The Small Company IPO Delusion and Reg A+ Solution

Doing some holiday reading, I picked up the Orange County Business Journal, and to my surprise, I saw two stories about two companies preparing for an IPO in 2017.  I thought to myself, “wow, it looks like some really great companies are coming out of Orange Country.” But reading through the articles and reviewing some public information about the companies in question, I quickly thought “these are likely not IPO ready companies.”  One of the companies was on their way and appeared to be growing rapidly with strong investment dollars behind them.  The other seemed to be a very small (sub $5M revenue) and they were only now starting to test their new product in the market.

Unfortunately, in the times we currently live in, the small-Cap IPO’s are non-existent.  The high regulatory burden in both man hours and dollars is a huge hurdle to overcome for a small company, even if it is doing well.  What’s more, business owners tend to think that everyone knows their business or will want to know their business because of the growth potential that can be unlocked.  Unfortunately, I can tell you more often than not business owners have trouble finding qualified investors without a previous history successful.  Companies struggle to separate their uniqueness to investors.  In any case, both the companies I read about would be well served NOT going through a traditional IPO process in my opinion.

With all that doom and gloom, here is the pot of gold at the end of the rainbow…Regulation A offerings.   My guess was that neither of these companies were advised on a Regulation A (“Reg A+”) offering that lets companies raise up to $50M annually through accredited and unaccredited investors in a Mini-IPO style process.   What’s so great about the Reg A+ process is that unlike the traditional quite period of a traditional IPO where everything is very hush-hush, Reg A+ contains what I like to call a loud period. This is a period where the company markets the offering and the company itself.  It’s reaching out to retail investors to invite them on a journey.  In that sense, you are actually spending money to market your company to potential customers while also soliciting investor dollars.  It’s a win-win when done correctly.  Reg A+ can also reduce the regulatory burden compared to a traditional IPO or you can use it to reach a national exchanged just like an IPO.  Therefore, you have more options under Reg A+ than a traditional IPO.

Bottom line is if your company does under $100M in revenue and you are thinking about an IPO, strongly consider Reg A+ as a better alternative. 

dbbmckennon is a full service CPA firm with offices in Orange County, San Diego and Santa Monica.  We specialize in companies filing with the SEC and utilizing equity crowdfunding through Reg A+ and Regulation Crowdfunding. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Choosing a CPA Firm for Reg A+ and Title III Regulation Crowdfunding

In these early days of Regulation A + (Reg A+, raises up to $50 Million) and Title III Regulation Crowdfunding (Reg CF, raises up to $1 Million), one of the hardest things to do as a potential issuer utilizing equity crowdfunding is to vet the service providers you want to work with.

Choosing the people your company works with, the people that give you advice, the people you trust is one of the most important things to do as a business.  Bad advice can set you back years, while good advice can accelerate you forward.

Often we get the questions:

How do we (the issuer) choose a CPA firm for equity crowdfunding?

…and

Why should I choose you over another firm?

Both great questions!  Let’s cover both types of equity crowdfunding as they will dictate different responses.

Regulation Crowdfunding (Raises up to $1M) have less regulation.  The financial statement reviews required can be performed by almost any CPA firm so long as they are registered to sign attestation reports in the state where you as the business owner are located.  Many firms only provide tax services and are specifically precluded from doing this work. However, for Reg CF, firms don’t have to be PCAOB registered, but they still must be registered with state(s).  One of the common issues that has come up, is CPA firms are issuing reports for issuers that are not in their home state.  If the CPA firm is not registered in the issuers’ home state or have practice privilege there, (every state is different) then the opinion can be deemed invalid and your campaign could flop before it starts.

For Reg A+, you should use a PCAOB registered firm (although not required in certain circumstances) in the chance you want to, or someday may want to be listed on a public stock exchange. All the same rules apply as Reg CF, make sure you use a CPA firm that can work in your home state.

So what sets CPA firms apart? You can see from the initial 100 filings for Reg CF companies and from review of many of the Reg A+ filings, some financial statements are better than others.  Whereas financial statements are ultimately the responsibility of issuer management, CPA firms should be making sure they go out nice, neat and clean with all required information (a requirement of the opinion they issue).  It is apparent (very obviously to people who know) that some firms are swimming in waters that are too deep for them.  They just don’t know the requirements and maybe shouldn’t be doing the work in the first place.  That is a significant issuer for an issuer as the issuer is ultimately responsible for everything.  

