UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 1-K

ANNUAL REPORT

ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2017

STARTENGINE CROWDFUNDING, INC.

(Exact name of issuer as specified in its charter)

Delaware	46-5371570
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

750 N San Vicente Blvd, Suite 800 West West Hollywood, CA	90069
(Address of principal executive offices)	(Zip code)

(800) 317-2200

(Registrant’s telephone number, including area code)

Common Shares

(Title of each class of securities issued pursuant to Regulation A)

STARTENGINE CROWDFUNDING, INC.

ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

		PAGE
Item 1.	Business	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Directors, Executive Officers and Significant Employees	12
Item 4.	Security Ownership of Management and Certain Securityholders	14
Item 5.	Interest of Management and Others in Certain Transactions	15
Item 6.	Other Information	15
Item 7.	Financial Statements	16
Item 8.	Exhibits	34
	Signatures	35

PART II.

In this Annual Report the term “StartEngine”, “we”, “us”, “our”, or “the Company” refers to StartEngine Crowdfunding, Inc. and our subsidiaries on a consolidated basis.

This report may contain forward-looking statements and information relating to, among other things, the company, its business plan and strategy, and its industry. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to the company’s management. When used in this report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements, which constitute forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those contained in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company does not undertake any obligation to revise or update these forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

Summary

StartEngine Crowdfunding, Inc. aims to revolutionize how startups and small businesses raise capital. We provide an online electronic platform that connects small and medium-sized businesses seeking capital with investors. Online investment by large numbers of investors in comparatively small amounts is often called crowdfunding.

Nearly 6 million small businesses are organized in the United States according to the U.S. Census Bureau. Most of these companies are in need of capital, and they are having difficulty finding it. Banks are reluctant to lend to small and risky companies. Venture capital funds flow to high growth-potential companies whose founders fit a particular profile in terms of education, age, gender and ethnicity. Founders who do not fit this profile risk their life savings to fund their companies and help them grow.

The JOBS Act, signed by President Obama in 2012, is intended to help solve the funding problems that early-stage and small companies encounter, by giving them access to a completely new source of funds: their friends and families, customers, fans and believers. In turn, those potential investors get the chance to invest in a company, team or idea they believe in, however uncertain eventual success might be.

StartEngine helps companies conduct crowdfunding offerings under the JOBS Act. StartEngine Crowdfunding, Inc. operates under Title IV of the JOBS Act, allowing private companies to advertise the sale of stock to both accredited and non-accredited investors under newly-amended Regulation A under the Securities Act. Our wholly owned subsidiary, StartEngine Capital LLC, operates under Title III of the JOBS Act, which added Regulation Crowdfunding to the funding options for small companies.

We want to empower thousands of companies to raise capital and create a million jobs in the next five years.

We currently facilitate capital-raising under three different exemptions from registration under the Securities Act, all made possible by the JOBS Act:

● Title II of the JOBS Act led to Rule 506(c) of Regulation D under the Securities Act. Since September 23, 2013, start-ups have been able to broadly solicit potential investors for their offerings, including presenting their offerings on online platforms, such as ours, to sell securities in their company. Investors under this rule are required to be accredited investors, meaning they meet certain income and net worth thresholds.

● Title III of the JOBS Act allowed for the adoption of Regulation Crowdfunding. Under Regulation Crowdfunding, companies can raise slightly over $1 million a year from accredited and non-accredited investors. Since the regulation went into effect on May 16, 2016, we been facilitating these transactions through our wholly owned subsidiary, StartEngine Capital, which is a funding portal registered with the SEC and a member of the Financial Industry Regulatory Authority (“FINRA”).

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● Title IV of the JOBS Act required changes to improve Regulation A, the exemption that we are using for this offering. Under the amendments to Regulation A, which went into effect on June 19, 2015, companies can raise up to $50 million a year from accredited and non-accredited investors.

