Dubbed the “All Day Every Day” pant, Goldstein sees his menswear as a way to tap into the apparel market similarly to what Lululemon did with their yoga pants. He also notices how young Americans are becoming more health conscious and investing more of their time and money into Athleisure apparel. “People are trying to live healthy lifestyles and want appealing and comfortable athletic clothing”, says Goldstein.
Public Rec wasn’t built on a trust fund account or through ABC’s Shark Tank – Goldstein funded his idea primarily through Kickstarter, a widely known crowd sourcing website. Kickstarter enables start-up companies to raise small amounts of money to fund anything from vacations to major motion pictures. Public Rec reached its fundraising goal of $15,000 within 48 hours of posting on Kickstarter.
One of crowd funding’s significant benefits is increased access to capital without diluting ownership. Kickstarter’s website explicitly states that funds cannot be used to offer equity, financial returns, or to solicit loans. However, some of the issues that companies may encounter are complex U.S Generally Accepted Accounting Principles (GAAP) treatment of revenue items.
Accounting Standards Codification 605 (ASC) issued by Financial Accounting Standards Board (FASB) states that “revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.”
Under GAAP, crowdfunded companies should record this as deferred revenue once the funds are received. As they begin producing their goods and shipping them out to customers who had previously contributed to the project, the organization can record the revenue. Creators receive all funds, less 8 – 10% from processing fees, soon after their campaign ends from Kickstarter. Cash basis companies would record revenue at this point, contrary to GAAP treatment.
Some of the issues that start-up companies with limited advisory resources may run into will be cash flow management, organized record keeping, and tax nexus application. These companies should carefully monitor cash flow forecasts in order to make timely payments to vendors, creditors, and other lenders. They should also be sure to properly record their income and expense items to create reliable financial reports and information for their business tax returns. Companies should also be aware if any states can sufficiently prove that a nexus exists between them and the state, which would subsequently expose the company to sales tax liability for that state.
Although crowdfunding is in its infancy relative to the information age, several regulatory agencies such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS) will continue to provide guidance and pronouncements for these types of businesses. These successful crowd funded companies can operationally grow quickly, but will need an understanding of proper accounting treatment.
|Solomon Feraidoon, CPA