Who this is for
- US corporations and LLCs planning a Regulation Crowdfunding offering
- Newly formed companies unsure which financial statements the offering needs
- Companies that have raised through Regulation Crowdfunding before and plan another raise
Not covered here
- Audit, review and compilation compared, and other securities rules that require them
- What an individual funding portal or broker-dealer asks for beyond the SEC rule
- Eligibility for the exemption, investor limits, Form C contents other than the financial statements, and marketing rules
- What a review or audit costs: neither the rule nor SEC guidance gives a figure
Which Reg CF financial statements does a raise need: certified, reviewed or audited?
The size of the raise decides, not the age of the company. Under the SEC's Regulation Crowdfunding (Reg CF) rule, the statements in the company's offering document (Form C) are certified by its principal executive officer (the person who runs it), reviewed by an independent public accountant, or audited, with one exception for a first Reg CF raise (17 CFR 227.201(t)). The table has the amounts.
| Amount counted for the offering | Statements required |
|---|---|
| $124,000 or less | Financial statements, plus income and tax figures from the latest federal return if one was filed, certified by the principal executive officer |
| More than $124,000 up to $618,000 | Financial statements reviewed by an independent public accountant |
| More than $618,000 up to $1,235,000, for a company that has never sold securities under Reg CF | Financial statements reviewed by an independent public accountant |
| More than $618,000 for a company that has sold under Reg CF before, or more than $1,235,000 for any company | Financial statements audited by an independent public accountant |
The SEC adjusts these amounts for inflation at least every five years (SEC fact sheet), so check the current text of the rule before relying on a figure.
Stronger statements replace weaker ones. If audited statements already exist, the company must provide them instead of reviewed ones. In the lowest tier, if reviewed or audited statements exist, the company provides those and drops the tax figures and the officer's certification. A company may also choose to meet a higher tier than its raise requires.
A case is not simple when:
- The maximum and earlier Reg CF sales push the counted amount over a tier line.
- The company, a company it controls or shares control with, or a predecessor (a business it took over) has raised through Reg CF before.
- The company is days or weeks old.
- A funding portal asks for reviewed statements, but the books are a spreadsheet, the cash basis or the tax return's basis, and the statements must follow U.S. GAAP.
- The offering will still be open more than 120 days after a fiscal year-end.
Gather before anyone reviews the statements:
- Formation date and state
- Target and maximum raise
- Every Reg CF sale in the last 12 months by the company, any company it controls or that is under common control with it, and any predecessor, with closing dates
- Bank statements and ledgers since formation
- The cap table
- The latest federal income tax return, if one has been filed
- Any reviewed or audited statements that already exist
If an accountant also keeps the company's books, ask early whether that accountant can also review them: independence may rule it out (see the reviewer section below).
Which raise amount counts, and what is added to it?
The counted amount is this offering's target plus everything sold under Reg CF in the preceding 12 months. If the company will accept proceeds above its target, the maximum it will accept goes into the calculation (Instruction 1 to 227.201(t)). Sales in that 12-month window also count toward the cap on what one company can sell under Reg CF in any 12 months, $5,000,000 (17 CFR 227.100(a)(1)). SEC staff measure that cap on a rolling basis from the date of each closing (Question 100.05); the tier rule says only "preceding 12-month period," so have a securities lawyer or the portal confirm a sale near the 12-month edge.
For this rule, "the company" includes any entity it controls, any entity under common control with it, and any predecessor. Control means the power to direct management and policies, through voting securities, contract or otherwise (17 CFR 227.100(c)). A sale that is more than 12 months old drops out of the sum, but it still makes the company a repeat issuer.
What if this is my first Reg CF raise and it is above the review tier?
A first-time issuer needs a review, not an audit, when the counted amount is above $618,000 and not more than $1,235,000. Above $1,235,000, an audit is required even on a first raise (17 CFR 227.201(t)(3)).
"First-time" means the company, any company under common control with it, and any predecessor have never sold securities under Reg CF. The rule text sets no time limit on having "previously sold," so a raise from years ago ends first-time status on its face. For what an audit involves and how to get the books ready, see audited financials for investors.