We launched our crowdfunding operations in June 2015, as Regulation A went into effect. Elio Motors’ equity crowdfunding offering, hosted on our site, eventually raised $16,917,576 from 6,345 investors. As of December 31, 2017, we have hosted the Regulation A offerings of 15 companies. Regulation Crowdfunding went into effect on May 16, 2016 and as of December 31, 2017 we have acted as intermediary for offerings by 104 companies, raising $14,943,981.

StartEngine was founded by Howard Marks and Ron Miller. Howard Marks is Chief Executive Officer (“CEO”). Howard founded StartEngine with the mission of helping entrepreneurs achieve their dreams. Howard was the founder and CEO of Acclaim Games, a publisher of online games that is now part of The Walt Disney Company. Before Acclaim, Howard was Chairman of Activision Studios from 1991 until 1997. As a former Board Member, and Executive Vice-President of video game giant Activision, he and a partner took control in 1991 and turned the ailing company into the video game industry leader. As a games industry expert, Howard built one of the largest and most successful games studios in the industry selling millions of games. He started StartEngine in 2011, an unrelated entity, as the first startup accelerator in Los Angeles with the goal of helping to make Los Angeles a technology city. After investing in over 60 companies, Howard realized the difficulties entrepreneurs had with raising capital from angel investors and venture capitalists. With the advent of the JOBS Act, Howard realized he could help thousands of entrepreneurs by creating a new company focused on implementing the equity crowdfunding rules. Thus, StartEngine Crowdfunding, Inc. was born in March 2014. Howard is the 2015 "Treasure of Los Angeles" award recipient for his work to transform Los Angeles into a leading technology city, and a member of Mayor Eric Garcetti's technology council.

Ron Miller is the chairman and cofounder of StartEngine. When Howard and Ron initially met in the fall of 2013, they recognized that the JOBS Act represented the greatest advancement for entrepreneurship in a generation. From direct experience as entrepreneurs, they recognized that the key to bringing new technologies and innovations to market required capital that is not readily available. As a serial start-up entrepreneur, Ron immediately went into action to advocate for SEC rulemaking to give life to the JOBS Act, raise the initial capital and built a leadership team to drive the sales and marketing plan to help StartEngine establish a leading position in the market.

Prior to StartEngine, Ron founded, built and sold five companies through management buyouts, private equity, private investors, and public markets. He was also nominated as a four-time Inc. 500/5000 award recipient and was an Ernst & Young entrepreneur of the year award finalist. As Chairman, Miller brings his deep experience as a leader and strategist to the company.

Overview

StartEngine Crowdsourcing Inc. (the “Company”) was incorporated in the State of Delaware on March 19, 2014. Shortly thereafter on May 8, 2014, the Company changed its name to StartEngine Crowdfunding, Inc. (“StartEngine Crowdfunding”).

StartEngine aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding operates under Title IV of the JOBS Act, allowing private companies to advertise the sale of their stock to both accredited and non-accredited investors under Regulation A, and under Title II of the JOBS Act, which permits offerings to accredited investors to be advertised under Rule 506(c) of Regulation D. StartEngine is in the process of expanding the breadth of its offerings in order to better serve its mission. Beginning in December 2017, StartEngine began offering transfer agent services through one of its subsidiaries. Currently, StartEngine is in the process of adding broker-dealer capabilities as well as an alternative trading system to the scope of its offerings.

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StartEngine Crowdfunding has three wholly owned subsidiaries:

● StartEngine Capital LLC (“StartEngine Capital”), a funding portal registered with the SEC and a member of the Financial Industry Regulatory Authority (“FINRA”), operates under Title III of the JOBS Act, which introduced Regulation Crowdfunding,

● StartEngine Secure LLC (“StartEngine Secure”), a transfer agent registered with the SEC that was formed on December 12, 2017, and

● StartEngine Primary LLC (“StartEngine Primary”), a company formed on October 12, 2017, which is the process of seeking approval to operate as a registered broker-dealer and alternative trading system.

