2019 Regulation CF Annual Report Compliance Guide
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. This post is not to be construed as an offer or a price quote for legal services, the cost of which shall vary. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion. Reading, downloading, or covering this article does not create an attorney-client relationship.
Am I Required to File An Annual Report under Regulation CF?
What are the Regulation C-AR Filing Deadlines?
Companies (referred to by the Securities and Exchange Commission as an “issuer”) that have raised money through a crowdfunding platform through what is known as a Regulation Crowdfunding(“Regulation CF”) must file an annual report on Form C-AR within 120 days of the end of the company’s fiscal year, if they are required to file (See “Who Must File the Annual Report on Regulation C-AR below). Most companies fiscal year ends on December 31. In this case, the filing deadline would be April 30, 2019.
Who Must File the Annual Report on Regulation C-AR?
Any company that has raised money under Regulation CF must file an annual report unless one of the following events occur:
- The issuer becomes a “public” company (sometimes called a “reporting company”) obligated to file reports under Sections 13(a) or 15(d) of the Securities Exchange Act (“Exchange Act”). A company becomes a “reporting company” under Section 13(a) when it has stock registered under Section 12 (for example, it has done an initial public offering or “IPO”);
- The issuer has filed at least one annual report and has fewer than 300 shareholders of record;
- The issuer has filed at least 3 annual reports in the past 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 CF (including repayment of any debt issued under Regulation CF or any complete redemption of redeemable securities); or
- The issuer dissolves or liquidates pursuant to state law.
If none of the events above apply to your company, then your company must file the annual report.
How do you count the number of “holders of record” for purposes of determining whether my company can terminate its duty to file ongoing annual reports?
According to the SEC, the issuer must count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering. https://www.sec.gov/divisions/corpfin/guidance/reg-crowdfunding-interps.htm#202.01.
Example: the company issued 1,000,000 shares of common stock each to 10 founders when it was incorporated. Later, the company raised money in a Regulation CF deal by selling shares of common stock to 291 investors. In this case, there are 301 holders of record of common stock, and the company must file at least 3 annual reports and have under $10 million in assets before it can terminate its annual reporting obligations.
Does my company have a duty to update or amend Form C-AR?
Yes. Regulation CF (17 C.F.R. 227.203) requires a company to update its annual report if there has been a material change to the previously filed annual report “as soon as practicable after discovery of the need for the material change.” Whether or not a material change has occurred can be a complicated securities law question, and we recommend that companies reach out to experienced securities counsel to help determine whether a material change has occurred and the best way to address the issue.
What Needs to be Filed if An Amendment is Required?
A company that must amend its annual report filings must do so on Form C-AR/A. Again, when information provided to investors has materially changed and can alter the total mix of information available to investors in a company’s securities, great caution must be exercised to minimize risks of civil and criminal liability. We recommend speaking to experienced securities counsel to help determine the best way to address a material change.
How does my company terminate its annual reporting obligations under Regulation CF?
The company must file Form C: Termination of Reporting (Form C-TR) with the SEC, indicating the basis for termination.
Nuts and Bolts of Annual Report Preparation
How Do I File My Regulation CF Report?
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.
Do I Have to File Audited or Unaudited Financial Statements?
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. In such a case, however, the principal executive officer does not have to certify the financial statements.
What Information is Required in the Annual Report under Form C-AR?
The annual report also must include the following disclosures:
- The name, legal status (including its form of organization, jurisdiction in which it is organized and date of organization), physical address and Web site of the issuer;
- The names of the directors and officers (and any persons occupying a similar status or performing a similar function) of the issuer, 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:
- (1) Each person’s principal occupation and employment, including whether any officer is employed by another employer; and
- (2) The name and principal business of any corporation or other organization in which such occupation and employment took place.
- For purposes of this requirement, the term officer means a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing similar functions.
- 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 §227.202
What Happens if my company fails to comply with Regulation CF?
