Crowdfunding annual filing season: still getting it wrong!

So May 2 marked the due date for most companies in the crowdfunding world to file their annual reports on Form 1-K or C-AR.

And many companies didn’t.

Do I need to remind you that in order to make an offering under either Reg A or Reg CF, if you have made offerings under that exemption before, you have to have made ALL ongoing reports required by the exemption in the previous two years before relying on that exemption again? Apparently I do.

Now for some companies, it’s possible to get back into compliance just by filing a compliant report (or reports plural, if you are missing more than one), even if it’s late. We’ve discussed in detail what companies are supposed to do if they are unable to file on time. Many companies filing late will become compliant again as soon as they file the missing report(s).

BUT. . .

First issue: the report filed has to actually be compliant. We’ve seen so many C-AR filings that simply aren’t. C-AR doesn’t require audited financials but it does require them to be in GAAP format. QuickBooks isn’t GAAP. Cash accounting isn’t GAAP. Tax accounting isn’t GAAP. And GAAP requires comparative numbers from the previous year. Plus, there are a whole lot of other requirements in C-AR, not just financials. Issuers and intermediaries looking to make a new Reg CF offering should properly review filings for the previous two years to make sure the issuer is eligible to make the new offering.

Second issue: by failing to file on time, you may have triggered or accelerated obligations to register with the SEC and become a fully-reporting public company. Section 12(g) of the Exchange Act says companies with assets in excess of $10 million have to register a class of equity securities that has 2,000, or 500 non-accredited, holders of record. There’s a conditional exemption from 12(g) for Reg CF issuers: Rule 12g-6. Under this rule, Reg CF investors can be excluded from the 2,000 total/500 non-accredited holder of record count, conditional upon the issuer making ongoing reports, having a transfer agent and not having assets more than $25 million at the end of its fiscal year. There’s a two-year phase-in period for the asset condition, but not for the other two requirements.

Rule 12g-6(a)(1) says “is current” with respect to reporting obligations, which is different from the corresponding Reg A exemption, which measures ongoing reporting compliance as of the last day of the preceding fiscal year. So, a company that failed to file a C-AR by May 2 would, on May 3, be unable to exclude CF holders from its holder count. The company falls out of the conditional exemption from 12(g) and has to go to the provisions of Section 12(g) itself. If on the last day of the most recent fiscal year-end, it had more than 500 non-accredited holders of record of a class of equity securities and assets of more than $10 million, it has 120 days from fiscal year-end to get its securities registered. While there is a two-year phase-in period for registration for the $25m asset test alone, even that is dependent on timely filing of C-ARs, as one of our clients found out from the Division of Corporation Finance when they filed their C-AR 4 days late. In that case, the obligation to register accelerates to the same 120 days that applies when the other conditions are not met.

Up till 2021, most Reg CF companies were unlikely to trigger the Section 12(g) $10 million asset test, and would have been able to get back into compliance by filing compliant Form C-ARs, even if late. However, since the increase in the maximum offering amount under Reg CF, it’s possible that quite a few Reg CF issuers that have had successful fundraises might be sitting on a large pile of cash. Even more so if they had also made offerings under Reg A.

Yes, this stuff is complicated. But these rules have to be complied with. As ever, get legal advice from an experienced lawyer. And as ever, this isn’t that advice.

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