Principal Products and Services

Depending on the type of offering being made, we currently operate as a technology platform connecting issuers and investors and as a Regulation Crowdfunding funding portal. We facilitate the following types of offerings that are exempt from registration under the Securities Act:

● Regulation A Offerings: Through StartEngine Crowdfunding we host Regulation A Offerings or Large Online Public Offerings (“Large OPOs”) on our platform. These companies are seeking to raise anywhere from $100,000 to $50,000,000 and we provide an array of services, including assisting with due diligence, custodial accounts and coordinating vendors.

● Regulation Crowdfunding Offerings: Through StartEngine Capital, our funding portal registered with the SEC and FINRA, we host Regulation Crowdfunding or Small Online Public Offerings (“Small OPOs”). These companies are seeking to raise anywhere from $10,000 to $1,070,000, and we also provide an array of services permitted by Regulation Crowdfunding, including campaign page design services, marketing consulting services, assisting with due diligence, custodial accounts, and coordinating vendors.

● Rule 506(c) Offerings: Through StartEngine Crowdfunding, we host offerings under Rule 506(c) of Regulation D or “Select Public Offerings.” Accredited investors are allowed to invest in these offerings and we host these offerings either on a stand-alone basis or concurrently with a Regulation Crowdfunding offering. Under Rule 506(c), companies can use general solicitation to attract investors and there is no limit to the amount of money that can be raised. Therefore, companies engaged in a concurrent Regulation Crowdfunding offering can also raise additional funds from accredited investors providing they comply with the requirements of each exemption.

In the past year, we have broadened the types of securities that are offered on our platforms. Currently, issuers are able to sell traditional securities (e.g., common shares and preferred shares) as well as digital assets (tokens). Sales of digital assets have been called initial coin offerings (“ICOs”), and all ICOs on our platforms will rely on the exemptions from registration available through Regulation A, Regulation Crowdfunding, Rule 506(c) of Regulation D and Regulation S.

Through our wholly owned subsidiary, StartEngine Secure, we offer transfer agent services. These services include tracking each investors account information and the amount of securities purchased and date purchased.  We began offering this service to all of our clients in November 2017. Revenues from this service were first recognized in January 2018.

We now offer marketing services branded under the name “StartEngine Premium”. For an additional upfront fee, our team will write and design a company’s campaign page, provide a designated account consultant to guide a company throughout the campaign creation process, and assist a company in developing a marketing strategy based on best practices and analytics from previous successful campaigns. This service first generated revenues in May 2017.

Services under Development

We strive to ever increase the services offered to our clients. We are in the process of expanding the scope of our offerings to include broker-dealer services as well as to create an alternative trading system. Both of these services will be executed through our subsidiary, StartEngine Primary. We intend that the alternative trading system will be branded StartEngine Secondary.

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StartEngine Primary: By adding broker-dealer services to the mix of our offerings, we will be able to take a more active role in the promotion and sale of securities in Regulation A, Regulation CF and Regulation D offerings hosted on our platforms. Further, we will be able to facilitate the trades that will occur on StartEngine Secondary. To further this goal, StartEngine Primary is applying for approval for a range of business lines to allow for us to act as the broker-dealer for the private placements of securities (which includes securities sold under Regulation D), to effect transfers and sales on StartEngine Secondary, and to be able to receive referral fees for sales of securities.

StartEngine Secondary: The goal of the StartEngine Secondary platform will be to increase liquidity for shares sold in Regulation A, Regulation Crowdfunding and Regulation D offerings. We intend to facilitate the transfer and sale of these shares by creating an alternative trading system to allow for secondary trades. Sales of shares sold under Regulation A and Regulation D on the StartEngine platform will be permitted immediately, while holders of shares sold under Regulation Crowdfunding will need to wait one year, in order to comply with the transfer restrictions to participate on the platform. We are currently working towards obtaining the necessary regulatory approvals.