Remember, Regulation CF is a safe harbor exemption from the general requirement that a company must register securities (stock, units, etc.) with the SEC. If a company does not have a valid exemption from registration of securities with the SEC, it and the company’s officers, directors or “controlling persons” could face criminal penalties, civil penalties and personal liability for failure to comply.
Generally, if the company purposefully or willfully violates any provision in Regulation CF, the company will lose the ability to claim the exemption and be subject to the above consequences. If, on the other hand, the company fails but made a good faith effort to comply, there could be more leniency, depending on how material the violation was at the time.
Regulation CF specifically provides as follows in 17 C.F.R 227.502:
- A failure to comply with a term, condition, or requirement of this part will not result in the loss of the exemption from the requirements of Section 5 of the Securities Act (15 U.S.C. 77e) for any offer or sale to a particular individual or entity, if the issuer relying on the exemption shows:
- The failure to comply was insignificant with respect to the offering as a whole;
- The issuer made a good faith and reasonable attempt to comply with all applicable terms, conditions and requirements of this part; and
- The issuer did not know of such failure where the failure to comply with a term, condition or requirement of this part was the result of the failure of the intermediary to comply with the requirements of section 4A(a) of the Securities Act (15 U.S.C. 77d-1(a)) and the related rules, or such failure by the intermediary occurred solely in offerings other than the issuer’s offering.
- Item 1 of this section shall not preclude the Commission from bringing an enforcement action seeking any appropriate relief for an issuer’s failure to comply with all applicable terms, conditions and requirements of this part.
What should my company do if we believe we violated a provision of Regulation CF?
Talk to an attorney about the best way to approach any violation before you file any documents or contact the SEC or shareholders. An experienced attorney who handles SEC matters can advise you on the best way to address potential issues.
You May Also Be Interested In:
Does A “Pitch Event” or “Demo Day” Constitute “General Solicitation” under the JOBS Act?!
Preparing For Exit Part 1: Good Corporate Hygiene
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. This post is not to be construed as an offer or a price quote for legal services, the cost of which shall vary. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion. Reading, downloading, or covering this article does not create an attorney-client relationship.
Am I Required to File An Annual Report under Regulation CF?
What are the Regulation C-AR Filing Deadlines?
Companies (referred to by the Securities and Exchange Commission as an “issuer”) that have raised money through a crowdfunding platform through what is known as a Regulation Crowdfunding(“Regulation CF”) must file an annual report on Form C-AR within 120 days of the end of the company’s fiscal year, if they are required to file (See “Who Must File the Annual Report on Regulation C-AR below). Most companies fiscal year ends on December 31. In this case, the filing deadline would be April 30, 2019.
Who Must File the Annual Report on Regulation C-AR?
Any company that has raised money under Regulation CF must file an annual report unless one of the following events occur:
- The issuer becomes a “public” company (sometimes called a “reporting company”) obligated to file reports under Sections 13(a) or 15(d) of the Securities Exchange Act (“Exchange Act”). A company becomes a “reporting company” under Section 13(a) when it has stock registered under Section 12 (for example, it has done an initial public offering or “IPO”);
- The issuer has filed at least one annual report and has fewer than 300 shareholders of record;
- The issuer has filed at least 3 annual reports in the past 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 CF (including repayment of any debt issued under Regulation CF or any complete redemption of redeemable securities); or
- The issuer dissolves or liquidates pursuant to state law.
If none of the events above apply to your company, then your company must file the annual report.
How do you count the number of “holders of record” for purposes of determining whether my company can terminate its duty to file ongoing annual reports?
According to the SEC, the issuer must count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering. https://www.sec.gov/divisions/corpfin/guidance/reg-crowdfunding-interps.htm#202.01.