However, the real difference maker is if the CPA firm makes Reg A+ and Reg CF an emphasis in their practice.  CPA’s should be well connected to marketing firms, portals, SEC attorneys’, all of whom are in the equity crowdfunding space.  If they aren’t connected, THAT is the difference. 

dbbmckennon is Proud to Sponsor the Crowd Invest Summit

As equity crowdfunding through Regulation A+ and Title III Regulation crowdfunding start to become more popular, it has been our pleasure to be one of the nations leading CPA firms when it comes to equity crowdfunding. 

We are proud to announce our sponsorship of the Crowd Invest Summit on December 7-8, 2016, a conference and expo meant to educate and bring together investors of all types with startups, issuers, and real estate investment opportunities.  

David Gosselin of dbbmckennon will be a featured panelist to discuss the accounting and audit requirements of equity crowdfunding under Reg A+ and Reg CF.  David has become the top CPAs in the nation for equity crowdfunding.  We look forward to seeing everyone at the event. 

Regulation Crowdfunding (Title III) - Power of the Crowd

Regulation Crowdfunding, Title III of the JOBS Act, or SEC equity crowdfunding goes by many names, and allows startups to raise up to $1M.  The adoption of Regulation Crowdfunding ("Reg CF") is truly a once in a lifetime event, given the fact that it changed 80 years of securities law. However, it's still not perfect.  Many will argue that the funding limit ($1M) is too low, or that the costs of legal, accounting, compliance, and/or portal fees, are too high.  We say, you can either complain or use it to your advantage. 

As an expert CPA in Regulation Crowdfunding and Reg A+, my favorite thing lately is to attend pitch competitions where various startups vie for the attention of VC and angel investors.  At these events, there are usually 100+ people; 5 VC/Angel investors listening to pitches who couldn't be more dis-interested and 100+ people there looking on.  The question I pose to each startup presenting is all the same:

"When you present are you better served facing the 5 people who likely won't like your ideas since it is not the next "unicorn" or would it be more beneficial to turn around and present to the 100+ people behind you who may be customers, stakeholders, and evangelicals for your Company?"

The so-called smart money, will tell you why Regulation Crowdfunding won't work, why it will never be successful, why it will never be as good as the connections smart money can provide. I call that market protection by the rich and powerful.  To be honest, an enthusiastic customer base is more powerful than smart money will ever be.  Enthusiastic follows is every startups trump card which makes equity crowdfunding under Tilte III of the JOBS Act such an advantage to early stage companies. 

dbbmckennon is a full service CPA firm with offices in Orange County, San Diego and Santa Monica.  We specialize in companies filing with the SEC and utilizing equity crowdfunding through Reg A+ and Regulation Crowdfunding. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Navigating Auditing Standards, Without the Headache

If you thought the process of navigating auditing standards was a painful process, you are not alone. The PCAOB has started taking steps towards re-organizing auditing standards, aiming to make navigating standards a less painful process and more in line with the workings of an audit. So what does this mean for auditors and their clients? Currently the list of standards and related interpretations is nearly as large as a menu from the Cheesecake Factory, exceeding 2,000 pages when printed. That’s a lot of information to take in and consider. The current proposed changes would re-organize the standards into a four-digit numbering system designed to follow the workings of an audit. Under the proposal, standards would be grouped by the following categories: General auditing standards, audit procedures, auditor reporting’s, matters related to secures laws, and other. The difference lies in removal of interpretations from the system. Interpretations will not be removed all together, but simply contain a link to the relocated interpretation in an effort to “trim the fat” off the current standards.

The proposed changes, if implemented, would result in a much more efficient and painless experience for both auditor and potentially the client as well. I think we can all raise a glass to those improvements.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Picking a Credit Card Processor

When you are starting a business, most likely you will need to consider taking credit card payments.  While there are a bevy of options at your disposal, some types better than others. The first thing you need to do is assess your business needs:

1.  Will you need a point of sale (POS) system?

2.  Do you expect frequent or infrequent use of credit card processing?

3.  What is the average sale you expect?

4.  What are your annual sales?

Many businesses get trapped into a traditional credit card processor which at times can be a mistake.  Traditional processors tend to be clunky and the fees they charge are hard to understanding even for the most experienced individuals.  If you don’t expect frequent use of the processor, you may want to stay away from the traditional processor; they charge you monthly fees whether or not you use the service and often require a multi-year contract.  Those fees can cost you up to $700 per year even if you don’t use the processor each month.