Ancillary Services: We are in the process of developing an array of ancillary services to assist the companies listing on our platforms. As these are in the development phase, there is no assurance that these services will be developed. These services may include an expansion of marketing services, StartEngine Premium, see “Principal Products and Services” above. In addition, we are working on creating digital advertising services, “StartEngine Promote”. These services are aimed at improving the success of campaign through paid advertising (e.g. create, design and media optimization services and reporting (e.g., ongoing performance reports and recommendations for campaigns). Further, we are developing services to assist our clients after the completion of their campaigns. Some of the services that we intend to develop include tools for the companies to communicate with their investors, assistance with annual reports and on-going compliance, and a variety of marketing tools so that companies can continue to increase their brand awareness and monitor their progress with their investors.

Support Services

Our company is focused on our core competencies and therefore we surround ourselves with third party companies who help us accomplish our non-core tasks.

We rely on the following companies for outsourced services:

● Fund America: Transaction management

● Amazon AWS: Cloud hosting

● Google Business: Cloud email and applications

Market

Regulation A

Amended Regulation A, popularly known as “Regulation A+,” became effective June 19, 2015. The SEC published an analysis after its first 16 months in November 2016, and reported that it qualified approximately 81 offerings seeking up to $1.5 billion. During this period, $190 million had been reported as raised. The SEC’s report came to the conclusion that this is a “potentially viable public offering on-ramp for smaller issuers.” As of December 31, 2017, approximately 191 offerings for companies that had filed to raise funds under Regulation A have been qualified.

We believe the market for Regulation A will continue to grow as more companies become aware of the ability to raise capital through crowdfunding platforms. Because it permits a maximum raise of $50 million each twelve months, we believe this rule is well suited for small and midsize businesses. We have seen the demand increase significantly between 2016 and 2017. We expect to continue to increase the number of companies who list their offerings on our platform, although we are likely to encounter competition from other platforms and from companies who seek to raise funds online without using a platform. Further gaining broker-dealer capabilities will enable us to increase the scope of services offered to our clients.

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Regulation Crowdfunding

Since its launch on May 16, 2016, we estimate that as of December 31, 2017, over 246 companies have completed successful offerings, 75 of them on our funding portal, raising over $14,943,981 million.

We believe Regulation Crowdfunding will continue to grow year over year as more startup companies become aware of this funding method and view Regulation Crowdfunding as a viable fundraising option. Regulation Crowdfunding makes it relatively inexpensive to make an offering of securities; legal, compliance and accounting costs can be less than $10,000, and offering costs can be even cheaper for companies who prepare the documentation internally. With a maximum raise of $1,070,000 per year, we believe that this funding method is perfect for early-stage companies.

We are working to increase awareness of the benefits of Regulation Crowdfunding through a lead generation program that includes advertising on social media, email marketing and through our workshops. We mainly focus on start-ups; however, our outreach will also include some companies further along in their development. We have and plan to continue to educate the market through the content we write and publish on our blog as well as being guest authors on other popular blogs.

Rule 506(c)

According to the SEC, the private placement market, and specifically the Regulation D market was a $1.3 trillion market in 2014. Of that market, 2% of those offerings (approximately $33 billion) were under Rule 506(c) of Regulation D. The vast majority of the sales were through Rule 506(b), which does not allow for general solicitation and allows for some non-accredited investors as well as less stringent requirements for verifying accredited status. That said, only 10% of the offerings under Rule 506(b) included non-accredited investors. Based on this information, we believe there is large potential market for online sales under Rule 506(c).

We believe Rule 506(c) offerings will to continue to grow year over year because it is an inexpensive way to raise capital from accredited investors with a low cost of entry. We estimate it can cost under $10,000 to prepare an offering under Rule 506(c). There is no limitation on the amount raised, which makes this rule attractive to companies who just completed a Regulation Crowdfunding offering or are planning a Regulation A campaign in the near future. This exemption can be used together with Regulation A and Regulation Crowdfunding. For Regulation Crowdfunding offerings, this exemption provides companies an opportunity to extend an offering beyond Regulation Crowdfunding once the maximum $1,070,000 has been reached. For Regulation A offerings, this exemption can be used as a fundraising option prior to the launch of the offering, because of the time it takes to get a Regulation A offering qualified.

