This is a guest blog post by David Gosselin of Dbbmckennon. Don’t miss David’s panel discussion:
? 12/07/2016 3:00 pm
Panel Discussion “Accounting Pitfalls in Crowdfunding”
Since equity crowdfunding started about in 2015 via Regulation A (Reg A+) myself and my firm, dbbmckennon, have been activity involved in the equity crowdfunding community. When Regulation Crowdfunding (Reg CF) went live in 2016, we doubled down on our efforts to be one of the leading CPA firms in the nation supporting the businesses undertaking an equity crowdfunding raise. Since that time, we have been a part of more Reg CF and Reg A+ filings than any other PCAOB registered CPA firm in the nation.
As a reminder, first time Reg CF issuers raising over $100,000 require a two-year review by an independent CPA, and Reg A+ filers require a two-year audit from an independent CPA, which is why we get involved.
Being part of so many campaigns, we get to see what works, what doesn’t work, how management teams succeed or fail, and where delays occur. In our experience, most campaigns experience delays from their anticipated launch date for one reason or another. Sometimes because marketing needs to be finalized, legal needs to review the filing, or the required review/audit is not yet complete. As experts on the accounting and auditing side, here are the main reasons why delays occur due to the review/audit requirements.
- Early stage companies think of accounting as an afterthought. Therefore, they have no financials to be reviewed or audited.
You don’t know how many conversations I’ve had with potential issuers who don’t even have a QuickBooks file. Sometimes they haven’t even filed tax returns or those tax returns are egregiously wrong. As an auditor, you can’t start anything until you have a base of information. This causes the Company to have to create historical financials from scratch which can take time.
- Recording of cash transactions form your bank statements is not GAAP (Generally Accepted Accounting Principles) and QuickBooks can’t solve the issue alone.
Most entrepreneurs think that since they have a QuickBooks file and a CPA that helps them with tax returns at year end or a bookkeeper who helps them weekly, it means their books are clean and GAAP compliant. Unfortunately, that is far from true. GAAP means accruing liabilities, deferring revenue if not earned, and a bevy of other things most businesses don’t do automatically. Most businesses record transactions on a cash basis…cash in, cash out. But GAAP also means, accounting for non-cash transactions: depreciation, amortization, interest expense, stock based compensation, discounts to debt, etc… After all that is done, it also means drafting footnotes to accompany your financial statements. Think of an annual report from a public company you invest in (i.e. Tesla, Apple, Ford, etc). Your financial statements for Reg CF and Reg A+ should be very similar, including all the disclosures. That’s not meant to scare anyone, but to let you know there is work to be done to be GAAP compliant.
- It’s the debt and equity!
This is the single most significant delay causing issue…debt and equity transactions. This is because people don’t know what they don’t know. Stock options are a form of compensation and under GAAP required to be valued and expensed as they vest just as if you gave that person cash periodically. Preferred stock may have liquidation preferences that need disclosure, or might be mandatorily or contingently redeemable which make stock be presented as debt, mezzanine equity, or permanent equity depending on the terms and whether you are filing a Reg CF or Reg A+. Sound complicated….it is. All these transactions (and plenty more) are outside the expertise of probably 80% of all CPA’s in the country let alone the entrepreneur. This is why your average bookkeepers or tax accountants are not a good source of expertise if you have convertible debt or equity issuances, and also why you need to speak with a CPA that is experienced working with SEC type clients. The easiest way to do that, is find a CPA firm that is PCAOB registered (which generally means they work with public companies).
- Waiting until the last minute to get the accounting work done.
Contrary to popular belief, any good CPA does not wait around every day for work to come in the door. We schedule our work out days, weeks, and sometimes months in advance. Fitting new work into an already busy schedule is a balancing act. Reviews and audits also take significant man-hours. Reg CF reviews generally take 3-10 business days from when information is received. Reg A+ audits can take anywhere from two weeks to two months depending on size, complexity and readiness. So, plan this work in advance with your CPA, so they can schedule your project.
The moral of the story is, be prepared, be informed, get good advice, and use a qualified CPA and auditor to make sure you are compliant with the financial requirements of Reg CF and Reg A+. Doing these things will ensure there are no delays in your campaign due to accounting and auditing requirements.