Regulation Crowdfunding Issuers Need to Comply with Annual Reporting Requirements – Post from our partner LawCloud

The following post is a reprint from our partner LawCloud. LawCloud is a Legal Technology platform that can help a company with legal forms related to not just incorporation by capital formation and compliance. It makes all sorts of complicated legal parts of running a corporation affordable and easy.

ANNUAL REPORTING
A Crucial SEC Requirement

Filing annual reports with the SEC is a requirement for any business which raises funds through a crowdfund offering using a regulated crowdfunding portal. The purpose of these reports is to provide investors and the public with an update on important developments with the company and its business.

The crowdfunding industry at large has developed a negligent attitude toward complying with this critical SEC requirement with widespread violations in meeting the simple requirements to file. Issuers may fail to file annual reports with sufficient updates about their company, supply investors with poor quality financial reports or, as is most often the case, simply choose not to file an annual report at all under the assumption that there are no negative repercussions for violating securities law.

This is discouraging as the SEC requirements are not difficult to comply with when compared to requirements for publicly traded companies. The SEC’s decision to lighten crowdfunding annual reporting requirements was specifically made in an effort to ease the burden on the less-sophisticated businesses expected to utilize crowdfunding for raising capital.

Issuers in the crowdfunding space seem to have come to regard annual reports as a nuisance rather than an opportunity to communicate new and important information (whether good or bad) to their investors. This problem has been ongoing for some time; last year in an open letter to the SEC signed by four state Attorneys General, this issue is directly addressed with stern enforcement action recommended:

“The pattern of noncompliance with Reg CF’s disclosure requirements may provide an environment in which fraud and manipulation flourish. Coupled with data that the SEC has engaged in very limited enforcement activity against Reg CF issuers or the portals who host them, this evidence raises concerns about whether investors are actually receiving the protections Reg CF currently mandates. The SEC should engage in meaningful enforcement of the disclosure requirements to incentivize issuers to provide this critical information to investors.”

– Xavier Becerra, Attorney General of California

Read the Full Letter

The growing size of the equity crowdfunding market will likely result in more scrutiny across the board for issuers, platforms, and the individuals involved as it relates to disclosure and compliance issues. We encourage platforms to assist issuers with understanding the importance of compliance and encourage issuers to be compliant before a fairly simple task becomes a significant business issue. The SEC’s Division of Enforcement has made it clear that “holding individuals accountable is the Commission’s most effective method of achieving deterrence. Experience teaches that individual accountability drives behavior and can also broadly impact corporate culture.”

LAWCLOUD ANNUAL REPORTING SOLUTIONS

Crowdfunding Issuers who have completed and filed their Form C through LawCloud are well aware of the time and cost reductions our Form C tool can provide. LawCloud also offers a cost-effective Form C-AR (Annual Report) service. LawCloud helped issuers file over 140 C-ARs in the last two years. These numbers are encouraging, but when taking into account that over 715 Form Cs were filed in 2019 and 763 were filed in 2018, it begins to highlight the disparity between Form C filers and subsequent C-AR filings.

The following data points from the SEC’s EDGAR database show the discrepancy of annual report filings versus Form C filings. While not all deals were completed or require annual report filing, there is clearly a shortfall in annual report compliance.

Since Equity Crowdfunding is still relatively new, there has yet to be an enforcement action brought by the SEC against an issuer that has failed to meet its annual reporting requirement. This is likely not an indicator of the SEC’s ambivalence toward the issue, rather, we interpret the current situation as one that has yet to reach the SEC’s radar given the small size of the market.

With new rule changes going into effect later this year that will permit Reg CF issuers to raise substantially more money, we fully expect that the SEC’s Division of Enforcement will focus more of its attention on this market and any disclosure deficiencies that have been previously ignored.

About LawCloud

LawCloud, previously known as iDisclose, was founded in 2015 and is an industry leading platform in the Crowdfunding and legal disclosure space with major contracts with various law firms as well as platforms such as WaterWorks, Title3Funds, MicroVentures, and FundMe. LawCloud offers legal document solutions for all small businesses, including regulatory documents, transactional documents, HR documents and more.
For more information about LawCloud, visit our website at LawCloud.co

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