SEC Proposed Rules
One of the most controversial provisions of the Act and the proposed rules concern the audited financial statements requirement. Specifically, depending on the offering amount, the SEC would require that the issuer’s financial statements be either certified by the issuer’s principal executive officer (< $100,000), reviewed by an independent public accountant ($100,000 – $500,000), or audited by an independent public accountant in accordance with either the AICPA or PCAOB auditing standards (> $500,000). While the SEC recognizes that many, if not most, issuers engaging in crowdfunding are likely to be early-stage startups, the agency says it does not believe compliance with this requirement would be burdensome for those companies. Nevertheless, the SEC itself estimates that companies may have to pay nearly $29,000 for an auditor to review their annual statements. To be sure, audited financial statements would provide added protection for potential investors, but for many small businesses, it could be a show-stopper. For a $500,000 offering, a $29,000 audit would be almost 6% of the amount raised, and there would be a lot of other associated costs, such as portal fees, systems implementation, and other issues.
Similarly, the Act and the proposed rules impose a significant burden on intermediaries by requiring them to register with the SEC and a self-regulatory organization and to provide investors with education materials, among other things. The preamble to the proposed rules says that intermediaries would have to maintain and implement systems to comply with this requirement but that intermediaries have the flexibility to determine how best to go about it. For instance, the SEC estimates that the cost of compliance for intermediaries that register as funding portals, which include registration, platform development, and other requirements, would be about $417,000 for the initial year and $90,000 per year thereafter. While this might be a trifle sum for some big players, it could, nevertheless, be a significant burden that would surely change the existing crowdfunding landscape.
Meanwhile, what are startups and small businesses seeking crowdfunding to do until the SEC finalizes the rules? Our next post will look at intrastate crowdfunding as a possible alternative to federal crowdfunding.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
About the Author
So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Office, P.L.L.C. She concentrates her practice on business law. So-Eun can be contacted at: (347) 921-0173 or email@example.com. Her profile is available on www.mcbrideattorneys.com.
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
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 Id. 66,528.About the AuthorR. Shawn McBride — is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride Law Firm or call (214) 418-0258.