Reg CF Issuers, File Your Annual Reports!
For Regulation Crowdfunding (Reg CF) issuers, Spring means more than tax time. Uncle Sam, through the Securities and Exchange Commission (SEC), requires an annual report, Form C-AR. Companies must submit these reports 120 days after the fiscal year (usually December 31) until they become eligible to stop.
And while an SEC Enforcement Division letter may not seem as scary as the IRS kind, ignoring these reports, which update investors on company progress and financials, comes with dire consequences.
First, the SEC could deem Reg CF securities as unregistered. This can mean personal liability for founders and other officers. Indeed, it could put the entire company at risk. The Commission is particularly protective of Reg CF-eligible retail investors. In its 2015 release the regulator stated it may prosecute delinquent filers, even if they had remedied. “We note that even if an issuer has regained eligibility [by filing past reports], the Commission could still bring an enforcement action under the federal securities laws based on the issuer’s failure to make the required filings.”
Reg CF Issuers must file Annual Reports to avoid SEC trouble
But even without this extreme action, founders ignoring Form C-ARs face potential legal headaches. First, the company will be ineligible to do another Reg CF raise until the company files past-due reports dating back two years. Second, companies must be current on these reports to exclude Reg CF investors from the 12(g) record-holder count. Exceeding this shareholder number requires companies to formally register with the SEC—an expensive and time-consuming process almost no recent Reg CF issuer is ready for. Third, issuers must disclose past failure to comply with reporting requirements on any future Reg CF offering statement and annual report, risking reputational harm.
More broadly for the industry, low filing rates give ammunition to those hostile to retail investor access to the private capital markets, particularly state-level regulators.
Reg CF issuer compliance with Annual Reports is abysmal
Despite these myriad negative repercussions, issuer compliance with Form C-AR is abysmal. In a recent Crowdfund Insider article, Howard Marks, founder and CEO of the StartEngine portal compiled the following data:
- Based on my team’s calculations, an estimated 1,548 Form Cs were filed in 2022, signifying the start of new Reg CF offerings.
- From that group, we further estimate that 810 companies that filed Form C-U – this typically indicates a successfully completed Reg CF funding round.
- We estimate that of the approximate 1,548 Form C filings, only 361 filed Form C-AR’s; and of the 810 successful rounds, as few as 253 completed the filing on time.
This results in compliance rates of 23% and 31% respectively. As stated, noncompliant founders and officers risk professional and personal harm.
Companies may stop annual reporting after as few as one C-AR, depending on number of shareholders and total assets, although it must notify the SEC with Form C-TR: Termination of Reporting. Other companies must report until some event occurs like registering the securities, repurchasing them, or ending operations.
By Jossey PLLC, contact for further information [email protected]