Transfer Agent

The exemptions provided by Regulation A and Regulation CF include conditional exemptions from the registration requirements of the Securities Exchange Act of 1934. One of the requirements is that should the number of a company’s securityholders and/or the value of a company’s asset exceed a certain threshold, a company needs to use a registered transfer agent to avoid the requirement that company become a fully-registered company with the SEC - an expensive proposition for many of these small companies. Therefore, the market for our transfer agent services consists of all companies that have previously raised funds through Regulation A and Regulation CF offerings. Currently, we mainly market our services to our current clients.

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StartEngine Secondary

Both the Regulation A and Regulation Crowdfunding markets are new markets. Collectively, in 18 months (which includes only the first full year of operation of Regulation Crowdfunding), these markets accounted for over $200 million in investments. This means that there are over $200 million in securities that could potentially be traded on a secondary market, similar to the market we intend to create on the StartEngine Secondary platform. We believe that a portion of the owners of securities purchased under Regulation A and Regulation Crowdfunding will be interested in selling their securities to prospective buyers. There is no viable marketplace today for these securityholders to sell their securities unless the company seeks a quotation on an over-the-counter marketplace. Companies who use Tier 1 of Regulation A or Regulation Crowdfunding do not qualify for quotation on the leading over-the-counter marketplace. Further even if a company qualifies for that market, which would include issuers using Tier 2 of Regulation A, the listing requirements are expensive. We believe StartEngine Secondary has the potential for success because there is currently no marketplace for these securities.

Registered User Base

As of December 31, 2017, we have 127,830 registered users. Of these, 28,940 have made investments on our platform. We are seeing week-over-week growth in registered users and expect to register more users as we add more companies to our platform.

Competition

With respect to offerings made under Regulation Crowdfunding, we compete with other intermediaries, including brokers and funding portals such as WeFunder, Next Seed, SeedInvest, Republic and MicroVentures.

With respect to offerings under Regulation A, we compete with other platforms, hosting services and broker-dealers. Some of our competitors include: SeedInvest, Hambrecht, CrowdEngine and Wefunder.

With respect to offerings under Rule 506(c), or online offerings made under Regulation D (which includes non-solicited offerings), we compete with platforms such as Crowdfunder, AngelList, EquityNet, SeedInvest, FundersClub and Fundable.

With respect to our transfer agent, we compete with transfer agents such as Computershares and VStock Transfer.

Strategy

Our Mission: To help entrepreneurs fuel the American Dream.

Our Strategy: To create a world-class digital marketplace to connect entrepreneurs directly and provide investment opportunities to accredited and non-accredited investors.

Our Advantages

We believe that StartEngine is one of the leaders in the global crowdfunding nation. We aim to facilitate financial ignition of innovative companies led by determined, intelligent entrepreneurs who have the energy and talent to start and grow successful companies.

We harness the power and wisdom of “The Crowd” through the internet to release entrepreneurial creativity, thereby creating jobs, economic efficiency and ultimately economic growth. We believe we not only help entrepreneurs raise capital to start and grow their businesses, but we also help them build armies of committed, long-term brand ambassadors who, as investors, promote their companies to their friends, families and colleagues.

As one of the first movers in the equity crowdfunding industry, we are active in crowdfunding legal and regulatory affairs. Our position allows us to collaborate to establish industry-wide best practices and to improve the quality of listings. We believe our backend operating systems are highly efficient. Each function operates through documented procedures to ensure consistent, quality results. Knowing what it takes to successfully grow a company, we try to keep operating expenses to a minimum.

