Speaker 1: To kick it off, Ousmane, I would love to just hear a little bit more about your background as a securities attorney and how you've worked in kind of the reg CF space.

Speaker 2: Sure. I started my career in New York after graduating from the University of Pennsylvania Law School. I worked at a large firm called Winston & Strawn, where I was a corporate attorney there. There I was doing securities, but other aspects of corporate as well. Venture capital, private equity, structured finance, M&A. After a few years, I went to a smaller, more boutique firm called Seward & Kissel, and there I was doing primarily securities, private placements, and IPOs at that time. When I moved to LA and I started my practice out here, we were obviously doing a lot of corporate work. Then around 2015, when reg CF was promulgated under the JOBS Act of 2012, I don't recall how I got in touch with LawCloud or iDisclose at that time. Ever since then, I've just been working with your team, doing the review process, but also for my private clients, also advising them on structuring the deals and investment instruments, and of course, the Form C and disclosure requirements and filings.

Speaker 1: For those who have never done a CAR or annual report, can you tell us what the legal requirement is and what the SEC language says about filing an annual report?

Speaker 2: Sure. After a successful raise, meaning that the issuer has actually raised funds under the reg CF exemption, they become basically a reporting company under the Exchange Act. Under reg CF, that means that they have to file an annual report before April 30th of every fiscal year. That essentially, you can think of it as a way to update your investors on the health of the business and, of course, the financial health. What's required is a Form C AR, the Form C annual report, which you guys at Raise Paper have templates for and then a system to get those filed. It requires all business information of the company, which is generally the same as it would be in the Form C, but it does not require any of the securities language. You don't have to describe the securities or the risk factors, which are going to be quite encumbering when it comes to the securities language. It requires financial statements from the previous fiscal year. One interesting thing is that the financial statements don't need to be CPA reviewed or audited, unlike in the Form C, where after certain thresholds, you have to have your financials either reviewed by CPA if you're raising up to one point two, three, five million. And if you're raising up to five million, you need them to be audited. So the Form C AR, they just need to be certified by an officer. So it's a relatively quick and easy process. And then the reporting requirements last until you hit one of the there's three things that if you qualify for that, you can end your reporting requirements.

Speaker 1: So, yeah, let's start there, actually, because I know a lot of folks are interested and go, OK, if I do this, then am I good to go? So let's talk about the things that could end your need to continue to provide reporting.

Speaker 2: Sure. I actually have the SEC's language up here because I want it to be as specific as possible as to how they define this. So the first exemption is if the issuer has filed at least one annual report and has fewer than 300 holders of record. Now, interestingly enough, a lot of issuers utilize the SPV model, where the SPV essentially is the sole investor in the issuer and then the CF investors invest into the SPV. There's many reasons why companies would want to do that. Primarily, it's to keep a clean cap table. And interestingly enough, that would qualify them for the 300 holders of record threshold because you only have technically one holder of record. Now, if it said beneficial owners, then it would be a different thing. But the SEC purposely says record holders of records. And I've actually read SEC comments and follow ups about that because a lot of people did have questions initially whether the SPV model would qualify for this. And they said it would. The second qualification is that if the issuer has filed at least three annual reports and has total assets that do not exceed 10 million dollars. So for a lot of small cap companies, especially the type that utilize REGCF startups, they usually qualify for this exemption just because they don't have assets over 10 million. And then the third is if the issuer liquidates or dissolves its business. So if the company goes out of business, obviously, then they're no longer reporting. There's no reporting requirements. And if they want to use the CTR, the termination report, what are the rules there?

Speaker 1: Do they have to file an annual report? And then is there a window of time in which they have to file that they want to terminate their reporting requirement in order for that to actually stick and stand? Yes. And this is very important because there's a very short window. It's a five day window.

Speaker 2: So after filing, let's let's assume that we're using the first exemption. You file your first annual report and you have less than 300 holders of record. Immediately after the form CAR is filed within five days, you'd want to file the form TR to terminate your reporting requirements. Unfortunately, not many issuers know about that. And sometimes they'll miss that window. Then they're you know, then they have to file again another five days. So that's a very important thing to keep in mind.