Alternatively, if your business is mobile, or requires infrequent credit card processing, think about using PayPal or Square for your credit card processing.  The fees as a percentage of the charge tend to be more than a traditional processor, but they also have options that don’t cost you anything monthly.  Both providers have options that allow you to charge cards in a mobile setting (using mobile phones and tablets).  Both have simple calculations for fees taken out of each charge.  Lastly, both provide an option that allows you to disburse money as well. With all these benefits, it’s no wonder why these services are becoming more popular by the day.

Research these services on your own to see what makes sense for your business. There are various calculators online that will help you with your decision.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Three Accounting Related Technologies for the next Ten years

Here are three services that will revolutionize accounting over the next ten years. 1.  Bill.com (www.bill.com) – Bill.com takes over your payable and receivable functions in a cloud setting.  Bill.com is billed as the “No-check” CEO software.  Why…because you can pay vendors by check, ePayment, or PayPal without ever touching a piece of payer.  Bill.com take over all the back of the house work….cutting checks, stuffing envelopes, mailing payments, etc.  It also tracks receivables, sends invoices (both by mail or email) and gives your customers online access to pay bills.  Best of all, it integrates with most major accounting software.

2. Xero (www.xero.com) – Xero is simple and functional accounting software that allows you to add functionality as your business grows.  Best of all, Xero is ever evolving.  Whereas many software companies are slow to update features, Xero releases new functionality each month and allow developers to add on their own programs.

3.  Square (www.square.com) – Square is the easy breezy payment processors for retail and businesses who need on site credit card processing.  For about $250 plus an iPad, you can set up everything need to set up a storefront.  With Square, there are no hidden fees, and not complicated processes.  Swipe a credit card, and receive your money next day.

With our fast paced technological world, its vital businesses are up on current trends.  Check out these services to see if they can help your business, or speak with a trusted accounting advisor.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Think an Outsourced Accounting Department is Too Expensive…THINK AGAIN

Growing companies always have big dreams. Part of those dreams is growth, success, and maybe some wealth as well. There are two kinds of business owners when it comes to their thoughts on their back office accounting: 1) owners who want to hire accountants before there is a significant need, and 2) owners who won’t hire until they are absolutely forced to do so. Rarely does a business hire individuals for their accounting needs at exactly the right time. How to solve this dilemma…outsource the accounting function and back of the house processes. Think about this cost breakdown, a CFO costs between $100,000-250,000 depending on the size of the Company and location (let’s assume its $150,000 for this example). An accountant to do the day to day work will cost $35,000-50,000 (let’s assume $40,000 for this example), your tax preparer another $2,000 and so on. If you follow that model and assumptions, the cost incurred by your company would be $192,000 plus employer taxes, plus benefits, plus 401K, plus the hardware necessary for the individual to do their work, plus increased office space required, plus, plus, plus. With all those pluses, your fees are sure to be close to $250,000 per year for those two employees. That’s a significant cost to incur when you’re still in the growth phase of your business.

On the opposite end of the spectrum, you can use an outsourced accounting department with experienced accountants and CFO types at a fraction of the cost (let’s assume $5,000 per month). If you compare that to the above scenario, it’s a $190,000 savings. Think of having all your back office, accounting and year tax needs taken care of each month for about the same price as that staff accountant. That also means no training, no benefits that need be paid, or extra costs incurred.

In the above example, we used $5,000 as a base amount, but generally such services start at $500 and go up depending on the size and complexity of your operations. In the end, it costs you not to consider having an outsourced accounting department.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Five Mistakes Startups Make

Five Mistakes Startups Make Following the American Dream and starting your own company can put you on the fast track to success, but it can also lead to the deep end of failure if not done correctly. Here are five accounting mistakes many startups make that hinder their potential.

1. Mixing business and personal finances – So many startups utilize their personal expenses for business use and vice versa.  Open a bank account for your business, transfer money, and keep the costs separate.  This will help minimize any negative tax consequences.
2. Entity type – A partnership can take many forms, an LP, LLC, LLP, S-Corp, or C-Corp.  There are certain entities that are better for certain businesses.  In addition the number of owners can effect which type of entity you should use.   Not all businesses can distribute earnings in the same way.  Pick an entity that best suits your business by asking a qualified advisor.
3. Not knowing obligations – That’s right, good old Uncle Sam and most states want theirs.  If you don’t have a reseller’s license, you will owe the state sales tax.  If you own an LLC and distribute guaranteed payments rather than W-2 wages, know that you will owe taxes on compensation received. Know your obligations.
4. Have the right tools – Use an accounting system that fits your company needs.  Do you need software to track your client relationships, email blasts, etc…? Make sure you use technology that fits your company and helps it grow.
5. Planning – Many startups think that they will be generating revenue from day one.  They find that it is harder to get off the ground than anticipated and they run out of money before they even start.  Make sure that you have enough money saved to live while you build your business.