What if the company is brand new, with almost no financial history?
Age does not change the tier; the counted amount does. A company a few days old that counts at or below $124,000 needs no outside accountant: its principal executive officer certifies the statements. One that counts higher needs a review, or an audit past the first-time limit, like any other company. If neither it nor a related company or predecessor has raised under Reg CF, a review covers it up to $1,235,000.
SEC staff say a recently formed company may present a balance sheet dated at formation if the offering is conducted during the period from formation until 120 days after the end of its first fiscal year. The income, cash flow and equity statements then do not apply (SEC staff Question 201.01).
| When the offering runs | Balance sheet | Other statements |
|---|---|---|
| From formation until 120 days after the end of the first fiscal year | Dated within that period; the formation date works | Not needed when the balance sheet is dated at formation |
| More than 120 days after the first year-end, before a second year-end | At the end of that year | For the period from formation to that year-end |
| More than 120 days after a second year-end | At the end of each of the last two years | For each of the last two years; the first may be a short period from formation |
Within 120 days after a later year-end, the year just ended may be left out if its statements are not yet available (Instruction 4; see the section on how current the statements must be).
If the new company took over an existing business, the rule's references to the company include its predecessors (Instruction 11 to 227.201(t)), so a formation-date balance sheet may not fit. Settle this with the reviewer before relying on it.
A review needs something to review. Where a middle-tier raise by a new company presents only a balance sheet dated at formation, that balance sheet would be the only statement to review. SEC staff Question 201.01 does not address a review of a lone formation balance sheet, and the rule does not say whether a reviewer will accept that scope, so confirm it with the reviewer before engaging one. The rule sets no fee, and neither it nor SEC guidance gives a cost for a review; for what startup bookkeeping and returns cost, see startup accounting cost.
What must Reg CF financial statements contain, and on what basis?
They must follow U.S. generally accepted accounting principles (U.S. GAAP) and include these statements (Instruction 3 to 227.201(t)):
- Balance sheets
- Statements of comprehensive income
- Statements of cash flows
- Statements of changes in stockholders' equity
- Notes to the financial statements
They cover the two most recently completed fiscal years, or the period since formation if shorter. Statements that are not audited, reviewed ones included, must be labeled "unaudited."
Cash-basis or tax-basis books are not U.S. GAAP until adjusted; see cash or accrual for a small business and revenue recognition for a startup. The rule's wording is "stockholders' equity." Ask the reviewer how that statement is titled and presented for an LLC or partnership.
A company may elect to follow new accounting standards only on the dates that apply to companies that are not "issuers" under the Sarbanes-Oxley Act; it must say so in its offering statement, apply the choice to all standards, and cannot elect it later if it declines now (Instruction 5).
How current must the statements be, and when are they updated?
The statements must cover the two most recently completed fiscal years, with a 120-day window after each year-end (Instruction 4 to 227.201(t)).
| Offering starts | Statements required |
|---|---|
| Within 120 days after the fiscal year-end (late April for a calendar-year company) | The two most recently completed years if they are available; otherwise the two years before the most recently completed one |
| More than 120 days after the fiscal year-end | The two most recently completed years |
If day 120 falls on a weekend or holiday, the next business day counts as day 120.
If an offering with at least one closing already held is still open more than 120 days after the fiscal year-end, the company files an amendment to its Form C with updated statements that meet the rule, plus an annual report on Form C-AR, and keeps filing progress updates (SEC staff Question 201.03).
After a raise, the company files an annual report on Form C-AR with the SEC and posts it on its website within 120 days after its fiscal year-end. Its statements are certified by the principal executive officer, or reviewed or audited ones are provided if they exist. Neither an audit nor a review is required (17 CFR 227.202(a); SEC guidance). The duty ends only on an exit the rule lists, for example after at least one annual report since the latest sale if the company has fewer than 300 holders of record (17 CFR 227.202(b)).
What tax return information goes in for a small raise?
