Final Rules for Financial Statements
As discussed more fully below, we are adopting requirements for financial statements in Part F/S of Form 1-A with changes from the proposed rules that are
427 E&Y Letter, Appendix B.
428 CAQ Letter. See Section II.C.3.a. above.
429 ABA BLS Letter; Canaccord Letter; MoFo Letter; NASAA Letter 2; PwC Letter.
430 ABA BLS Letter (although supporting excluding non-Canadian foreign companies); Andreessen/Cowen Letter; Canaccord Letter (stating generally that the Commission should clarify that companies may use IFRS); CAQ Letter; Deloitte Letter; PwC Letter.
431 Karr Tuttle Letter.
432 BIO Letter; MoFo Letter; U.S. Chamber of Commerce Letter.
designed to simplify and lower the cost of compliance for issuers, while maintaining important investor protections. As proposed, the final rules require Tier 1 and Tier 2 issuers to file balance sheets and other required financial statements as of the two most recently completed fiscal year ends (or for such shorter time that they have been in existence). With the exception of the requirement to file two years of balance sheets, the final rules largely maintain the existing financial statement requirements of current
Part F/S for Tier 1 offerings, while requiring Tier 2 issuers to file audited financial statements in Part F/S.
Financial statements for U.S.-domiciled issuers will be required to be prepared in accordance with U.S. GAAP, as is currently the case. Canadian issuers, however, may prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).433
Additionally, consistent with the suggestions of commenters and in order to be
consistent with the treatment of emerging growth companies under Section 102(b)(1) of the JOBS Act, the final rules permit issuers, where applicable, to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities.434 In this regard, with respect to the delayed implementation of new or revised financial accounting standards, if the issuer
433 If the financial statements comply with IFRS as issued by the IASB, such compliance must be unreservedly and explicitly stated in the notes to the financial statements and the auditor’s report must include an opinion on whether the financial statements comply with IFRS as issued by the IASB. See General Rule (a)(2) to Part F/S of Form 1-A.
434 CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. See also Section 7(a)(2)(B) of the Securities Act, 15 U.S.C. 77g(a)(2)(B), and Section 13(a) of the Exchange Act, 15 U.S.C. 78m(a).
chooses to take advantage of the extended transition period to the same extent that a “non-issuer” company is permitted to, the issuer:
Must disclose such choice at the time the issuer files the offering statement; and
May not take advantage of the extended transition period with respect to some standards and not others, but must apply the same choice to all standards.435
However, issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings.436
As proposed, the final rules require issuers conducting Tier 1 offerings to follow the requirements for the form and content of their financial statements set out in Part F/S, rather than following the requirements in Regulation S-X.437 However, consistent with a
comment received,438 in certain less common circumstances, such as for an acquired
business or subsidiary guarantors, Part F/S directs issuers conducting Tier 1 offerings to certain portions of Regulation S-X that provide guidance on when financial statements for entities other than the issuer are required.439 In Tier 1 offerings the form and content
435 See paragraph (a)(3) of Part F/S of Form 1-A.
436 Id.
437 See paragraph (b) of Part F/S of Form 1-A.
438 E&Y Letter.
439 We are updating the requirements for financial statements of businesses acquired or to be acquired in Part F/S to refer to the requirements of Rule 8-04 of Regulation S-X. We are also providing specific references to the relevant provisions of Regulation S-X regarding the requirements for financial statements of guarantors and the issuers of guaranteed securities (Rule 3-10 of Regulation S-X), financial statements of affiliates whose securities collateralize an issuance of securities (Rule 3-16 of Regulation S-X), financial statements provided in connection with oil and gas producing activities (Rule 4-10 of Regulation S-X), pro forma financial information
(Rule 8-05 of Regulation S-X) and income statements for real estate operations acquired or to be acquired (Rule 8-06 of Regulation S-X). The financial statements provided in these circumstances
of the financial statements for those other entities also follow the requirements set out in Part F/S. We believe this guidance will assist issuers with compliance with the general requirements for financial statement disclosure in these less common circumstances and is an appropriate change in the final rules. In an effort to reduce confusion, as suggested by commenters,440 the final rules also direct issuers to Rule 8-05 of Regulation S-X for pro forma information disclosure requirements. Additionally, the final rules require compliance with Rule 8-06 of Regulation S-X for real estate operations acquired because real estate companies and REITs are eligible issuers.
The final rules require Tier 2 issuers to follow the financial statement requirements of Article 8 of Regulation S-X, as if the issuer were a smaller reporting company, unless otherwise noted in Part F/S.441 This requirement also includes any financial information required for Tier 1 offerings, as discussed above, such as acquired businesses required by Rule 8-04 and 8-05 of Regulation S-X.442
As adopted, financial statements in a Tier 1 offering are not required to be audited. Consistent with the suggestions of commenters,443 and in order to avoid potential confusion as to the presentation of financial statements, issuers in Tier 1 offerings that do not provide audited financial statements must label their financial statements as unaudited. However, the final rules clarify that, if an issuer conducting a
would only be required to be audited to the extent the issuer had already obtained an audit of those financial statements for other purposes.
