Regulation CF Crowdfunding and SEC Reporting After the Offering

After an issuer completes a Regulation CF crowdfunding offering, it must comply with certain ongoing reporting obligations. Unlike public company SEC reporting requirements, Regulation CF’s ongoing reporting requirements consist of only one filing annually. 

Regulation CF Issuers Required to File an Annual Report on Regulation C-AR

An issuer that sold securities in a Regulation Crowdfunding offering must submit an annual report on Form C-AR to the SEC through Edgar no later than 120 days after the end of its fiscal year. Form C-AR must be also be posted on the company’s website. Form C-AR requires information similar to what is required in the Form C offering statement which we discuss here; however, the issuer is not required to obtain an audit or review of its financial statements.

Issuers must comply with Regulation Crowdfunding’s annual reporting requirement on Form C-AR until one of the following occurs:

• the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
• the issuer has filed at least one annual report and has fewer than 300 holders of record;
• the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;
• the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or
• the issuer liquidates or dissolves in accordance with state law.

Any issuer terminating its annual reporting obligations is required to a Form C-TR notice reporting that it will no longer provide annual reports pursuant to Regulation Crowdfunding.

SUMMARY OF REGULATION CF CROWDFUNDING

Regulation CF offers flexibility to issuers for crowdfunding offerings of up to $1.07 million in a 12 month period if certain requirements are met:

Filing Form C-AR

Crowdfunding companies with annual reporting obligations under Regulation CF must file the Form C-AR with the SEC and “post on the issuer’s website” the annual report, along with the financial statements of the issuer certified by the principal executive officer of the issuer to be true and complete in all material respects and a description of the condition of the financial condition of the issuer as described.

Financial Statements in Regulation CF Offerings

If the issuer has had an audit of their financial statements or financial statements that have been reviewed by a public accountant that is independent of the issuer, then it must provide those audited or reviewed financial statements with the Form C-AR.  The principal executive officer does not have to certify the financial statements.

Form C-AR Annual Report Disclosures

The annual report on Form C-AR must include the following disclosures:

• The name, legal status (including its form of organization, jurisdiction in which the issuer is organized and its date of organization), physical address and website;
• The names of the issuer’s directors and officers (and any persons occupying a similar status or performing a similar function), all positions and offices with the issuer held by such persons, the period of time in which such persons served in the position or office and their business experience during the past three years, including each person’s principal occupation and employment, including whether any officer is employed by another employer; and the name and principal business of any corporation or other organization in which such occupation and employment occurred.
• The name of each person, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, who is a beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
• A description of the business of the issuer and the anticipated business plan of the issuer;
• The current number of employees of the issuer;
• A discussion of the material factors that make an investment in the issuer speculative or risky;
• A description of the ownership and capital structure of the issuer, including:
  • The terms of the securities being offered and each other class of security of the issuer, including the number of securities being offered and/or outstanding, whether or not such securities have voting rights, any limitations on such voting rights, how the terms of the securities being offered may be modified and a summary of the differences between such securities and each other class of security of the issuer, and how the rights of the securities being offered may be materially limited, diluted or qualified by the rights of any other class of security of the issuer;
  • A description of how the exercise of rights held by the principal shareholders of the issuer could affect the purchasers of the securities being offered;
  • The name and ownership level of each person, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, who is the beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
  • How the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions;
  • The risks to purchasers of the securities relating to minority ownership in the issuer and the risks associated with corporate actions including additional issuances of securities, issuer repurchases of securities, a sale of the issuer or of assets of the issuer or transactions with related parties; and
  • A description of the restrictions on transfer of the securities, as set forth in §227.501;
• A description of the material terms of any indebtedness of the issuer, including the amount, interest rate, maturity date and any other material terms;
• A description of exempt offerings conducted within the past three years; In providing a description of any prior exempt offerings, disclose:
  • The date of the offering;
  • The offering exemption relied upon;
  • The type of securities offered; and
  • The amount of securities sold and the use of proceeds;
• A description of any transaction since the beginning of the issuer’s last fiscal year, or any currently proposed transaction, to which the issuer was or is to be a party and the amount involved exceeds five percent of the aggregate amount of capital raised by the issuer in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) during the preceding 12-month period, inclusive of the amount the issuer seeks to raise in the current offering under section 4(a)(6) of the Securities Act, in which any of the following persons had or is to have a direct or indirect material interest:
  • Any director or officer of the issuer;
  • Any person who is, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, the beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
  • If the issuer was incorporated or organized within the past three years, any promoter of the issuer; or
  • Any member of the family of any of the foregoing persons, which includes a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. The term spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.
  • For each transaction identified above, disclose the name of the specified person and state his or her relationship to the issuer, and the nature and, where practicable, the approximate amount of his or her interest in the transaction. The amount of such interest shall be computed without regard to the amount of the profit or loss involved in the transaction. Where it is not practicable to state the approximate amount of the interest, the approximate amount involved in the transaction shall be disclosed.
  • For purposes this item, a transaction includes, but is not limited to, any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships.
• Whether the issuer or any of its predecessors previously failed to comply with the ongoing reporting requirements of Regulation CF.

Non-Compliance with Regulation CF Crowdfunding Requirements

Regulation CF is a safe harbor exemption from the SEC’s registration requirements. If a company does not have a valid exemption from registration, it’s offering could be disqualified. This could result in the company’s officers, directors or “controlling persons” being subject to enforcement action. Additionally, if the company purposefully or willfully violates any provision in Regulation CF, the company will lose the ability to claim the exemption in the future. 

Prior to conducting a crowdfunding offering, you should hire competent securities counsel to help you select the appropriate exemption and assist you with the SEC’s requirements including appropriate disclosures.

Hamilton & Associates Law Group, P.A. is providing guidance to help its clients identify and understand Regulation CF and its SEC reporting requirements.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding,  sponsoring market makers and Form 211,  dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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