Speaker 1: Something else that I've been asked recently, and I want to get your thoughts on, say we have founders who come through, you know, they did a raise in 2021 and they never filed their 2022 CAR and now coming along here, or maybe it was 2022 and they're coming here in 23, so they don't have their report from last year and they don't have the report yet for this year. One, do they have to file two reports? So do they have to make up for the time that they've been out of compliance? And then two, is there any sort of fine or anything that they'll face for providing such a late report?

Speaker 2: Well, the general rule whenever it comes to SEC is better late than never. So if you miss your reporting requirement, we urge you to get caught up. So if you're in 2023 and you haven't filed for the last two years, we would request that you file them consecutively or concurrently to get caught up and be in good standing again. In fact, I know that the Form C and the Form C both have a disclosure that requires the issuer to let their investors know if they're noncompliant or if they've ever been noncompliant. So even if you did get caught up, you would still have to say that at one point you were not compliant. Now, as far as what does the SEC do? I don't know offhand what the fines or penalties are, but it's always recommended to follow the SEC guidelines. Luckily, we haven't seen an instance where the SEC has taken action against somebody for not filing. But I know FINRA does, they do the self audits and they usually do come down on the intermediary, the platforms on these issues. As far as the issuer themselves, I haven't seen anything yet. So hopefully everybody just gets their annual reports filed on time.

Speaker 1: One of the other things, so it's like, OK, maybe you don't face a fine for being late or not having it, but it does preclude you from using Reg CF or Reg A plus, any of those, correct?

Speaker 2: Oh, absolutely. Yeah. If you're noncompliant and that precludes you from future exemptions under Reg CF for sure. I'm not sure about Reg A, but I would imagine that that could also apply. And I think there could also be issues if the company wants to go public, which is a Form S-1, that's a separate type of a exemption. But I think that would also apply if it's applicable to not use of Reg CF and Reg A.

Speaker 1: Yeah, raised papers will pull in a lot of the standard disclosures and things that you provide in the Form C to make your life easier. We already mentioned that you have to provide the kind of GAAP financials and you could self-certify those, those don't have to be done by an accountant. What other key things end up getting updated in the CAR around like business updates?

Speaker 2: Of course, any material facts about the business needs to be updated. But generally speaking, there's a financial section where when one files a Form C, the issuer has to talk about its liquidity reserves or capital expenditures and kind of give a roadmap of what their financial health is. And it's not always reflected in a balance sheet or a P&L because there may be things that are coming up that aren't captured in the last year. So you want to update your investors on the financial health of the company in addition to any kind of material changes. And also, like I said, it's a good way for issuers to keep connected with their investors, just to give them, you know, just like a private company would send out shareholder updates, you know, on an annual basis. You could think of it that way too. You can just give your investors an update on the business in general.

Speaker 1: No, it's certainly a best practice. And I liked what you just mentioned there. Let's talk about what material is defined as. I know a lot of founders can be like, what does that mean? What is material, right? Is that, oh, I, you know, I had a an EA or, you know, an assistant and they're not working with me anymore. Is that material or is it something bigger than that? So a lot of people don't understand material. Can we just talk a little bit about what that kind of is defined as or the general?

Speaker 2: It's even hard for attorneys to define what material means in the context of let's take it back a bit. When you file a Form C, if there's a material change in your business or in the securities or in the offering terms, you're required to file a Form C, an amendment to the Form C. And if it is a material change, the investors have a right to recommit their investments. And that is a subjective test that the SEC has advised, even though there's no ruling on this or any black letter law. But the general consensus is that anything that would have but for this information would the investor have invested. So if you all of a sudden have a lawsuit and you're on the brink of, you know, God forbid, bankruptcy or something, you know, that that could really affect the viability of the business. That's a material change because maybe an investor would not have invested had they known that this in this example, there was a lawsuit out there. As far as what the example you use, you know, with the intern changing, though, that's not a material change, but officers are directors absolutely are. If a company changes its CEO, that's a material change. And that would be something that would be required not only as under the Form C as an amendment, but you want to, of course, disclose that to your investors in the annual report.