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We believe that StartEngine’s key asset is its team members. We are a group of talented people who have come together to democratize finance and investment in startup and growth companies. The hallmark of the company is talented, respectful, enthusiastic and entrepreneurial people who understand and operate on the principles of dignity and respect.

Our mission is to help entrepreneurs achieve their dreams. Our objective is that by 2025, we will facilitate funding for the startup and growth of 5,000 companies every year.

Research and Development

StartEngine has invested approximately $356,047 in 2017 and $684,291 in 2016 in research and development, product development, and maintenance.

Employees

As of December 31, 2017, we have 27 employees working out of West Hollywood, California. We also work with a large number of contractors for user-experience design, security controls, and testing, services and marketing.

Regulation

Having platforms that host Regulation A, Regulation Crowdfunding and Regulation D offerings, we are required to comply with a variety of state and federal securities laws as well as the requirements of FINRA, a national securities association of which our funding portal subsidiary is a member. Further, as a registered transfer agent, we are required to comply with a variety of state and federal securities laws and laws that govern transfer agents, as well as laws aimed at preventing fraud, tax evasion and money laundering

Regulation Crowdfunding

In order to act as an intermediary under Regulation Crowdfunding, our subsidiary is registered as a funding portal with the SEC and became a member of FINRA. In the future, we may be subject to additional rules issued by other regulators, such as the money-laundering rules proposed by FinCEN.

SEC Requirements

As a funding portal, our subsidiary is prohibited from engaging in certain activities in order not to be regulated as a full-service broker-dealer. These activities are set out in Section 4(a)(6) of the Securities Act and in Regulation Crowdfunding. We have accordingly established internal processes to ensure that our subsidiary as well as its agents and affiliates do not engage in activities that funding portals are not permitted to undertake, including:

● Providing investment advice or recommendations to investors for securities displayed on our platform;

● Soliciting purchases, sales or offers to buy securities displayed on our platform;

● Compensating employees, agents or other persons for solicitation or for the sale of securities displayed or listed on our platform; or

● Holding, managing, processing or otherwise handling investors’ funds or securities.

In addition, our funding portal has certain affirmative requirements that it is required to comply with to maintain its status. These affirmative obligations include:

● Providing a communications channel to allow issuers to communicate with investors;

● Having due diligence and compliance protocols and requirements in place so that it has a “reasonable basis” to believe that

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○ its issuers are in compliance with securities laws, have established means to keep accurate records of the securities offered and sold, and that none of their covered persons (e.g., officers, directors and certain beneficial owners) are “bad actors” and therefore disqualified from participating in the offering;

○ its issuers and offerings do not present the potential for fraud or otherwise raise concerns about investor protection; and

○ its investors do not invest more than they are allowed to invest under the limitations set out in Regulation Crowdfunding; and

● Creating procedures for its investors to notify them of risks regarding investing in securities hosted on its platform and providing them with required investor education and disclosure materials.

We are also required to set up protocols regarding payment procedures and recordkeeping.

FINRA Rules

As a member of FINRA, our funding portal is subject to their supervisory authority and is required to comply with FINRA’s portal requirements. Some of those rules are also applicable to the Company as an entity associated with the portal. These requirements include rules regarding conduct, compliance and codes of procedure. For instance, FINRA’s compliance rules require timely reporting of specified events such as complaints and certain litigation against the portal or its associated persons as well as the provision of the portal’s annual financials prepared on a U.S. GAAP basis. In addition, under the conduct rules, the portal is required to conduct its business with high standards of commercial honor and just and equitable principles of trade, is limited to certain types of communications with investors and issuers, and is prohibited from using manipulative, deceptive and other fraudulent devices.

Liability

Under Section 4A(c) of the Securities Act, an issuer, including its officers and directors, may be liable to the purchaser of its securities in a transaction made under Section 4(a)(6) if the issuer makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which there were made, not misleading; provided, however, that the purchaser does not know of the untruth or omission, and the issuer is unable to prove that it did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.