Example: the company issued 1,000,000 shares of common stock each to 10 founders when it was incorporated. Later, the company raised money in a Regulation CF deal by selling shares of common stock to 291 investors. In this case, there are 301 holders of record of common stock, and the company must file at least 3 annual reports and have under $10 million in assets before it can terminate its annual reporting obligations.
Does my company have a duty to update or amend Form C-AR?
Yes. Regulation CF (17 C.F.R. 227.203) requires a company to update its annual report if there has been a material change to the previously filed annual report “as soon as practicable after discovery of the need for the material change.” Whether or not a material change has occurred can be a complicated securities law question, and we recommend that companies reach out to experienced securities counsel to help determine whether a material change has occurred and the best way to address the issue.
What Needs to be Filed if An Amendment is Required?
A company that must amend its annual report filings must do so on Form C-AR/A. Again, when information provided to investors has materially changed and can alter the total mix of information available to investors in a company’s securities, great caution must be exercised to minimize risks of civil and criminal liability. We recommend speaking to experienced securities counsel to help determine the best way to address a material change.
How does my company terminate its annual reporting obligations under Regulation CF?
The company must file Form C: Termination of Reporting (Form C-TR) with the SEC, indicating the basis for termination.
Nuts and Bolts of Annual Report Preparation
How Do I File My Regulation CF Report?
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.
Do I Have to File Audited or Unaudited Financial Statements?
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. In such a case, however, the principal executive officer does not have to certify the financial statements.
What Information is Required in the Annual Report under Form C-AR?
The annual report also must include the following disclosures:
- The name, legal status (including its form of organization, jurisdiction in which it is organized and date of organization), physical address and Web site of the issuer;
- The names of the directors and officers (and any persons occupying a similar status or performing a similar function) of the issuer, 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:
- (1) Each person’s principal occupation and employment, including whether any officer is employed by another employer; and
- (2) The name and principal business of any corporation or other organization in which such occupation and employment took place.
- For purposes of this requirement, the term officer means a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing similar functions.
- 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 §227.202
What Happens if my company fails to comply with Regulation CF?
Remember, Regulation CF is a safe harbor exemption from the general requirement that a company must register securities (stock, units, etc.) with the SEC. If a company does not have a valid exemption from registration of securities with the SEC, it and the company’s officers, directors or “controlling persons” could face criminal penalties, civil penalties and personal liability for failure to comply.
Generally, if the company purposefully or willfully violates any provision in Regulation CF, the company will lose the ability to claim the exemption and be subject to the above consequences. If, on the other hand, the company fails but made a good faith effort to comply, there could be more leniency, depending on how material the violation was at the time.
Regulation CF specifically provides as follows in 17 C.F.R 227.502:
- A failure to comply with a term, condition, or requirement of this part will not result in the loss of the exemption from the requirements of Section 5 of the Securities Act (15 U.S.C. 77e) for any offer or sale to a particular individual or entity, if the issuer relying on the exemption shows:
- The failure to comply was insignificant with respect to the offering as a whole;
- The issuer made a good faith and reasonable attempt to comply with all applicable terms, conditions and requirements of this part; and
- The issuer did not know of such failure where the failure to comply with a term, condition or requirement of this part was the result of the failure of the intermediary to comply with the requirements of section 4A(a) of the Securities Act (15 U.S.C. 77d-1(a)) and the related rules, or such failure by the intermediary occurred solely in offerings other than the issuer’s offering.
- Item 1 of this section shall not preclude the Commission from bringing an enforcement action seeking any appropriate relief for an issuer’s failure to comply with all applicable terms, conditions and requirements of this part.
What should my company do if we believe we violated a provision of Regulation CF?
Talk to an attorney about the best way to approach any violation before you file any documents or contact the SEC or shareholders. An experienced attorney who handles SEC matters can advise you on the best way to address potential issues.
You May Also Be Interested In:
Does A “Pitch Event” or “Demo Day” Constitute “General Solicitation” under the JOBS Act?!
Preparing For Exit Part 1: Good Corporate Hygiene
