their maximum investment.
Regulation CF offerings must be conducted through one single online platform, which must be a broker-dealer or funding portal registered with the SEC and FINRA. A list of authorized Regulation CF providers can be found at https://www.finra.org/about/funding-portals-we-regulate. Each of them will have their pros and cons and some of them specialize in certain industries and types of offerings. Each of them will charge you a fee, which can vary depending on the portal, including some upfront and some based on the amount of capital you raise. So, do your research before selecting a portal to perform your Regulation CF Raise.
There are restrictions on the type of entities that can use Regulation CF to raise capital. Entities that are prohibited from using Regulation CF include, non-US companies, companies selling illegal products (i.e. marijuana), companies with no specific business plan.
The disclosure requirements are simpler but will still require some thought and effort to complete the required tasks. You must file what is called a Form C with the SEC EDGAR system. There is not a specific presentation format required for the attachments to Form C. However, certain platforms may have templates and/or requirements as to the format of the Form C to help you facilitate your capital raise. While there is no specific form of the Form C required by the SEC, it must include the following information:
The financial statements included in Form C do not require you to have a review or audit by a CPA for offerings of $107,000 or less. For offerings below $107,000, the CEO simply certifies the financial statements are accurate and complete and provides some income tax information. This makes getting some initial startup costs and early stage equity or loans reasonable with little upfront costs for small business owners. We recommend that you utilize a CPA to help you prepare the financial statements included with Form C, if you have no previous experience preparing financial statements. A QuickBooks print out is not sufficient for your financial statements to comply with this requirement. The cost to prepare your financial statements with Ignatius L. Jackson, CPA LLC will typically be between $750 and $1,500 for each year presented, depending on the type of activity you have within the business and the amount of disclosures required.
If your offering is greater than $107,000 but not more than $535,000, you are required to have your financial statements reviewed by an independent CPA. This applies even if you have no activity in the business as a startup. Ignatius L. Jackson, CPA LLC can complete the review for your financial statements. For a review of the financial statements, that have not previously been reviewed, you can typically expect costs of about $2,000 to $4,000 for each year presented, depending on the type of activity you have within the business and the condition of your financial records.
If your offering is greater than $535,000, you are required to have your financial statements reviewed by an independent CPA for first time Regulation CF issuers. This applies even if you have no activity in the business as a startup. If you have previously issued securities using Regulation CF, then you are required to have audited financial statements by an independent CPA. Ignatius L. Jackson, CPA LLC can complete the review or audit of your financial statements. For a review of the financial statements, that have not previously been reviewed, you can typically expect costs of about $4,000 to $6,000 for each year presented, depending on the type of activity you have within the business and the condition of your financial records. For an audit of the financial statements, that have not previously been audited, you can typically expect costs of about $6,000 to $10,000 for each year presented, depending on the type of activity you have within the business and the condition of your financial records.
Under Regulation CF, you are required to file annual reports on Form C-AR no later than 120 days after the end of your fiscal year. The annual report includes information similar to what is required in the original Form C. However, you are not required to have an annual audit or review unless you decide to do another capital raise under Regulation CF.
The SEC has issued a compliance guide for issuers under Regulation CF that you can review at https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
Regulation A+ now has two tiers for securities offerings. Tier 1 is for offerings up to $20 million in a 12-month period and Tier 2 is for offerings up to $50 million in a 12-month period. Investors in Tier 1 offering can be from any individual. Investors in a Tier 2 offering must typically be accredited investors, otherwise the investor will be limited in how much they can contribute similar to regulation CF.
Both Tier 1 and Tier 2 issuers are required to file financial statements for the two previous fiscal year ends (or since existence, if less than 2 years). Tier 1 offerings are not required to do audited or reviewed financial statements and do not have ongoing financial statement reporting requirements. However, most states may require you to have audited financial statements even though the SEC does not. Tier 2 issuers are required to provided audited financial statements in their offering documents and to file annual, semiannual, and current reports with the SEC on an ongoing basis.
For Tier 1 offerings, it is recommended that you utilize a CPA to help you prepare the financial statements, if you do not have experience in preparing financial statements. Ignatius L. Jackson, CPA LLC can help you prepare the required financial statements typically for $1,000 to $3,000, depending on the activity in your financial statements and the amount of disclosures required.
For Tier 2 offerings, Ignatius L. Jackson, CPA LLC can perform the audit of your financial statements. For an audit of the financial statements, that have not previously been audited, you can typically expect costs of about $10,000 to $20,000 for each year presented, depending on the type of activity you have within the business and the condition of your financial records. For companies raising this level of capital it would typically be expected that you have some complex accounting requirements that require specialized knowledge and extra effort, which is ultimately what drives up the costs on these types of audits.
Regardless of which method you ultimately decide to use under the crowdfunding securities laws, we highly recommend you consult with a CPA and a securities attorney knowledgeable in the area prior to deciding which option to undertake. While these regulations have made access to capital easier for small businesses, the provisions are still complicated, and you need to make sure you comply with all SEC rules in regards to soliciting investments. Ignatius L. Jackson, CPA LLC is available for a complimentary consultation if you are considering a securities offering under Regulation CF or Regulation A+. Contact Ignatius L. Jackson, CPA LLC today for preparation, review or audit assistance with your crowdfunding securities needs.
For more information regarding the requirements of a review or audit please visit https://iljcpa.com/auditing.php