If you’ve ever invested in the stock market or followed a public company, you know how important annual reports are. These reports contain extensive information about a company’s financials and performance indicators. 

Private companies, on the other hand, do not need to produce such reports or publicly disclose important information about their finances. They also don’t have to follow the stringent and complex accounting rules and standards enforced by the Securities and Exchange Commission (SEC). 

This has some very real advantages for founders. Staying private gives a company more freedom to choose its investors and to retain its focus or strategy — rather than having to meet Wall Street’s expectations. Instead of focusing on increasing revenues or their stock prices, private companies can focus on experimentation and continuously change strategies until they reach a repeatable and scalable business model

Continuous change and experimentation are an essential part of a startup’s journey, but they can also make the company’s financials look scary for investors. That’s why as long as the company is still private, most founders prefer to keep their companies’ financials and performance indicators private, and only share those details with a handful of angel or venture investors who understand what founders have to go through until they can scale their businesses. 

A Lack of Transparency

But the markets are not black and white anymore. Thanks to equity crowdfunding, private companies can now raise capital from the public and still stay private. And while this has opened up a broad range of exciting opportunities for investors, many founders are still operating with a lack of transparency. 

While raising Regulation Crowdfunding (Reg CF) or Regulation A (Reg A) funding rounds on equity crowdfunding platforms, some founders still tend to be secretive about their business models, partnerships, detailed financials, business experiments, and growth indicators. But how can a potential crowdfunding investor make an informed investment decision in a company if the company isn’t sharing enough details? 

Even after raising capital on a crowdfunding platform via Reg CF or Reg A, many founders I’ve talked with still believe they are running private companies. Even though they have thousands of investors who have become shareholders, they still tend to not share their companies’ details with their own investors! 

This is a huge problem. So it’s important for investors and founders to know that transparency is just as essential for private companies as it is for public companies. To illustrate this, let’s walk through equity crowdfunding and IPOs — two different avenues to raise capital that share similar requirements around updating investors.

Keeping Investors Informed

Both equity crowdfunding companies and IPO companies require a high degree of transparency because investors are putting their money into these companies — so they need to be able to trust that companies are being honest with them. 

Once a company has raised capital through either equity crowdfunding or an IPO, it is important for the company to continue to communicate with investors on a regular basis. This can be done through investor newsletters, shareholder meetings, or other means. By keeping investors informed, companies can build trust and loyalty.

In addition to regular communication with investors, both types of companies are required to file annual forms with the SEC. These forms provide investors with more detailed information about companies’ financial performance, management teams, and other factors. 

For example, after raising a Reg CF round, founders are required to file a Form C-AR —  an annual report that must be filed for any crowdfunding campaign that successfully closed in a calendar year. 

Many founders choose not to file those annual update reports to the SEC, even though failure to file a timely Form C-AR could prevent founders from ever crowdfunding again or from using other registration exemptions (like Regulation D)

By being transparent, communicating regularly, complying with regulations, and filing the required annual forms, companies can build trust with investors and raise even more capital in future rounds to grow their businesses.