rose steelThe need for CPA reviews may explode when Jumpstart Our Business Startups (JOBS) Act stock offerings begin this May. Section 4 of the Securities Act of 1933 is amended to permit crowdfunding investments in emerging growth companies (EGC) of up to $1 million annually. Signed April 5, 2012, the JOBS Act recognized equity crowdfunding as an offering of unregistered securities through registered websites. After four years of deliberation the SEC will issue its final standards for crowdfunding in 2016. The time for CPAs to begin preparing is now.

Four years is a long time for an Act of Congress to take effect. At least one good thing came from the wait. Originally, if an EGC planned on raising between $500,000 and $1 million their financial statements would have to be audited. Now crowdfunders may proceed with a review of financial statements for the first offering. The rules already permit reviews of financial statements for campaigns raising between $100,000 and $500,000.

Prior to enactment of the JOBS Act entrepreneurs and charities had success on the Internet raising money from contributors in exchange for rewards or completed products. This Kickstarter type of funding, referred to as Reward Crowdfunding is famous for launching the Pebble Watch and Oculus Rift virtual reality glasses. The problem is supporters put up money and received a product; with equity crowdfunding investors get a piece of the company.

Title III of the JOBS Act entirely revolutionizes the eight decades old 1933 SEC Act. For CPAs with an entrepreneur interest, it’s a brave new world. The JOBS Act permits securities-based crowdfunding and permits Internet funding platforms that facilitate the offer and sale of securities without registration with the SEC as brokers. There are still no significant investor protections that purportedly delayed the rules for four years; so much for an Act of Congress.

The JOBS Act also prevents states from policing crowdfunding offerings until an alleged fraud has been committed. This means investors will need to do more research before they use the online sites.

“The two largest sites for reward crowdfunding, Indiegogo and Kickstarter have not experienced a high fraud because of the daylight effect that the Internet brings,” according to David Marlett, founder of the National Crowdfunding Association.

CPA Involvement

CPAs know the SEC wants to protect the small investor, which is why equity crowdfunding is so revolutionary. Anyone can invest at least $2,000. Beyond that amount, an investor is still restricted based on income or net worth. Issuers can use email, Facebook, and Twitter to offer an investment in their company as long as they hit 100% of their funding target.

“Anyone with over $100,000 annual income can invest 10% of yearly income.” said CPA firm audit director Mike Sharp. “If under $100,000 the investor can invest 5% of annual income or up to $2000. They already lifted the ban on advertising.

“For our firm, we will focus on startups and established companies who are looking to expand for these emerging growth companies. Certain sites will focus on different specialized areas. You really have to do some due diligence on how the accounting comes together. It may be the owner themselves. They may have only kept cash books.”

“They may not have any books,” said Don Pfluger, CPA, audit partner with Gallina. “We may help them select their accounting system. It will be all along the gamut. They may have QuickBooks or they may be pure startups with no transaction history to speak of.”

A review of financial statements reduces the cost and the assurance provided by an audit.

“A review provides limited assurance that is limited to inquiry and analytics to evaluate whether the statements have material misstatements and correcting them,” said Angie Moss, CPA, formally an audit partner with Sanford, Baumeister & Frazier. “There is no confirmation, or third party verification. You don’t confirm anything. You make inquiries whether cash was reconciled. You ask, was accounting consistent? You perform analytics on the numbers themselves. Then you write up the statements.”

“A review is a different level of service,” said Pfluger. “You do ratio analysis and ask questions. You get limited assurance that things are not materially misstated. With an audit you get reasonable assurance there are no misstatements. The general rule is; if an audit is $1, a review is 60 cents because you don’t have to do the audit tests.”

For clients interested in equity crowdfunding they must realize they are selling securities which is a highly regulated activity. Clients need to understand what they cannot do in order to keep them out of trouble. Each offering must include a business plan for a bona fide business and not an investment vehicle.

Failing to comply with the rules could mean the loss of their exemption. Clients cannot list their offering on more than one platform. Offering investment advice by the funding portal is not allowed. A launch party to promote your client’s offering is not permitted unless the portal is also a registered broker-dealer.

If a client hits their funding target, investors have the right to rescind. Clients must disclose anything about their business that has a material impact on an investor’s decision to back it. While the audit requirement has been removed for first time crowd fund issuers; clients must provide complete financial statements including balance sheet, income statement, statement of cash flow, and statement of change in owner’s equity. Clients raising under $100,000 must disclose their income tax return and certify it is correct.

Companies not eligible are non-U.S. companies, Exchange Act reporting companies, certain investment companies, and companies with no specific business plan or whose plan is only for merger or acquisition with unidentified companies.

Not everyone is a fan. Richard Swart, chief strategy officer at NextGeneration Crowdfunding may have built the largest collection of crowdfunding data nationally. “The collapse of fund raising from banks has forced a need for an access to capital,” Swart said. “Title III Internet fundraising from unaccredited investors may be the most expensive way to raise capital at 12-37%.” Swart is more bullish on the broader form of crowdfunding. “There are 11 different types of social funding. For alternative finance, the largest group in dollars is peer lending. Crowdfinance peer to peer lending has exploded,” he said.


The following disclosure financial statements are required for the SEC, investors, and the Internet portal facilitating the offering include: 

• Complete financial statements.

• A discussion of the company’s financial condition.

• A description of the business and the use of proceeds from the offering. 

• Information about officers, directors, and owners of over 20%.

• Certain related-party transactions.

• The price of the securities.

• The target offering amount.

• The deadline to reach the target offering amount, and whether the company will accept investments beyond the target.

• An annual report.

Crowdfunding Platforms 

MicroVentures claims to be one of the top five leading crowdfunding platforms in the U.S., raising more than $80 million from 30,000 investors. CEO Bill Clark said, “The new Title III crowdfunding allows investments not hidden behind a wall. You will have a lot more investors. The portal raise will not be more than normal, but the cost is $5-15,000. The portal charge is 5% of the raise which includes the escrow, communication, ACH or money transfers. We meet the team behind the company. If we believe in the story and the team the investment committee reviews the financials and projections and competition. It takes two weeks to consider, two weeks to prepare, and 30 days to raise. Five weeks without and seven weeks with an audit.

“The exit’s through an IPO which is rare. More likely a larger round will cash out the investors at a certain valuation. There could also be a merger. There should be a private market for these deals down the road. Investors may need liquidity.”

StartEngine is a portal that already executed crowdfunding with non-accredited investors through Title IV crowdfunding (Reg. A+). According to CEO Ron Miller, “Under Title III there are no other legal requirements other than being a corporation. The review cost would depend on the condition of the books. A small company who doesn’t have a CFO, the CPA needs to know the viability of crowdfunding for raising capital for these companies.”

Advice for interested CPAs continued with Douglas S. Ellenoff, a member of the law firm Ellenoff Grossman & Schole. “I believe there will be people [CPAs] who will spread their costs over several [crowdfunding] deals and get the opportunity to provide them, said Ellenoff.” Ellenoff expects Reg. A+ audits and the cost for reviews will probably come down. “Clever people are using technology to automate and intelligently reduce the cost of making it [an audit] happen,” he said.

Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software, now owned by Microsoft, and launched CPA Software News in 1991.

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