Business Reporting Language (XBRL).
Comments on Proposed Rules
We received numerous detailed suggestions from commenters on our proposed financial statement requirements for Part F/S of Form 1-A. Commenters were generally supportive of the proposed rules, but also raised concerns as to the effect some of the proposed requirements for audits in Tier 2 offerings could have on issuers and recommended clarifying revisions that would help to make the financial statements more consistent in some respects with those required in registered offerings, while also eliminating potentially confusing or inconsistent terminology.
Commenters generally supported the proposed increase to two years of balance sheets.393 One commenter noted that the Commission’s proposal to require two years of balance sheets was appropriate, particularly in light of the existing requirement to provide
391 See discussion in Section II.E.1. below.
392 See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
393 See, e.g., CFA Institute Letter; ABA BLS Letter.
statements of income, cash flows and stockholders’ equity for two years.394 Another commenter, however, argued against two years of balance sheets for Tier 1 issuers instead of the one year required under existing Regulation A.395
While commenters generally approved of the proposed rules not requiring audits for Tier 1 issuers,396 many recommended making changes to the proposed auditing requirements for the financial statements included in an offering.397 One commenter
recommended not requiring audited financial statements until after the first year of operations as a “public startup company” or not at all for companies that are pre-revenue or that have paid-in capital, assets and revenues below a specified threshold.398 Many commenters recommended allowing Tier 1 issuers to designate financial statements as “audited” if the auditor was only independent in accordance with the rules of the AICPA and not in accordance with the Commission’s auditor independence rules.399 These commenters noted that the proposed requirements for financial statements only to qualify as “audited” if the auditor complies with the independence standards of Article 2 of Regulation S-X, as opposed to the independence standards of the AICPA, may increase costs to smaller issuers due to the increased likelihood that an issuer would need to have
394 ABA BLS Letter (noting that in light of the existing requirements, the proposed change did not seem unduly burdensome).
395 Campbell Letter.
396 See, e.g., CFA Institute Letter; ABA BLS Letter; Campbell Letter.
397 ABA BLS Letter; BDO Letter; Canaccord Letter; CAQ Letter; CFA Letter; CFIRA Letter 2; Deloitte Letter; E&Y Letter; Letter from KPMG LLP, March 24, 2014 (“KPMG Letter”); Letter from McGladrey LLP (“McGladrey Letter”); MoFo Letter; WOC Letter; WR Hambrecht + Co Letter.
398 Letter from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 25, 2014 (“Public Startup Co. Letter 3”) (suggesting three tiers, where at least the first two would not require audited financial statements); Public Startup Co. Letter 6.
399 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter.
their financial statements audited a second time by an auditor who was independent under Rule 2-01 of Regulation S-X. One commenter requested clarification of whether a Tier 1 issuer could voluntarily provide an audit opinion on its financial statements that was obtained for other purposes if the auditor complied with U.S. GAAS, including AICPA independence standards, but not with the Commission’s independence rules.400 Several commenters recommended requiring Tier 1 issuers that provide unaudited financial statements to label them as unaudited.401
Many commenters recommended allowing financial statements in Tier 2 offerings to be audited in accordance with either PCAOB standards or U.S. GAAS.402 One commenter limited its recommendation to smaller Tier 2 issuers and conditioned this recommendation on the Commission not altering the requirement that auditors be independent under Rule 2-01 of Regulation S-X.403 This commenter also recommended conditioning the ability to follow U.S. GAAS under Tier 2 on the issuer’s showing of undue cost and impracticability in the offering statement and also limiting this relief to the issuer’s initial Tier 2 offering. One commenter noted that because Regulation A issuers are not “issuers” (as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002),404 when the audit is performed in accordance with PCAOB standards, AICPA rules would require the audit to be compliant with both AICPA and PCAOB standards
400 CAQ Letter.
401 CAQ Letter (recommending that such issuers disclose that the financial statements have not been subject to an audit or review by an independent accountant); E&Y Letter; KPMG Letter.
402 ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter.
403 ABA BLS Letter.
404 15 U.S.C. 7201(a) et seq.
and the auditor’s report would have to reference both AICPA and PCAOB standards. This commenter also noted, however, that given recent changes to the auditor’s report under AICPA standards, it may not be possible for the auditor to be in compliance with both AICPA and PCAOB standards from a reporting perspective.405
Additionally, two commenters expressed concern about potential confusion that
could result from requiring PCAOB standards in Tier 2 offerings, but not requiring PCAOB registration.406 One of these commenters recommended avoiding any potential confusion by allowing for audits under U.S. GAAS in Tier 2 offerings.407 Another commenter stated that the issue could be resolved by requiring either the use of PCAOB- registered auditors for Tier 2 offerings or appropriate disclosure of the auditor’s PCAOB registration status, noting that the disclosure option would result in lower costs to the issuer and fewer instances in which an issuer would need to have its financial statements audited a second time under PCAOB standards.408
One commenter asked the Commission to clarify issues relating to transition reporting for Tier 1 issuers that have previously conducted an offering pursuant to the exemption under Section 4(a)(6) and were required to file reviewed annual financial statements.409 Another commenter asked the Commission to clarify the application of the audit requirements applicable to Tier 1 issuers that have audited financial statements prepared for other purposes, in light of potentially contradictory references in proposed
