In today’s article, we will explore the differences between Regulation A (Reg A) and Regulation Crowdfunding (Reg CF) regarding their disclosure requirements for companies raising funds.
There’s an interesting contrast between Regulation A and Regulation CF in terms of disclosure.
Reg A requires that issuers provide financial statements for “businesses acquired or to be acquired.” Even if that’s not what the money is being raised for. If you just acquired, or are probably going to acquire, a business (and it doesn’t have to be a whole company, just a “business”, and the SEC Staff has a fairly robust view of when a business is being acquired, so don’t assume you can ever convince them that you are only acquiring “assets”), then you have to provide Reg A-compliant financial statements for that business.
Reg CF doesn’t have that feature. Probably because originally the offering limit for Reg CF was $1 million, and everyone assumed it would be used by very early-stage startups who weren’t going to be in acquisition mode just yet. And what can you buy with $1 million?
But with the offering limit now at $5 million, that has changed. We are seeing later-stage companies using Reg CF, and in several cases we have seen companies that are going to use the funds raised to acquire another company or business. What should they disclose about that acquisition?
Reg CF doesn’t specifically mandate financials statements of the acquiree company in that case. However, if there ARE financials, then it would be consistent with all the other filings in this space (Form C-AR, for example) for regulators or plaintiffs’ lawyers to argue that they should be produced, and that to withhold them would be the omission of material information. While QuickBooks financials are definitely not GAAP, they do include useful information, so consider availability of QB financials in deciding what to disclose. (But also consider how reliable the QB financials are!)
At the very least consider including material data points in the discussion of financial condition in the Form C. What is material is always going to be a facts-and-circumstances analysis, but you should apply that analysis bearing in mind the “catch-all” disclosure requirement of Rule 201(y): “Any material information necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading”. So if your Form C says you are planning to acquire a profitable donut shop, you’d better either explain what you mean by profitable or provide the data necessary to put that statement in context.
Just because disclosure isn’t specifically itemized doesn’t mean it isn’t needed.
It’s always good to remember that seeking professional guidance and leveraging a trustworthy fundraising platform, are 2 essential aspects when raising funds for your company. This combined approach impact both regulatory compliance in your offering documents and a streamlined fundraising process.