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Compliance with Reg CF: Current liquidity and capital resources

While never intended to be the type of discussion that accompanies the management’s discussion and analysis of a registered securities offering, the SEC expects issuers making offerings under Regulation CF to discuss all the material information regarding their current liquidity and capital resources. Under Rule 201(s), this discussion must cover each period for which the issuer has provided financial statements as well as identification of any material changes that have occurred after the end of the periods covered by the financial statements. In practice, the discussion would include items like cash on hand, burn rate, and availability of other sources of capital.

After surveying each posted offering under Reg CF, our review indicates that only 42% of issuers have met this requirement.

In some cases, failure to comply may not trigger the loss of the exemption — for example, the non-compliance might be treated as an “insignificant deviation” from the rule if the issuer provides recent financial statements that capture the information that would have otherwise been provided in the discussion. For many issuers that is not the case. For instance, for an issuer whose current liabilities exceed the value of its liquid assets, not including a discussion of this situation and capital resources could not be considered “insignificant.”

Most importantly, without this discussion, investors are left without information on how long of a runway the company has to meet its stated goals. While an issuer may demonstrate significant assets on a balance sheet, the issuer can still end up in trouble if it cannot meet its current liabilities with cash on hand.

 Some issuers did go beyond what is required by the SEC and included information that is more akin to the management’s discussion and analysis included in a Regulation A offering. Others were able to comply, by providing discussions that were “just the facts”. Such discussions were likely not very difficult or time consuming to produce, but they greatly enhance an investor’s understanding of the issuer.

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