405 KPMG Letter.
406 BDO Letter; Deloitte Letter.
407 Deloitte Letter.
408 BDO Letter.
409 E&Y Letter.
Form 1-A to the “standards of the PCAOB” and the PCAOB auditing standards.410 One commenter recommended not requiring audited financials under either Tier 1 or Tier 2 for “small companies with limited revenues and assets.”411 Another commenter raised concerns about allowing Tier 1 issuers to include financial statements audited using U.S. GAAS and not requiring that all audits be conducted by PCAOB–registered auditors.412
Many commenters recommended making other changes to the financial statement requirements not directly related to audit requirements.413 A number of commenters suggested allowing companies to use alternatives under U.S. GAAP for non-public business entities when preparing their financial statements, since Regulation A issuers would otherwise be considered “public business entities” under FASB standards.414 These commenters were concerned about the need for issuers to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities, as discussed in greater detail below. One commenter did not address this issue with respect to Tier 1, but recommended allowing the smallest Tier 2 issuers to follow alternatives under U.S. GAAP applicable to non-public business entities.415 One commenter recommended allowing companies to include financial statements prepared in accordance with alternatives under U.S. GAAP for non-public business entities in
410 CAQ Letter.
411 WOC Letter.
412 CFA Letter.
413 ABA BLS Letter; BDO Letter; Letter from Frederick D. Lipman, Blank Rome LLP, March 17, 2014 (“Blank Rome Letter”); Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; Karr Tuttle Letter; McGladrey Letter; MoFo Letter; PwC Letter; WR Hambrecht + Co Letter.
414 ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter.
415 ABA BLS Letter.
offerings up to a specified minimum, suggesting $10 million or $20 million.416 Another commenter recommended explicitly stating that Regulation A issuers are subject to “public business entity” requirements if the final rules do not provide for the use of, or a non-costly transition from, financial statements based on alternatives under U.S. GAAP for non-public business entities.417 One commenter limited its recommendation with respect to the applicability of alternatives under U.S. GAAP for non-public business entities to Tier 1 issuers and to entities whose financial statements are required to be included in offering statements relying on Tier 1.418 Another commenter noted that significant acquired businesses will qualify as “public business entities” because their financial statements are filed with the Commission.419 As a result, financial statements of those businesses would also need to be revised, and an issuer would potentially need to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities.
Several commenters recommended allowing issuers under Regulation A to defer adopting new or revised accounting standards effective for public companies if non- public business entities have a delayed effective date (similar to accommodations for emerging growth companies under Section 102(b) of the JOBS Act).420 Two commenters recommended either clarifying how the disclosure requirements for pro forma financial information in Part F/S for Tier 1 issuers differ from Rule 8-05 of
416 McGladrey Letter.
417 KPMG Letter.
418 E&Y Letter.
419 Deloitte Letter.
420 CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter.
Regulation S-X or requiring such Tier 1 issuers to follow Rule 8-05.421 One commenter recommended allowing companies formed within nine months of the filing date of the offering statement to provide only a discussion of their financial condition and operations since inception, rather than financial statements as of a date within nine months of the date of filing.422 This commenter further recommended aligning the financial statement updating requirements with the timing of periodic reports (e.g., allowing for 120 days before year end financial statements are required in the offering statement, rather than 90 days).423 This commenter also recommended that the Commission consider additional scaling for Regulation A offerings in the requirements concerning the financial statements of: acquired or to-be-acquired businesses; guarantors of issuers of guaranteed securities; and, affiliates that collateralize an issuance.424
Another commenter recommended that Tier 2 issuers not be subject to
Rule 8-04(b)(3) of Regulation S-X when the to-be-acquired business has significant loss operations.425 This commenter recommended at least not applying Rule 8-04(b)(3) in situations where companies intend to eliminate the losses by dropping certain products or service lines of business that produced the loss. Another commenter recommended clarifying whether financial statements should also be dated within nine months of the qualification date of the offering statement.426
421 CAQ Letter; PwC Letter.
422 E&Y Letter.
423 Id.
424 Id.
425 Blank Rome Letter.
426 E&Y Letter (referring to paragraphs (a)(3)(i) and (b)(2) of Part F/S of proposed Form 1-A).
One commenter made a number of specific recommendations that we clarify language in particular paragraphs of the proposed requirements for financial statements in Part F/S of Form 1-A.427 A different commenter indicated that proposed Form 1-A seemed to require issuers to disclose “selected financial information” and objected to any such requirement as being more onerous than the requirements otherwise applicable to smaller reporting companies.428
Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB, as proposed.429 More generally, many commenters recommended allowing foreign issuers to use IFRS as issued by the IASB to prepare their financial statements.430 One commenter recommended allowing U.S. companies to use IFRS when conducting offerings in Canada.431 This comment was made within the context of providing U.S. companies the ability to list on a Canadian exchange without being subject to resale restrictions imposed
by Regulation S. Three commenters specifically opposed adding an XBRL requirement.432