JOBS Act Reviews- What to Expect

After a years-long deliberative process, the SEC finally voted in October of 2015 to approve rules that will govern equity crowdfunding with general solicitation through registered funding portal or broker-dealer intermediaries. The provision of the Jumpstart Our Business Startups Act (AKA the JOBS Act Title III) allowing investment funds to be raised online took effect in May of 2016.

The final rules include some disappointing points. The annual fundraising and investment limits are far too low, in my opinion. Nevertheless, there are a few small victories for startups. One such measure is a single use exemption from the requirement to obtain a financial statement audit prior to the offering by companies raising $1,000,000 or less. Companies raising up to $500k (or $1,000,000 for first timers) under Title III may use financial statements reviewed by an independent accountant. Companies raising less than $100k can meet disclosure requirements by presenting the company’s most recent tax return.

Why Reviews?

Congress left the rulemaking process associated with the JOBS Act to the SEC. The SEC originally wanted audits due to the perceived high risk of fraud associated with small sales of non-public securities. However, the main objection raised by citizens who took the time to comment on the proposed JOBS Act Title III rules was that early stage companies often have little or no activity for an auditor to examine. Companies raising money before commencing operations would be placed in the position of having to front potentially thousands of dollars for an independent auditor to examine and certify pro-forma, or “shell” financials, with little benefit to the investing public or mitigation of disclosure risk. It seems that the SEC took those comments to heart.

A review is a type of attest engagement whose purpose is nothing more than to provide an opinion as to whether the form of a company’s financial statements is appropriate, stated in accordance with GAAP, and free of obvious errors. Reviews include a limited amount of investigation and analysis, but not detailed scrutiny of supporting records and business practices.

What Does A JOBS Act Review Entail?

If your company requires a review to comply with JOBS Act Title III fundraising requirements, you will need to get in touch with an independent Certified Public Accountant. Independent means that a staff accountant or consulting accountant probably cannot do the work for you. Many (but not all) states have licensing requirements that prevent or limit practice by accountants licensed in other states, so you may need to find a firm that is local to your area or at least in the same state.

Your reviewer will ask for financial statements, accounting records, business formation records, and a variety of other documents as part of the review. It is helpful if you’ve retained another practitioner early to help you prepare for the review. If you don’t have financial statements, the reviewer should be able to assist you with putting them together.

A review should take less time to complete than an audit, but expect the work to take at least one to two weeks in most cases. When the review is complete, the reviewer will issue a report on your financial statements that says whether they are stated fairly and in accordance with GAAP. If significant deficiencies are noted, then you will most likely be informed in advance and given the opportunity to correct them. It is rare for a company to receive other than an unqualified report for a review or audit engagement, so don’t worry if your financials are less than pristine at the outset.

What happens after the JOBS Act offering is concluded?

JOBS Act Title III offerings are limited to $1,000,000 in a year. The audit exemption is only good for one offering. Many companies will eventually need quarterly reviews and an annual audit, either because they are using Title III for subsequent rounds of fundraising or because they elect to use another SEC rule with more stringent requirements.

If you need help preparing for your JOBS Act Title III offering (or a subsequent round of fundraising) we can help! Contact us for more information.