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Recently, the Crowdfunding Professional Association issued a list of policy positions taken by its Board of Directors. I’m proud to serve on the Board. We started work on this official set of recommendations last year while I served as President. Crowdfunding lawyer Jenny Kassan has led the effort from its beginning. CfPA President Brian Christie now champions the policies.

Under Brian’s leadership, the CfPA will be hosting a Summit in Washington, DC, on October 22nd and 23rd. The first day of the event will be devoted to meetings with policymakers in their respective offices. We’re targeting meetings in four different Congressional offices, along with meetings with the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA). Conference registrants will be invited to participate in the meetings they choose.

Drawing on my personal experience working on Capitol Hill, I’ll lead the team meetings there.

The policy positions are intended to make small offerings easier and more affordable, enhance disclosure requirements to benefit both issuers and investors and create tax incentives for investors, benefitting Small Businesses.

What follows is my take on several of the policy recommendations that I find especially important and personally champion.

Reform of Requirements for Financial Reporting

The reporting requirements for Regulation Crowdfunding offerings are remarkably complex. Offerings up to $124,000 require certified GAAP financial statements. Offerings up to $1,235,000 require a financial review (much more formal and expensive than that word implies), and those above $1,235,000 require a formal audit. There is no exemption for newly formed businesses with no operating history.

The CfPA is recommending three key changes, all of which I support strongly:

1. Raise the $124,000 to $250,000. The CfPA has informally expressed support for the Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee’s proposal to raise that threshold to $350,000. I’ve previously expressed my support.

2. Allow Tax Return Disclosure. Rather than require small businesses to prepare a new set of financial statements based on GAAP, CfPA recommends allowing them to disclose the tax returns they are already required to prepare. This eliminates the need to pay to have a second set of financial statements prepared. This is consistent with the SBA’s requirements for small business loans.

3. Exempt Newcos from Financial Statement Requirements. A rather obvious step for simplifying offering requirements and reducing expenses will be to eliminate the need for newly formed businesses to provide financial statements, regardless of the scale of the offering. The CfPA and I support this change.

These changes would have a rather dramatic impact on the cost of and time required for a Reg CF capital raise. This will benefit both entrepreneurs and investors. When issuers save time and Money on a raise, it is easier to raise more money and increase the chances of success, benefiting investors, too.

Searchable PDFs on EDGAR

Entrepreneurs raising capital are required to file a Form C—a fairly detailed disclosure document—with the Securities and Exchange Commission. Portals customarily file the documents on behalf of the issuers.

Investors reviewing the documents want the documents to be searchable so they can find key sections of the document quickly. If the document isn’t, finding simple things like details about the deal terms is tedious and difficult. The Form C may be the best way to discover if a convertible note converts to common or preferred equity and what triggers that conversion. Similarly, a fully amortizing note terms like whether or not there is a personal guarantee or collateral may be easy to find in a searchable Form C, but challenging to find otherwise.

There is an added benefit. Current AI technologies like ChatGPT can read a searchable PDF, but can’t read it otherwise. The AI can help investors understand the offering.

The issue is more complex, I’ve learned, than simply requiring searchable documents. The SEC routinely rejects Form C filings based on formatting. Including links in the Form C can trigger a rejection. PDF documents can be saved in a flattened format, essentially converting the pages to non-searchable images and making the files instantly acceptable to the SEC while becoming much less valuable to investors.

The solution will be to get the SEC to make filing easier and require searchable documents.

Tax and Accounting Treatment of Securities

I love revenue-based financing as a tool for companies raising capital from the crowd. This tool can dramatically reduce the risk of Investing in a startup company by accelerating the return on investment. Investors don’t have to wait for the company to go public or get sold.

IPOs are extremely rare outcomes for startups; betting on one is a risky gamble. Some entrepreneurs have little or no interest in selling a business—they often make the best business leaders as they focus on long-term success over short-term value.

A revenue-based financing note that promises to pay three or four times the initial funding back to investors based on future revenue offers a lower risk, high-return investment opportunity.

Here’s the catch. Neither the IRS nor the Financial Accounting Standards Board (the FASB defines Generally Accepted Accounting Principles) provide formal guidance on the accounting for these instruments. It isn’t a huge problem, but lacking that guidance, accountants sometimes disagree on how to treat payments.

Imagine that the RBF note requires a payment of $5,000 to investors. How much of that payment is principal? How much is interest? For tax purposes, investors want the payment to be mostly principal, delaying the income until later. Companies, especially profitable ones, want to report interest expense to lower income taxes. Of course, for GAAP purposes, roles reverse. Investors want to report maximum income, and companies want to report minimum expenses. Guidance is needed!

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Upcoming SuperCrowd Event Calendar

If a location is not noted, the events below are virtual.

• Impact Cherub Club Meeting hosted by The Super Crowd, Inc., a public benefit corporation, on September 17, 2024, at 1:00 PM Eastern. Each month, the Club meets to review new offerings for investment consideration and to conduct due diligence on previously screened deals. To join the Impact Cherub Club, become an Impact Member of the SuperCrowd.

• SuperCrowdHour, September 18, 2024, at 1:00 PM Eastern. Each month, we host a value-laden webinar for aspiring impact investors or social entrepreneurs. At September’s webinar, Devin Thorpe will provide an in-depth answer to the question, “Can I Beat the Stock Market with Impact Crowdfund Investments?” Free to attend.

• Superpowers for Good Live Pitch, September 25, 2024. The application window is open now. Apply today! The Live Pitch will stream simultaneously to the e360tv network, Facebook, Linkedin, YouTube and Superpowers for Good. We hope for an audience of thousands! Don’t miss this opportunity to pitch your regulated investment crowdfunding campaign to the SuperCrowd!

• Recently, we created an AI GPT to help you learn more about The Super Crowd, Inc., a public benefit corporation, and our upcoming events. Click here to try it.

Community Event Calendar

• Community Revitalization – Devin Thorpe – SuperCrowd, Thursday, August 29, 10:00 AM Eastern.

• Successful Funding with Karl Dakin, Tuesdays at 10:00 AM ET – Click on Events

• Main Street Skowhegan and NC3 Entrepreneur Finance Workshop Series, September 17 – November 19, 2023.

• Power Your Passion: Funding Social Enterprises Through Crowdfunding, September 19, with Paul Lovejoy, Logan Fahey, Eve Picker and Devin Thorpe.

• Crowdfunding Professional Association, Summit in DC, October 22-23

• Asheville Neighborhood Economics, November 12-13.

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Originally Published on https://www.superpowers4good.com/

Devin Thorpe Champion of Social Good

Devin is the CEO of The Super Crowd, Inc., a public benefit corporation helping diverse founders and social entrepreneurs raise capital via impact crowdfunding. He is also a bestselling author who calls himself a champion of social good. His most recent book, How to Make Money with Impact Crowdfunding, is an investment guide for everyone. He has produced about 1,500 episodes of his show featuring luminary change agents, including Bill Gates. His books—read over 1 million times—help people do more good. He has helped nonprofits raise millions of dollars via crowdfunding. He draws on his experience as an investment banker, CFO, treasurer and U.S. Senate staffer. He earned an MBA at Cornell. Frequently finding himself on airplanes, Devin is grateful to be middle-seat-sized.