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Compliance with Reg CF: Financial statements under Rule 201

The financial statements and corresponding discussion of financial condition of an issuer undertaking a securities offering under Regulation CF is arguably the most important set of information for an investor to make an informed investment decision. While the story of the company is critical for gaining investor interest, it is the financials that help an investor understand the potential for financial return. The financial statements and discussion are required disclosures under Rule 201 of Regulation CF.

However, according to CrowdCheck’s research, approximately 35% of Regulation CF issuers are conducting, or have conducted, offerings with non-compliant financial statements. The degree of non-compliance for some raises the possibility that those offerings violated the terms of Regulation CF, creating liability for those issuers and platforms under both federal and state law.

The SEC identifies exactly what is required of each issuer in Instruction 3 to paragraph (t) of Rule 201. In that instruction, the SEC makes clear that for any size offering, “the financial statements must be prepared in accordance with U.S. generally accepted accounting principles and include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders' equity and notes to the financial statements.”

The manner of non-compliance varies. For offerings under $100,000, non-compliance is most likely to come in the form of not providing financial statements at all. Those issuers seem to be acting under the false notion that they only need to provide the amount of total income, taxable income and total tax, or the equivalent line items, as reported on the federal income tax returns filed by the issuer for the most recently completed year. While those pieces of information are required, so are complete financial statements that are certified by the principal executive officer of the company as being “true and complete in all material respects”.

Another regular form of non-compliance is the omission of notes to the financial statements. Notes are an integral part of the financial statements. They describe the accounting policies that have been used and provide material information necessary to provide context to the figures included in the statements, such as property and equipment assets and financing activities.

Larger offerings that have supplied reviewed financial statements have typically been in compliance with Rule 201, as the independent accountant has taken steps to ensure the statements are complete.

For any offering, one of the first things that an issuer should prepare is its financial statements, whether they need to be reviewed or merely certified by management. Without complete statements, it is likely that the offering will be in violation of Regulation CF.

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