Regulation Crowdfunding (Reg CF) provides a framework for businesses to raise capital directly from investors through online platforms. This method allows startups and smaller companies to access a broad pool of potential investors. Adequate knowledge of these financial requirements is crucial for any business considering this route.
Learn more about the financial requirements surrounding Reg CF below. Do not hesitate to reach out to a professional who can help your company position itself for a successful campaign.
Financial Disclosure and Audit Requirements for Reg CF by Size
Regulation Crowdfunding mandates a comprehensive and transparent presentation of a company’s financial history, especially for businesses operational for more than a year. These firms are required to provide detailed financial statements that reflect their fiscal performance, ensuring that investors have a clear view of the company’s operational viability and financial health. This level of transparency is important in maintaining a positive relationship with investors who prioritize openness and straightforward communication. Companies must carefully adhere to these requirements to stay compliant and retain investor confidence.
As companies engage in crowdfunding, they are subject to tiered financial disclosure requirements that escalate with the amount of funds raised. For smaller fundraising efforts, the regulations are designed to be less stringent, reducing the administrative load on emerging startups. Yet, as the funding totals climb, the requirements for financial disclosures become more complex and demanding. Businesses that aim to raise substantial amounts must prepare for detailed financial reviews or audits by independent accountants, a measure that boosts investor confidence by ensuring that significant investments are supported by robust financial analysis.
The key financial and audit requirements for regulation crowdfunding, include:
| Raise Amount | Financial Requirements |
| Less than $124,000 | Financial statements and specific line items from tax returns, certified by the principal executive officer. No need for CPA review or audit unless already available. |
| $124,001 to $618,000 | Financial statements reviewed by an independent public accountantThe accountant’s review report. |
| $618,001 to $1.235 million | If first-time crowdfunding and audited financials are not available, financial statements are reviewed by an independent public accountant and the accountant’s review report; otherwise audited financials. |
| More than $1.235 million | Financial statements audited by an independent public accountantThe accountant’s audit report. |
Financial Disclosure Requirements for Newly Incorporated Companies
Newly incorporated companies face unique challenges and requirements under Regulation Crowdfunding. These businesses must provide a snapshot of their financial health from inception to the present. Within the initial 120 days of incorporation, these businesses must provide detailed financial snapshots, ranging from simple statements certified by a principal executive officer to more complex reviews or audits conducted by independent accountants. This requirement aims to provide potential investors with clear, transparent insights into the startup’s financial health, which is crucial for building trust and attracting early investment.
For startups newly formed and looking to engage in crowdfunding, aligning with these stringent financial reporting standards is crucial for legal compliance and establishing credibility. Companies seeking to raise up to $124,000 must have their financial statements and tax returns certified by their principal executive officer. If the raise amount is between $124,001 and $618,000, the financial statements require a review by an independent public accountant. For amounts exceeding $618,000, reviewed statements are necessary unless audited financials are available, underscoring the higher scrutiny imposed on larger fundraising efforts.
The financial requirements for companies form within 120 days can be found here:
| Company Age | Raise Amount | Financial Requirements |
| Less than 120 days | Less than $124,000 | Financial statements and tax returns, certified by a principal executive officer. |
| Less than 120 days | $124,001 to $618,000 | Financial statements, reviewed by an independent public accountant. |
| Less than 120 days | More than $618,000 | If first-time crowdfunding and audited financials are not available, financial statements reviewed by an independent public accountant; otherwise, audited financials. |
Importance of CPA Review and Audit Reports
The Generally Accepted Accounting Principles (GAAP) play a crucial role in the Regulation Crowdfunding because CPA reviews will likely use these principles as a part of their review. This CPA review, or independent audit, offers a layer of credibility to a company’s financial disclosures. For higher raises under Regulation Crowdfunding, these reviews or audits are mandatory. They validate the financial information presented, reducing the risk of misinformation and enhancing investor confidence. When CPAs leverage GAAP principles, they streamline crowdfunding businesses’ ability to raise funds successfully. GAAP ensures that all financial statements are prepared according to recognized standards, providing a reliable basis for investment decisions.
The requirement for CPA reviews or audits escalates with the amount being raised, reflecting the increased risk and need for transparency. Companies should view these financial vetting processes as an opportunity to build trust and a strong reputation in the investment community.
What Should Be Included in GAAP Financials?
GAAP financial statements provide a comprehensive view of a company’s financial health and are essential for stakeholders to make informed decisions. These documents follow a standardized format to ensure consistency and comparability across different organizations.
- Cover page: A cover page should include the company’s name, the title of the financial statement, and the period covered. It sets the stage for the financial disclosure and provides basic yet crucial information at a glance.
- Balance Sheet: A balance sheet presents a snapshot of the company’s financial condition at a specific point in time. It lists assets, liabilities, and shareholders’ equity, showing the company’s net worth and financial stability.
- Income Statement: Your income statement details the company’s revenues and expenses over a particular period. It highlights the company’s profitability by showing how revenues are transformed into net income or loss.
- Statement of Cash Flows: You should also include a statement of cash flows showing inflows and outflows from operating, investing, and financing activities. It helps stakeholders understand how the company generates and uses cash.
- Statement of Stockholders’ Equity: Your statement of stockholder equity provides details about changes in the equity section of the balance sheet. It includes information on stock issuances, dividends, and earnings retained within the company.
- Financial Statement Footnotes: Your footnotes to financial statements provide additional insights and disclosures not readily apparent from the main documents. They can explain accounting policies, contingencies, and other details that affect a stakeholder’s understanding of the financial condition.
GAAP financial statements are integral to financial reporting, offering a clear and regulated method of presenting a company’s financial data. These documents enable investors, analysts, and regulators to review and assess the financial health and trends within an organization effectively.
Resources and Support for Financial Compliance
The financial requirements of Regulation Crowdfunding can be complex, especially for startups and smaller companies. Fortunately, resources and support services are available to help businesses meet these demands efficiently. From financial service providers specializing in crowdfunding to online platforms offering streamlined financial reporting tools, companies have a variety of aids at their disposal.
Additionally, utilizing a stock transfer agent can simplify the compliance process, reduce administrative burdens, and provide safe harbor protections and exemptions. Fostering relationships with experienced professionals and utilizing robust financial management tools are crucial steps toward successful capital raises under Regulation Crowdfunding.