Crowdfund Insider | Kim Wales | December 18, 2013

Efforts to influence the final proposed rule for Financial Disclosure (Section 4A(b)(1)(D)), requires “a description of the financial condition of the issuer,” in which regulators have requested comments from the public for the Final Proposed Crowdfunding Rules released on October 23, 2013.  Industry pioneers, like Ryan Feit, CEO of SeedInvest, and myself, are exploring options for the industry to consider including a cost benefit analysis of the proposed rules.  We will soon provide comment letters with recommendations to the Securities and Exchange Commission (SEC) by the pending deadline, February 3, 2014.

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As regulators prepare for fresh skirmishes with the industry over the proposed rule, which seeks issuers offering more than $500,000 (or such other amount as the Commission may establish) are required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors audited financial statements.  We all understand the importance of creating robust investor protection standards for the crowdfunding industry while improving capital formation and job creation.

However, the expense associated for a start-up company seeking funding of more than $500,000 to have audited financial statements is burdensome.

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At the recent 2013 – SEC Small Business Forum for Capital Formation held on November 21, Phillip Laycock, an Audit Partner from leading accounting firm Grassi & Co. acknowledged, “audited financial statements could cost small businesses upwards of $18,000 to $25,000.”

It must be said that too little credit has been given to regulators for their efforts to impose a simple and commonsense approach in the proposed rules.   These regulations will establish a framework of tiered financial disclosure requirements based on aggregate target offering amounts and all other offerings made in reliance on Section 4(a)(6) within the preceding 12-month period, for example:

• Issuers offering $100,000 or less are required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors income tax returns filed by the issuer for most of the recently completed year (if any) and financial statements that are certified by the principal executive to be true and complete in all material respects;
• Issuers offering more than $100,000, but not more than $500,000, are required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors financial statements reviewed by a public a accountant that is independent of the issuer.

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