For Regulation Crowdfunding (Reg CF) issuers, spring means more than tax time. Uncle Sam, through the Securities and Exchange Commission (SEC), requires the filing of 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.
Ignoring these reports, which update investors on company progress and financial information, 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 SEC is particularly protective of Reg CF-eligible retail investors. In its 2015 release, the SEC stated that it may pursue delinquent filers, even if they had remedied the late filing. “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.”
But even without this extreme action, founders ignoring the SEC annual reporting requirement 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 limit requires companies to formally register with the SEC and become fully reporting public companies—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 in 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.
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 filed Form C-U – this typically indicates a completed Reg CF funding round.
- We estimate that of the approximate 1,548 Form C filings, only 361 filed Form C-ARs; 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 annual report on Form C-AR is filed, depending on the issuer’s number of shareholders and total assets, although it must notify the SEC with Form C-TR: Termination of Reporting. Other companies must continue filing annual reports until a specified event occurs, such as registering the securities, repurchasing them, or ending operations.
NEXT powered by Shulman Rogers can ensure companies stay compliant with this important report and keep founders focused on growing their businesses. If your company needs guidance on complying with current or past Reg CF annual reporting requirements, please contact us for an initial consultation.