Speaker 1: Got it. And these are the types of things, just so you know, that we will prompt you for in the process of putting together your annual report and help provide guidance. So along, but I just wanted to kind of dive in and understand what those look like more so. And then in terms of, you know, if I'm planning on doing another REG CF, say, you know, in a few months, maybe I'm going to do one in the fall. Is there anything you can pull from the CAR to help you build out your Form C? Yeah, absolutely.

Speaker 2: I mean, the business risk disclosures will likely stay the same unless the business has kind of, you know, veered or pivoted into a different direction. The capitalization of the company may stay the same unless the company has done a subsequent raise, not under REG CF. Let's say they did a private placement in between that. But generally speaking, your capitalization, you know, likely stay the same. And of course, all the things we just talked about with about the business and its CEOs and its directors. So you can pull a lot of that information from the Form C, AR.

Speaker 1: From my perspective, it's a really helpful thing to build off of it. It just kind of keeps you in the process. And again, while you are not required to have audited or reviewed financials just for doing the CAR, you can self-certify them. I do find it helpful if you're thinking about a future raise. This might be a perfectly good time to just go ahead and start getting that process in place, because we all know these things take far longer than you ever expect. So might as well have the financials ready to go when the time comes. Those 2023 financials, if you're getting them reviewed or audited now, will be good through until April 30th of next year. So it gives you plenty of time to utilize those reviewed or audited financials to raise new capital. Yeah. Let's talk a little bit curious on kind of the material front and just providing business updates. A couple of others that I've heard recently from some of our customers asking us about if you've done a really small capital raise, say you raise, you know, a couple million dollars online and now you've gone back to market, done a Reg D and you've only raised, you know, 50, 100 thousand dollars, maybe with some sort of kind of bridge financing. If it's a small dollar amount, is that something you should be reporting?

Speaker 2: Yeah, you're required to because, A, it's going to change the, depending on the type of securities, it's definitely going to change the capitalization of the company. If you issued more shares and ostensibly your investors have gotten diluted, your CF investors, that's something that needs to be explained. Also, depending on, I mean, if it's a Reg D offering, you are required to file a Form D. I mean, that's a separate animal on its own. And so the SEC becomes aware of your capital raise. So, of course, your investors would need to know that as well. And there is a prior offering section in the Form C and also the Form CAR where you're required to disclose any exempt or non-exempt offerings conducted in the last three years. And that includes in between the filing of Form C and then your annual reporting requirements.

Speaker 1: Let's talk about on the other side of things. If you've raised some debt, maybe you've raised a $50,000 working capital loan or maybe it's a financing for a new piece of equipment. If you're a manufacturing company, whatever it may be, are those also things that need to be disclosed in this annual report?

Speaker 2: Yeah, absolutely. Because first off, the loan will likely show up on the balance sheet of the company. And there is a outstanding debt section in the Form C or Form CAR that requires you every year to disclose the amount of debt that the company has.

Speaker 1: Understood. And why I want to go over all of these things is, again, when you're thinking about material changes and business updates, people think, well, you know, not a ton has changed. I'm not sure what I need to put in here. These are all the types of things you're going to be prompted and asked about that are important to provide in these documents. And again, just think about it holistically, right? If you're an investor, these are the types of things you want to know. It's how you're growing the business. It's how you're investing in the business. So they really are important disclosures to be making to your investors. And we always reiterate all the time that the best thing you can do is get a repeat investor, right? A repeat investor is better than a new investor. You don't have to reacquire them. And if you continue to provide really good updates, this is the type of stuff that investors are going to build trust in and say, OK, I'll back this person with more money. So it is in your best interest as you're thinking about future capital raises that you take care of the investors who are already on your cap table. And I have a lot of experience of this myself, having really benefited from repeat investors who are excited about our business and are thankful for the updates and feel like they feel trust and seeing how we progress. A couple of other just technical small questions I want to go over, Usman. Some people say you opened a raise on December 28th of this, of 2023, and maybe, you know, you had a couple of friends and family put in five thousand dollars. It was in the escrow account. You didn't actually do a closing of the round, but you did open in December of 2023. Are you on the hook for an annual report this year or because you haven't sold any securities, you haven't pulled down or done any closings of the round? Are you OK and not need to provide that?

