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August / September 2016

Fall 2016 Issue

Tax Strategies for Windfalls

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

Individuals may have financial windfalls because of a variety of occurrences. Some windfalls result from good fortune, such as winning the lottery or selling a business, while others result from...

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White Paper Showcase

Ten Best Practices for Successful Accounting Websites

CPASiteSolutions 9 2016 imageEffective web design is a bit like dating. You want to put your best foot forward, but there are so many decisions to be made. Some are obvious – parachute pants are NOT flattering – and others are more difficult – should I have my financial services listed on individual pages or just one? Learn the do’s and don’ts of website design and download the whitepaper: 10 Best Practices for Creating Great Accounting Websites.

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Tax Strategies

Tax Strategies for Windfalls

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

Individuals may have financial windfalls because of a variety of occurrences. Some windfalls result from good fortune, such as winning the lottery or selling a business, while others result from...

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Client Tax Tip

Tactics to Use When Preparing 1040s

Julie Welch, CPA, CFP

Be Alert for Digital Documentation Now that companies are going digital, many W-2s and Form 1099s are available digitally. This is a blessing since they may be more readily available when...

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Financial Planner

What is a Credit Score?

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

This is a question on many people’s minds. A few years ago consumers were trained to monitor their credit report. However, now consumers are seeing commercials asking, “Do you know...

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Feature Stories

Finding and Maintaining New Clients

Joshua Fluegel

Individuals and businesses put great thought into what must be done to preserve income from the government. Lest the world forget, tax professionals are making sure citizens are receiving their...

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Editor Blog

Identity Theft: Response Plan

T. Steel Rose, CPA with Joshua Fluegel

In this information age, identity theft is no longer something you merely hear about on the news in the evening. Most people know someone who has had either a credit...

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Technology Advisor

The PC Industry Needs to Evolve or Prepare for Extinction

Rick Richardson, CPA, CITP, CGMA

PCs are on almost every desk in the world and the installed base is measured in the hundreds of millions. Brian Krzanich, Intel’s latest CEO, recently announced a massive layoff...

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What is Fog Computing?

Rick Richardson, CPA, CITP, CGMA

By now, you've probably heard of cloud computing. That’s where companies rent shared software, computers, and storage instead of buying and installing it all themselves in private data centers. They...

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Tax Checklist

Checklist: 1040 Planning Idea

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

√ MULTI-GENERATION CRT Blended families are common, perhaps the norm (only about 20% of family units are comprised of traditional intact families). For many of these clients portability solves any estate...

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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.”