By Zac Blanco, CPA, CFE, Business Assurance & Advisory Services Partner
Crowdfunding Overview and Accounting Considerations
Traditionally, businesses that are trying to get off the ground could raise capital through various different methods including equity financing, convertible debt, debt financing, and venture capital, etc. Each option comes with its own advantages and disadvantages.
Innovative companies are now turning to another funding option, crowdfunding, to raise the money they need to fund their business.
What is Crowdfunding?
- Crowdfunding leverages crowdfunding platforms, networks, and marketing campaigns to pull large groups of investors and entrepreneurs together.
- Investors can choose from thousands of business investments with varying contribution and investment sizes.
- Businesses pitch their idea with the intent to raise hundreds of thousands to millions of dollars from the investor pool.
What are the Financial Reporting Requirements for Crowdfunding?
In order for a business to fund raise under Regulation Crowdfunding, certain financial information must be disclosed. The financial reporting requirements depend on incorporation date and raise size.
Business incorporated more than 6 months ago, and raising…
- Less than $250K: A company will need its 2 most recent years of financials in GAAP (generally accepted accounting principles) format. These do not have to be reviewed by an independent CPA.
- More than $250K: The company needs its 2 most recent years of financials in GAAP format and a CPA Review
- More than $1.07M: The company will need its 2 most recent years of financials in GAAP format and an Independent Auditor’s Report.
Business incorporated less than 120 days ago and raising…
- Less than $107K: The business will need a cover sheet, balance sheet and footnotes for the period spanning your incorporation date up to the current date.
- More than $107K: The business will need a cover sheet, balance sheet, and footnotes, and a CPA Review Statement.
- More than $1.07M: The business will need a cover sheet, balance sheet, and footnotes, and an Independent Auditor’s Report.
- If the business recently incorporated but do has 2 prior years of operating history (e.g. a company operated as an LLC for a while and then recently converted to a C corp), then the business will need 2 years of financials in GAAP format. If the company is raising more than $107K, they will need to include a CPA Review Statement.
Business incorporated more than 120 days ago, but within the last 6 months, and raising…
- Less than $107K: The business will need financials in GAAP format for the period spanning your incorporation date up to the current date.
- More than $107K: The business will need financials in GAAP format for the period spanning your incorporation date up to the current date and a CPA Review Statement.
- More than $1.07M: The business will need financials in GAAP format for the period spanning your incorporation date up to the current date and an Independent Auditor’s Report.
- One exception – if it’s a business’s second Regulation Crowdfunding campaign and they raise more than $535K, the business will need audited financials. These will have to be completed by a CPA who is qualified to complete audits.
What a Business Needs to Include in the GAAP Financials for Crowdfunding Raises
*with the exception of companies incorporated less than 120 days ago
- Cover page
- Balance Sheet
- Income Statement
- Statement of Cash Flows
- Statement of Stockholder’s Equity
*Footnotes are typically 2 -5 pages and usually include: business information, accounting policies, an explanation of your taxes structure, a summary of significant balance sheet accounts (i.e. – debt, equity, etc.)
Talk to an Advisor about Accounting Compliance Requirements for Crowdfunding
Business owners of early-stage companies are often overwhelmed by the complexity associated with securing funding as well as the financial reporting requirements once funding is secured. The process is not easy. Nor should it be undertaken without the appropriate advisors to partner with you through the process.
Questions on the appropriate financial reporting for your startup’s capital raise? Contact your Opportunity Advisor or Email | Call: 804.747.0000
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.