Private Companies Must Update Financial Statement Disclosures to Rule 701 | Fenwick & West LLP

Recently, the United States Securities and Exchange Commission adopted changes to some disclosure requirements in an attempt to streamline rules and regulations and remove redundant, duplicative, overlapping, obsolete, or superseded requirements. We have previously summarized these changes.

As part of these changes, the SEC revised the financial statement requirements from Part F / S to Form 1-A to require an analysis of changes in equity for interim financial statements. Prior to these amendments, an analysis of changes in equity was not required for interim financial statements.

Since Rule 701 relies on the financial disclosure requirements of Form 1-A, private companies that are required under Rule 701 to provide financial statement information in order to provide equity capital service providers, should ensure that they update their financial information to provide an analysis of changes in equity for interim periods presented either in a note to the financial statements or in a separate statement.

Introducing Rule 701

U.S. federal securities laws require that securities be registered under the Securities Act of 1933, as amended, unless an exemption from registration is available. Rule 701 provides such an exemption for private companies offering and selling securities to certain employees and other service providers under written compensatory benefit plans (such as stock option and incentive plans. actions). In many cases, Rule 701 is only available if the issuer provides its service providers with financial statements that meet the requirements of Form 1-A. Therefore, recent changes to Form 1-A affect the scope of financial disclosure obligations under Rule 701. Please see Fenwick reference table for a summary of financial disclosure requirements.

New financial disclosure requirements

Generally, Rule 701 requires companies that are required to provide financial and other information to provide financial statements for the last two fiscal years ended or the period in which they existed whichever is shorter. These financial statements must include consolidated balance sheets and statements of operations, cash flows and changes in equity. Interim financial statements may also be required to ensure that the date of the most recent financial statements is never more than 180 days before the sale or issue of the securities.

In the previous version of Form 1-A, changes in equity were only required to be reported for each of the two fiscal years preceding the date of the most recent balance sheet provided and were specifically not required for interim financial statements. . However, after the changes to Form 1-A, for all cases where a consolidated interim balance sheet is required under Form 1-A, an analysis of changes in equity reflected in the balance sheet should also be provided. The analysis should be provided in a separate note or statement and should be presented in the form of a reconciliation of the opening balance and the closing balance for each period for which a statement of comprehensive income is to be filed with all material reconciliations described by appropriate captions with contributions and distributions to owners shown separately.

Impact of the new disclosure requirements

As a result of these new disclosure requirements, private companies that are required to provide financial statement information to certain shareholders under Rule 701 should ensure that they update their financial statement information to include interim reports on changes in equity whenever interim financial statements are required.

For more information on the new disclosures to be disclosed in financial statements under Rule 701 (by way of revision of Form 1-A), please see footnote 445 on page 111 of the DRY adoption of the release and updated Form 1-A.

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