It’s Form C-AR filing season again, and maybe time to discuss an interesting consequence of using a crowdfunding special purpose vehicle (“SPV”). These are used in roughly one quarter of all Regulation CF filings, according to the analysis of our colleagues at Kingscrowd.
Everyone in crowdfunding knows that once a company has taken money from investors in an offering subject to Regulation Crowdfunding, it must provide updates to those investors in annual Form C-AR filings. (Sadly, not everybody in crowdfunding actually complies with that requirement. Kingscrowd data shows a significant decline in ongoing reporting from dismal to an appalling 24.4% for the most recently completed reporting period.)
The filing requirement generally continues for three years but if an “issuer” (explanation coming up) has filed at least one C-AR and has fewer than 300 “holders of record” it may terminate reporting, by filing a Form C-TR.
Back in 2021, it became legal for crowdfunding companies to use SPVs, bundling all human investors into an entity that showed up as one entry on the cap table. The SEC made this work by saying that both the company and the SPV were “co-issuers” and could file on the same Form C. There was a lot (and I mean a LOT) of discussion about the consequences of permitting the use of SPVs, both in the release that proposed this structure, and the release that adopted the new rules. But in neither the Proposing nor the Adopting Release was there a word about the impact on ongoing reporting requirements. So one would have THOUGHT that those ongoing reporting requirements would be unchanged. Now the issuing company only has one “holder of record” – the SPV (plus any non-natural persons investing) but the SPV is also an issuer, and it will have all the human investors on its books as holders of record, and Rule 202(b) says “an issuer” must continue to comply with the ongoing reporting requirements. So you might THINK that investors should get their three years’ worth of updates that way.
Wrong. Current practice is that a company counts the SPV as one holder, and disregards the fact that more than 300 investors may hold through the SPV, and we understand that this is not a position that will be challenged by the Staff.
You have to ask why a change that resulted in less information flowing to investors wasn’t flagged in the rulemaking process as a consequence of the rule change, and a deliberate policy choice. Although the more pertinent question may be “Sara, why the moral outrage about the rules permitting fewer filings when no-one is making those filings in the first place?” I have no answers.