Whose Financial Statements?

Reg CF requires financial statements. To refresh your memory:

Those thresholds are based on the maximum you’re trying to raise. So if your “target amount” is $600,000 but you’re trying to raise up to $900,000, and this is your second Reg CF offering, you need audited statements. 

Now suppose you conducted your business as a sole proprietorship or an LLC until six months ago, when someone in Silicon Valley told you to convert to a C corporation. Your sole proprietorship or your LLC is a “predecessor” of your C corporation within the meaning of 17 CFR §230.405. Hence, under the Reg CF rules, your financial statements should include the results of the sole proprietorship or LLC. Which makes sense, given the purpose of the disclosure rules.

The same is true if your company intends to acquire another company. If you’re raising money to buy TargetCo Inc. then TargetCo Inc. is a “predecessor” of your company for purposes of Reg CF. Hence, you should include the financial statements of TargetCo Inc. Which also makes sense.

Especially for small companies, financial statements represent one of the biggest impediments to Reg CF. The rules around predecessors make the impediment that much higher.

Questions? Let me know.

4 thoughts on “Whose Financial Statements?

  1. Gary J Ross

    Thank you, Mark, this is great! The issue that we often face is whether to include the financial statements of the parent company. Some companies want to do it for marketing purposes, since it looks much better than only having the blank statements of a brand new startup, but then some folks would rather not reveal the parent’s financials, and the platform will ask us if the parent can be considered a predecessor.

    1. crowdfundattny

      That’s a great point. I think if the parent contributed the business to the issuer then the parent would be a predecessor. But even if the parent isn’t a predecessor, you could include its financial statements if you wanted to, as an Exhibit.

  2. The need for reviewed or audited financials for crowdfunding up to $1M is ridiculous and not aligned with most intrastate rules — not to mention REG-D exemptions.

    It needlessly increases the cost of capital under REG-CF and offers NOTHING in the way of any kind of “insurance”.

    Investors in these days are largely investing because they know, like and trust the founders. And if they do not? They are typically not investing amounts that rise to the level of even hiring a lawyer to go try and get back.

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