Speaker 2: Yeah, that's an interesting question, because I think you hit it on the head. It's it has to do with the sale of securities. So if you are in an active raise, you're not required to file the form CR. That's only after you've sold securities. But one thing that that many issuers may not know, and it's worth keeping in mind, is that your financial savings can go stale. There is a concept of them going stale. So let's assume in your example, you conducted a raise in December 28, 2023. That would require you to provide two years worth of two fiscal years worth of financial statements. So 2021 and 2022, because you haven't completed 2023 yet. So you don't have financial statements. Now, come April 30th of 2024, your financial statements have gone stale because now you have that missing gap of the 2023. So you would be required to provide financial statements. You could do it through the filing of a form CR or you just do it as a file. I'm sorry, a form CR amendment and update your financial statements.

Speaker 1: And now now let's say let's take it a little further back. Say you started a raise on December 1st, you hit your minimum, you raise 50K and you do a close of the round on maybe December 15th of that year of 2023. Now, technically, you've sold securities in 2023. So you do need to have that annual report by April 30th as well.

Speaker 2: Correct. Yes, you would.

Speaker 1: And if you have a raise open and you're raising capital, even if you get your 2023 financials in time, but you have not filed your annual report, you would still have to shut off your raise. Correct. Unless you have filed the annual report.

Speaker 2: It depends on the timing.

Speaker 1: So how in your example, when my example, so you start your raise on December 1st of 2023, you raise your minimum. You close on that minimum. So you pull down the fund. So you've sold securities and now you're raising in 2024.

Speaker 2: April 30th. You were talking about the same offering? Yep. My understanding and what my experience is that if the if the raise is live, meaning that it hasn't you haven't filed a form CW to withdraw or a form CU to update and close it out. I don't think you need to file a form CR. I think it's just updating the financial statements.

Speaker 1: Yes. OK, that's helpful to know. And one other question we do get asked about is when folks don't have a successful raise. So in 2023, you go out to raise capital on direct CF and you fail or you do a withdrawal. Right. You don't raise the minimum and you decide to just withdraw the offering. In that case, an annual report is not required.

Speaker 2: Correct. It wouldn't be required because the company didn't sell any securities.

Speaker 1: Excellent. Well, those are all of the key items that I wanted to go over. Is there any other things you want to make sure founders know before we hop off here?

Speaker 2: No, I think, you know, being up to speed and up to date with your annual reporting requirements is very important. And as you pointed out, you want to keep your investors happy and in the loop. I mean, the last thing somebody wants as an investor is to invest in a company. They don't hear from them for a couple of years. You should treat your reg CF investors just like you would treat a venture capital investor.

Speaker 1: I couldn't agree more with you. Thank you for that very much. Thank you for your time today. Thank you, everyone, for listening. And as always, we are here to help with your annual report. You have the opportunity to work with us. We try and make this as absolutely cost affordable as possible. Our best pricing is occurring right now before March hits. What we try and do is kind of stagger the pricing going up throughout the season. And the reason we do that is because we all like to procrastinate. We end up with hundreds of founders in the last weeks all of a sudden trying to get their stuff done. We really want to make sure we get this done in a timely manner for you, that you're good to go to continue to raise capital under reg CF, under reg A plus, and that you're in full compliance. So the earlier you can work with us, the better. And I promise we'll make your life as easy as possible. We'll walk you through the process. We'll save you as much time as we possibly can. And hopefully this has helped you understand the process and that it really isn't all that extensive and we can be very helpful with it. So thank you again, everyone, for listening. And as always, please reach out if you have any questions.