CF countdown: auditing and review requirements

Issuers of securities under Regulation CF will be required to provide financial statements prepared in accordance with US Generally Accepted Accounting Practices (U.S. GAAP) covering the two most recently completed fiscal years (or shorter period since inception). The type of review that these financial statements have to undergo depends on the amount sought, the amount of securities that the issuer has already sold in reliance on Regulation CF in the preceding 12 months, and whether the issuer has previously sold securities in an offering under Regulation CF:

  • If current offer plus previous raises amounts to $100,000 or less, the financial statements must be certified by the principal executive officer and accompanied by information from the company’s tax returns.
  • If current offer plus previous raises amounts to $100-500,000, the financial statements will be required to be reviewed by a CPA.
  • If current offer plus previous raises amounts to $500,000 or more, the financial statements must be audited by a CPA. However, if the issuer has not previously sold securities under Regulation CF, the financial statements will only be required to be reviewed by a CPA.

The review standards to be used by the accountant are the Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. While there has been widespread applause at the flexible position taken by the SEC with respect to audit requirements for first-time issuers, issuers should realize that the review process is a substantive one. As anyone who has ever shepherded a company through the review process knows, this is no insignificant task. Look at the procedures the accountant has to followReputable accountants estimate that the review process may involve 80% of the effort (and thus the cost) of an audit for an early-stage company. If issuers have been using simple financial statement software like QuickBooks, the reviewing CPA is likely to require them to revise, reformat and expand their financial statements in order to meet GAAP requirements.

As a QuickBooks user myself, I spend some hours at the end of every month manually transposing QB data into a spreadsheet that presents my financials in a format closer to GAAP.

And it’s not just formatting; it’s making sure that you have adopted accounting policies that are in accordance with GAAP. One issue that startups with revenue should pay particular attention to is their revenue recognition policies.

So we should all be pleased at the SEC’s flexible position, but we should not underestimate the amount of work that issuers will have to do to make sure that their financials conform to GAAP, or the work an accountant will have to do to check that.

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