Preparing for an A+ grade: financial statements

Just over four weeks to go to effectiveness of new Regulation A, and time for another post on Reg A+ topics. This time I’d like to discuss Tier 1 financial statements. I’ve seen some chatter to the effect that while financial statements for Tier 2 offerings must be audited, Tier 1 financials must be reviewed by a CPA. Actually, not so. The SEC’s rules just say “need not be audited.” No review required.

But don’t start cheering yet.

The absence of the audit requirement may make Tier 1 look like a more attractive option for companies raising a smaller amount of money and only intending to target investors in one state. But it’s not going to be as easy as it might seem. Financial statements even for Tier 1 must be prepared in accordance with US Generally Accepted Accounting Principles (GAAP). Many small companies do not have personnel who are experienced in the application of accounting principles, and it is easy to imagine circumstances in which SEC comments during the review process, either on the financials themselves or on the “Management’s Discussion and Analysis” based on those financials, would lead to questions with respect to GAAP compliance of financials produced, for example, by popular accounting software such as QuickBooks. QuickBooks isn’t GAAP-compliant. I spend hours each month trying to force QB data into an Excel spreadsheet that is vaguely GAAP-compliant. In order to ward off delays created by having to revise or reformat financial statements, having a qualified accountant at least compile the financial statements, even if the company cannot afford an audit, might prove wise.

 Additionally, even though the SEC doesn’t require audited financial statements for a Tier 1 offering, many states (Arizona, New Mexico, for example) require audited financials in order for the offering to be made in the specific state.Even in states that do not require audited financials, the absence of audited financials may create concerns for regulators in merit review states where regulators believe that the unaudited financial statements do not present a fair picture of the issuer’s operations.

It’s just one of the many reasons we don’t see Tier 1 as an attractive option for early-stage capital-raising.

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