In my last blog post, I wrote about the importance of financial data. Companies raising money through equity crowdfunding — especially through Regulation Crowdfunding, or Reg CF — have to disclose their financial statements for the most recent fiscal year-end and the prior fiscal year-end. According to LawCloud, a legal platform for crowdfunding, “The Form C-AR must be filed no later than 120 days after the end of the fiscal year. For those with a fiscal year ending December 31, the C-AR is due by April 30.” 

These deadlines apply to closed funding rounds to guarantee that those who invested previously in a company stay informed of its financials. 

But what about new rounds that are about to start? 

According to my own research, there are no specific guidelines or clear definitions for what the term “most recent fiscal year” means. 

A Growing Problem

Let’s assume that for a new company (we’ll call it NewCo), the fiscal year ends on December 31, like the majority of the companies we see on KingsCrowd. In this example, we would also assume that if NewCo is starting a new Reg CF raise after December 31, 2023, then it will provide financials from 2022 and 2021. 

But that’s not always the case! Many founders say they have not finalized their most recent financial statements yet and provide older financial statements instead — in NewCo’s case, for 2020 and 2021. Companies can get away with this because there is no specific deadline for providing the prior year’s financials when they start a new round. So in NewCo’s case, when it starts a new round in 2023, there is no specific date in 2023 by which the founders are obligated to provide their 2022 financials. 

Here’s why that’s a problem. If a company did very well in 2020 and 2021 but did poorly in 2022, then starts a raise in 2023, it could show investors only the older financials and make them think that its revenues are still growing. And the later the company starts its new round in 2023 — say, in the second or third quarter — the bigger this problem becomes. 

That’s why whenever we evaluate a company on KingsCrowd — whether quantitatively in our ratings or qualitatively in our Top Deal or Deal to Watch designations — we comb through its raise page to see if the founders provide any reference to the latest revenues of the current calendar year. This helps us get a clearer picture of the company’s financial health. 

If founders don’t provide updated data anywhere, we tend to assume that they’re hiding a poor performance and note that in our analyst reports. And if investors ask founders directly about their updated financial information and the founders avoid answering the question, it’s almost always a red flag for investors. (If their current year revenues are favorable, they’ll want investors to know about them!) This might deter many investors from investing and consequently harm the company. That’s why transparency is crucial for both investors and founders. 

As I mentioned in my previous blog post, if founders choose to raise a crowdfunding round, they need to provide enough details for investors to make informed decisions. After all, a crowdfunding round is basically a community round. Founders are bringing in partners who might help the startup grow faster. Investors become loyal customers or “investomers” and ambassadors. Incentives become perfectly aligned. So founders have an obligation to state all the facts before asking anyone to invest in them.