Only the lowest tier asks for it, and only when reviewed or audited statements are not available. The company gives its total income, taxable income and total tax, or the equivalent line items, from the federal income tax return filed for its most recently completed year, if any. The principal executive officer certifies that the figures reflect the return accurately (17 CFR 227.201(t)(1)).
- Latest return not filed yet: give the prior year's figures, and add the latest year's when the return is filed during the offering.
- Extension requested: the figures are not required until the return is filed, if it is filed during the offering.
- No return filed and none due before the offering ends: no tax figures are needed.
The same officer certifies that the statements are true and complete in all material respects (Instruction 7). That is not the only exposure. A purchaser can sue over an untrue or misleading statement in the offering, and the statute treats as the issuer the company, its directors or partners, its principal executive, financial and accounting officers, and anyone who offers or sells the securities, unless they show they did not know and with reasonable care could not have known (15 U.S.C. 77d-1(c)). The suit must come within one year after the problem was or should have been discovered, and within three years after the sale (15 U.S.C. 77m).
"Equivalent line items" matters for pass-through entities. A partnership reports income on an information return but does not pay income tax (IRS: Partnerships). An S corporation passes income through to its shareholders (IRS: S corporations). The rule does not list which return lines stand in for taxable income and total tax, so that is a call for the person who prepared the return.
Who can review or audit Reg CF statements, and what is a modified report?
The reviewer or auditor must be an independent public accountant: a CPA registered and in good standing where the CPA lives or has a principal office, or a public accountant in good standing and entitled to practice there. The signed report must have no modification (Instructions 8 to 10 under 17 CFR 227.201(t)).
| Review | Audit | |
|---|---|---|
| Standards | AICPA Statements on Standards for Accounting and Review Services | AICPA auditing standards (U.S. GAAS) or PCAOB standards |
| Report | Signed review report must accompany the statements | Signed audit report must accompany the statements |
| Report that fails the rule | Any modification | A qualified opinion, an adverse opinion or a disclaimer of opinion |
- Independence: the accountant must meet either the SEC's independence rule, 17 CFR 210.2-01, or the AICPA's independence standards.
- Status: the accountant must be a CPA duly registered and in good standing under the laws of the place of residence or principal office, or a public accountant in good standing and entitled to practice there.
- Notice: the company must tell the accountant it intends to use the report in the offering.
Under the SEC's independence rule, an accountant is not independent if, during the audit and professional engagement period, it maintains or prepares the company's accounting records, or prepares financial statements filed with the SEC or forming the basis of those filed, unless it is reasonable to conclude that the results will not be subject to audit procedures (17 CFR 210.2-01(c)(4)). The AICPA standards are a separate test. Settle with the reviewer, before either engagement starts, whether the firm that keeps the books can also review them under the standard the reviewer applies.
The rule does not define "modification." Ask the reviewer, before the engagement, whether the report they expect to sign will be unmodified, since a modified review report does not meet the rule (Instruction 8).
A compilation is not one of the three levels the rule names. For how review, audit and compilation differ, see audited financials for investors.
Example
These examples are illustrative; the figures are in US dollars.
A four-week-old company raising $100,000
A Delaware corporation formed four weeks ago sets a $100,000 target and will take nothing above it. It has sold nothing under Reg CF, so the counted amount is $100,000, which is in the lowest tier. Its principal executive officer certifies the statements. The offering falls in the window that runs from formation until 120 days after its first fiscal year-end, so the statements can be a balance sheet dated at formation, labeled unaudited. The company has filed no federal return and none is due before the offering ends, so no tax figures are needed. If it set a $200,000 maximum instead, that maximum would go into the calculation and the middle tier, a review, would apply.
A second-year startup raising $400,000
A startup in its second year targets $400,000, will accept nothing above it, and has sold nothing under Reg CF. The counted amount is above $124,000 and below $618,000, so an independent public accountant must review U.S. GAAP statements covering its completed fiscal years, up to two, and the signed review report must carry no modification. If it had also sold $250,000 under Reg CF five months ago, the counted amount would be $650,000. That is above the review tier, and because the company has sold under Reg CF before, it would need an audit.