440 CAQ Letter; PwC Letter.
441 See paragraph (c) of Part F/S of Form 1-A.
442 Tier 2 issuers would, however, follow paragraphs (c)(1) of Part F/S of Form 1-A with respect to the age of the financial statements and the periods to be presented. In Tier 2 offerings, the form and content of financial statements for other entities follow the requirement of Article 8 of Regulation S-X.
443 CAQ Letter; E&Y Letter; KPMG Letter.
Tier 1 offering has already obtained an audit of its financial statements for other purposes, and that audit was performed in accordance with U.S. GAAS or the standards of the PCAOB, and the auditor followed the independence standards of either Rule 2-01 of Regulation S-X or the independence standards of the AICPA, then those audited financial statements must be filed.444 We believe the requirement to file already available audited financial statements will benefit investors. The auditor need not be registered with the PCAOB. While audited financial statements are not generally required to be filed for Tier 1 offerings, allowing auditors to follow the independence standards of the
AICPA or Rule 2-01 of Regulation S-X is consistent with the suggestions of most commenters and will provide smaller issuers that seek to submit “audited” financial statements in Tier 1 offerings with greater flexibility in satisfying the financial statement requirements.445 We agree that, when available, financial statements that satisfy the financial statement requirements and that have been audited by an auditor that meets the independence standards of the AICPA should be deemed “audited” for purposes of Tier 1 offerings.
Issuers conducting Tier 2 offerings are, by contrast, required to have their financial statements audited. The auditor of financial statements being filed as part of a Tier 2 offering must be independent under Rule 2-01 of Regulation S-X and must comply with the other requirements of Article 2 of Regulation S-X, but need not be
PCAOB-registered.446 In a change from the proposed rules, and consistent with the
444 See CAQ Letter (requesting clarification on this issue).
445 While not a requirement, issuers in Tier 1 offerings may have independent business reasons why they seek to provide, or investors that may otherwise demand, audited financial statements.
446 See paragraph (c)(1)(iii) of Part F/S of Form 1-A.
suggestions of commenters,447 the final rules require issuers conducting Tier 2 offerings to provide financial statements that are audited in accordance with either U.S. GAAS or the standards issued by the PCAOB.
As noted above, one commenter indicated that, because Regulation A issuers are not “issuers,” as defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be compliant with U.S. GAAS even if the auditor has conducted the audit in accordance with PCAOB standards. Staff of the Commission consulted with the AICPA on this issue and has been advised that an audit performed by its members of an issuer conducting an offering pursuant to Regulation A would be
required to comply with U.S. GAAS in accordance with the AICPA’s Code of Professional Conduct.448 As a result, an auditor for a Regulation A issuer who is conducting its audit in accordance with PCAOB standards would also be required to comply with U.S. GAAS, and the auditor would need to comply with the reporting requirements of both the AICPA standards and the PCAOB standards. As further noted by this commenter,449 there may be some question as to whether an auditor can currently comply with both sets of standards when issuing its auditor’s report. Commission staff also consulted with the AICPA on this issue and has been informed that the AICPA will consider taking action to address this potential conflict so that an auditor’s report would be able to comply with both sets of auditing standards.
447 ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter.
448 The AICPA Code of Professional Conduct is available at: http://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
449 See KPMG Letter.
Thus, requiring issuers in Tier 2 offerings to have their financial statements audited in accordance with PCAOB standards would have the effect of requiring issuers to comply with two sets of auditing standards and potentially result in audits for Tier 2 issuers being subject to additional incremental costs than would be required for registered offerings (which are only subject to PCAOB auditing standards). To avoid such a result, the final rules permit Tier 2 issuers the option of following U.S. GAAS or the standards
of the PCAOB.450
We believe that providing issuers with this option could help reduce the cost of required audits in Tier 2 offerings while maintaining appropriate safeguards for investors. We believe audits conducted in accordance with U.S. GAAS provide sufficient protection for investors in Regulation A offerings, especially in light of the requirement that auditors for Tier 2 offerings must be independent under Rule 2-01 of Regulation S-X. Moreover, we believe that the flexibility adopted in the final rules is more appropriately tailored for the different types of issuers likely to conduct Tier 2 offerings because it will not only eliminate the potential that existed under the proposed rules that some issuers would need to have their financial statements audited a second time under PCAOB standards, but also continue to permit issuers, such as those that may seek concurrent registration of a class of securities under the Exchange Act, to comply with the PCAOB standards if they so choose.451