And one for the road:

Consider and 83b election when forming your C-Corp.  It needs to be filed within 30 days of incorporation.   The election will minimize immediate tax consequences and lock-in your basis.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Employee versus Contractor

The biggest factor in assessing whether an individual is an employee or contractor comes down to control.  If a company can dictate hours and schedule, the person is more likely to be an employee.  Does a worker wear a shirt with your company’s logo on it while visiting clients?  Then they are likely an employee.  Here are a few other guidelines. Control: Does the hired person work directly under the orders of others in a defined position? They are most likely an employee. However, if the person works separately on specific projects with little to no supervision or time constraints, they are more likely to be a contractor.

Reimbursement: An important difference between a contractor and an employee is the method of payment for services provided. If the paycheck is constant and includes benefits such as a pension plan and vacation days, the person involved is an employee.

Importance: The proximity of the hired person to your vital operation is a good indicator of hired status. Is the person working on a direct part of your business model required to complete the process? Are tools provided for the job? If so, the hired person is most likely an employee.

The difference between an employee and a contractor has important tax repercussions, and should not be ignored. For more information, read information provided by the IRS here.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Ready Your Business for Investment

You had an idea, you started a business and put that idea into action, you looked for funding, and you found a potential investor that likes that idea.  The investor is ready to put money in and things are looking up.  Your business is about to get the money it needs to ramp up activity.  So what is the problem? Most startups strive so much for funding, they don’t necessarily think about the point at which someone says, “I love the idea and want to invest.”  It’s those magical words you've been waiting for, but now what?  Often those same words are just the beginning of the sentence which goes, “I love the idea and want to invest….so I will need to conduct my due diligence on your finances and records among other things.” Those other things include reviewing your burn rate, the runway you will need to get your product to market, etc.  All these items revolve around finance, accounting, and budgeting.  Remember, for a investor its all about the potential to make their investment back...times ten.

This is the point at which you start scrambling for the shoebox you stuffed with receipts, sift through drawers, print credit card statements, and find anything that resembles an invoice.  Then you figure out what is personal and what is business related.  Then you call a friend with “finance” experience and ask for help.  This is a dire situation to be in.  If you find yourself at this point, chances are that funding may be long-gone.  What does it say about your professionalism and your business savvy if you have to keep an investor waiting a week, a month, or even two days to get them information that you should have readily available.  We aren't talking about projections, we are talking about history.

The importance of keeping adequate books and records cannot be understated.  Having a professional and not a friend who "went to business school" is imperative in your growth and funding strategy.  When an investor asks for financial records, you should have it next day in their hands.  These financial records will also be the basis for your budget going forward.  Historical operating costs are a good starting point when estimating future burn rate, which will ultimately determine the runway your company has.  Remember, why would an investor put money in, knowing the company will run out of money before the intended goal is met.  Lining up your burn rate and development time line or your time to market, is critical for the success of your company.

If you are a founder of a startup, doing all the accounting and financial modeling can be slow and painstaking.  More importantly, it takes you away from what you are best at...developing your startup.  Contracting with a qualified accounting expert will expedite the accounting and finance process while freeing your time.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Audit, Client, Consultant Relationship

At some point, most successful businesses or businesses with significant potential must go through an audit to verify historical activity and results for investors, shareholders, or potential buyers.   However, because so many businesses are stretched thin in terms of staffing and specialized expertise, audits sometime become significantly burdonsom on a Company. These scenarios often result in delayed completion of the audit, unnecessary difficulty in completing the audit, and impaired independence for the auditor.  Companies lacking bandwidth will have to find time to devote to an audit; and those lacking expertise will have difficulty in completing the work in acceptable ways.  Regardless, often times what happens is the auditor assists the client (adjusts balances, writes financial statemens, etc...) to the point where their independence is impaired.  If an auditors independence is impaired, they are precluded from issuing an opinion.  The burden of knowing if an auditors independence is impaired can't be on the auditor alone.  If a company's auditor is determined to be not independent at a later time, their audit report can be disqualified and the Company may be subject to re-audit at the companies expense.

To remedy these situations, wise executive teams hire expert consultants to assist in the audit preparation and oversight.  By hiring a qualified consultant, companies can negate bandwidth and expertise issues, that will in turn resolve most independence issues.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.