A repeat raiser targeting $1,000,000
A company raised $150,000 under Reg CF 14 months ago and now targets $1,000,000, accepting nothing above it. The earlier sale is outside the 12-month window, so the counted amount is $1,000,000, above $618,000. The company has sold under Reg CF before, so the first-time exception does not apply. The statements must be audited under U.S. GAAS or PCAOB standards, and the signed audit report cannot be qualified, adverse or a disclaimer. The company must also be current on the annual reports required from its earlier raise, or the exemption is not available (17 CFR 227.100(b)(5)).
Different for you?
- Your funding portal asks for reviewed statements and your books are a spreadsheet, the company is days old, or you cannot tell which tier the raise is in: the tier turns on the amount counted, and a review needs U.S. GAAP statements behind it. Work through it with startup accounting help; the review itself comes from an independent accountant. If the books are also behind, see cleaning up your books before fundraising.
- A lender, investor or another securities rule asks for an audit or review: see audited financials for investors.
- You are preparing for investor diligence, or you just raised: see financial records investors ask for, bookkeeping for a venture-backed startup and startup accounting software before funding.
- You want to know what startup bookkeeping and returns cost: see startup accounting cost.
- You raised under Reg CF before and missed an annual report: the exemption is not available until the company has filed with the SEC and provided to investors the annual reports required during the two years before the new offering statement (17 CFR 227.100(b)(5)). A securities lawyer can confirm where you stand.
- The company is organized outside the United States (for example in Canada), or has owners abroad: Reg CF requires an issuer organized under the laws of a US state, territory or the District of Columbia (17 CFR 227.100(b)(1)); that test looks at where the company is organized, not where its owners live. Other eligibility conditions apply, and a securities lawyer can confirm them.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Regulation Crowdfunding: top of the tier allowing officer-certified statements and tax return figures Target offering amount plus Regulation Crowdfunding sales in the preceding 12 months; reviewed or audited statements must be used instead if available. Inflation-adjusted by the SEC. | $124,000 | eCFR: 17 CFR 227.201(t)(1) Checked |
| Regulation Crowdfunding: top of the tier requiring reviewed statements More than $124,000 up to this amount requires statements reviewed by an independent public accountant; above it, audited statements, except a first offering up to $1,235,000. Inflation-adjusted by the SEC. | $618,000 | eCFR: 17 CFR 227.201(t)(2)-(3) Checked |
| Regulation Crowdfunding: top of the reviewed-statement tier for an issuer's first crowdfunding offering Applies to issuers that have not previously sold securities under section 4(a)(6); above this amount, audited statements are required. Inflation-adjusted by the SEC. | $1,235,000 | eCFR: 17 CFR 227.201(t)(3) Checked |
| Regulation Crowdfunding: most one issuer may sell in any 12-month period Aggregate amount sold under section 4(a)(6) during the 12 months before the offer or sale, including the securities offered in that transaction. The SEC left this limit unchanged in its inflation adjustment. | $5,000,000 | eCFR: 17 CFR 227.100(a)(1) Checked |
Primary sources
- eCFR: 17 CFR 227.201 (Regulation Crowdfunding disclosure, paragraph (t) financial statements)
- eCFR: 17 CFR 227.100 (Regulation Crowdfunding exemption and requirements)
- eCFR: 17 CFR 227.202 (Regulation Crowdfunding ongoing reporting)
- eCFR: 17 CFR 210.2-01 (Qualifications of accountants)
- SEC: Regulation Crowdfunding, Guidance for Issuers
- SEC: Regulation Crowdfunding Compliance and Disclosure Interpretations
- SEC: JOBS Act Inflation Adjustments fact sheet
- US Code: 15 U.S.C. 77d-1, requirements for certain small transactions
- US Code: 15 U.S.C. 77m, limitation of actions
- SEC: Regulation Crowdfunding
- IRS: Partnerships
- IRS: S corporations
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.