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Tax Strategies

Tax Perspective on Nonpublic Education

Sidney Kess, CPA, J.D., LL.M.

Tax Perspective on Nonpublic Education

Today, there are a growing number of primary and secondary students who are being educated outside of the public school system. Alternative education includes home schooling, private schools, and tutors...

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Feature Stories

The Great Migration to Cloud Services and Lower Cost Tax Sof…

T. Steel Rose, CPA, ACS Editor

The Great Migration to Cloud Services and Lower Cost Tax Software

A great migration for CPA firm software is beginning again. It’s reminiscent of the first major migration when stand-alone tax software took over the desktop in 1991 revolutionizing professional tax...

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Editor Blog

NSA Cyber-Tracking Avoidance Techniques

Steel Rose

The nuisance of online machine-generated advertising has recently been exceeded by word that Google, Yahoo, Microsoft, Facebook, AOL and Apple have been providing data to the NSA. Are there alternatives...

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Client Tax Tip

Tax Return Retention Policy

Julie Welch, CPA/PFS, CFP

Tax Return Retention Policy

“How long should my client keep his/her tax returns and supporting documentation?” is a frequently asked question. The safe, quick answer is keep old tax returns, W-2’s, and information with...

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Tax Checklist

Charitable Tax Planning Consulting

Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

Charitable Tax Planning Consulting

√ Charitable Planning Should Address Personal Goals Charitable giving is too often focused on tax benefits or legal decisions. Practitioners can help clients refocus on “people” decisions. This is especially important...

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IRS Representation Advisor

IRS Posts New Forms for Offers in Compromise

E. Martin Davidoff

IRS Posts New Forms for Offers in Compromise

On December 31, 2013, the IRS posted the January 2014 revision to Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, to be used for offers in...

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Financial Planner

Helping Clients Develop a Household Budget

Jerry Love, CPA

Helping Clients Develop a Household Budget

I am frequently asked by clients to help them develop a household budget. As most CPAs know all too well, that question can be a very difficult one because it...

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Crowdfunding for CPAs

To get to the essence of crowdfunding for CPAs I talked with Sherwood Neiss, the entrepreneur, who pioneered the legislation, Sara Hanks, a due diligence attorney, and Richard Salute, the CPA who may have the most relevant experience about this new practice area for CPAs.

Equity crowdfunding was made possible by the JOBS Act signed into law in April to allow individuals to buy equity stakes in emerging growth companies, who will be able to raise up to $1,000,000. The SEC has concerns about fraud now that raising capital from the general public will become legal in 2013, the first time in 80 years. Therefore, audits by CPAs are required for capital raised over $500,000. Reviews are required for capital raised over $100,000, up to $500,000.

From Sherwood Neiss, I learned that the JOBS Act rules are expected to remain largely intact despite the burden to the SEC. Neiss is one of three entrepreneurs that literally provoked an Act of Congress to obtain SEC exemptions for these public capital formations of under $1,000,000 on websites.

“The review area will be a boon to CPAs who prepare and review financials for integrity and comprehensiveness,” said Neiss.

Neiss expressed the same consternation as other people I talked with who are entrepreneurs. “How are CPAs going to do an audit for a startup since it is hypothetical?” he asked.  “The CPA industry will provide guidelines,” he said.

In my discussion with CPAs, an audit remains an audit, as does a review. “There is no way to modify how you perform attestation,” Neiss believes. “The onus will be on the funder that the financials have been stated accurately. They will need the income statement, a balance sheet and cash flow statement.”  It is Neiss’ opinion that, “The CPAs who want to get involved in these will have to find a way to keep the fees lower, to make more, later. This is a brilliant add-on component. It is essentially a private offering of public shares.”

Companies can be getting ready right now. “Building a business plan and a social network with an executive summary of financials can occur, but we all must wait on the SEC to finalize rules,” Neiss advised. As the crowdfunding framework now exists, Neiss stated, “The investment opportunity is presented by the entrepreneur. They must hit 100% of their [capital raising] target or they don’t get the money.” As to how much equity they can give up, “There is no set standard,” Neiss said. Determining valuations is another area for CPAs with valuation credentials to play a role.

Neiss was motivated to do this with two other entrepreneurs because, “we all tried to raise capital after the 2008 meltdown and found out that it wasn’t there,” Neiss lamented.  “Five years ago you could not do this because Internet was not providing the sunlight to this,” Neiss said referring to Kickstarter.com, which is a platform used to raise money for products and intangibles but not equity. He recommended reviewing crowdcube.com, a site where equity is offered successfully, operating in the UK.

The players in the crowdfunding arena are similar to the roles played at investment banks: The issuers offer equity in their companies. The investors provide the capital. The CPAs provide some assurance. The new wrinkle is the website portals and other intermediaries who provide due diligence and other services. Each player will have to comply with important rules to protect investors and satisfy the SEC.

Companies that help issuers and portals with the required due diligence are already forming. An early pioneer is Sara Hanks, CEO of CrowdCheck. A securities lawyer for 30 years, Hanks was drawn to crowdfunding based on her interest in the need for “micro-due diligence for micro IPOs.”

“CPAs are going to play such an important role, and we are happy to help them,” said Hanks. “In the statute, there is a requirement for a background check and a securities regulatory check for the portals which is not a defined term of the SEC. The statute has to define ‘background check’ as well. The one thing people have to bear in mind is that the SEC has to issue rules and register the portals.”

Hanks described the CrowdCheck service as one that will help entrepreneurs put together, “the disclosure package of some kind to be posted on the portal and sent to the SEC.” Hanks helped me to get my head around all of the fees involved. “There is the disclosure process, the CPA, the escrow and some legal fees, possibly; as well as the merchant processing fees to be passed along to the issuers. There will also be portal fees, and PayPal fees,” said Hanks. “As it grows, these amounts will go down.” CrowdCheck will be looking for CPAs to provide audit services. “Some of these will be super startups, only a few weeks old,” said Hanks. “The SEC needs to provide some guidance to provide what they will audit.”

Realizing that the crowdfunding enthusiasts are not well versed concerning what it takes to provide the level of assurance that the SEC requires, I talked to CPA Richard Salute of JH Cohn. Salute has experience auditing SPACs, which are similar because SPACs are special purpose offerings raising blind pools of capital for issuers to then find businesses to acquire.

“The SPAC may only have founder stock, or founder stock and warrants,” explained Salute. “The financial statements, even though they are zeros, the offering is audited in accordance with GAAS.”

“Standards already exist,” said Salute. “The challenge that you have is an audit is an audit is an audit. These are risk based activities that require work even when there are narrow financial statements and internal controls. We should celebrate the standards, not reduce them.”