Though not explicitly stated in the statute, this section may extend liability to funding portals, and the SEC has stated that, depending on the facts and circumstances, portals may be liable for misleading statements made by issuers. However, funding portals would likely have a “reasonable care” due diligence defense. “Reasonable care” would include establishing policies and procedures that are reasonably designed to achieve compliance with the requirements of Regulation Crowdfunding, including conducting a review of the issuer’s offering documents before posting them to the platform to evaluate whether they contain materially false or misleading information. We have designed our internal processes and procedures with a view to establishing this defense, should the need arise.

Further, we may also face liability from existing anti-fraud rules and statutes under the securities laws. For instance, under Section 9(a)(4) of the Exchange Act anyone who "willfully participates" in an offering could be liable for false or misleading statements made to induce a securities transaction.

In addition, FINRA imposes liability for certain conduct including violations of commercial honor and just and equitable principles of trade and acts using manipulative, deceptive and other fraudulent devices.

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Regulation A and Regulation D

Broker-Dealer Registration Requirements

With respect to sales under Regulation A and Regulation D, we provide the technology for issuers to identify and interact with potential investors, and do not structure transactions. We currently are not registered as a broker-dealer and do not engage in certain activities that would constitute “engaging in the business” of being a broker-dealer, including:

● Actively soliciting investors and negotiating the terms of an arrangement between companies and investors;

● Accepting compensation related to the success and size of the transaction or deal;

● Effecting transactions, including handling of the securities and funds relating a transaction; and

● Extending credit to investors; and creating the market and help negotiate the price between buyers and sellers.

There has been little regulatory guidance as to the circumstances in which state or federal broker-dealer registration requirements apply to online investment platforms, and such guidance as it exists generally predates the technological developments of the last couple of decades. Despite a long-standing request from organizations such as the American Bar Association to clarify the circumstances in which “finders,” who also connect buyers and sellers of securities, are permitted to perform that function without registering as broker-dealers, the SEC has not provided any guidance.

Liability

Section 12(a)(2) of the Securities Act, which applies to Regulation A, imposes liability for misleading statements not only on the issuers of securities but also on “sellers,” which includes brokers involved in soliciting an offering. We do not act as a broker for Regulation A or Regulation D offerings. Rule 10b-5 under the Exchange Act generally imposes liability on persons who “make” statements; the information presented on our platform is drafted by the issuers themselves. Additional liability may arise from as-yet untested provisions such as Section 9(a)(4) of the Exchange Act, discussed above.

Transfer Agent Regulations

As a registered transfer agent, we are required to comply with all applicable SEC rules, which predominantly includes the rules under Section 17A(c) of the Exchange Act. The requirements for transfer agents include:

● minimum performance standards regarding tracking, recording and maintaining the official record of ownership of securities of a company and related recordkeeping and reporting rules

● timely and accurate creation of records for security holders, and

● related safeguards and data security requirements for fraud prevention.

In addition, we must comply with various state corporate and securities laws as well as provisions of the Anti-Money Laundering (AML) regulations, Office of Foreign Assets Regulations (OFAC) and the Foreign Account Tax Compliance Act (FATCA).

Intellectual Property

We have a trademark for “StartEngine” in the United States. We do not own any patents; however, we have our own proprietary source code that we use in operating our platform. We also have a patent pending on the topic of peer to peer trading.

Litigation

The company is not involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Results

StartEngine Crowdfunding, Inc. was incorporated on March 19, 2014 in the State of Delaware. The company was originally incorporated as StartEngine Crowdsourcing, Inc., but changed to the current name on May 8, 2014. The Company’s revenue producing activities commenced in 2015 with the effectiveness of the amendments to Regulation A under the Securities Act adopted in response to Title IV of the JOBS Act. Operations expanded in 2016, as Regulation Crowdfunding, adopted in response to Title III of the JOBS Act, went into effect.

For offerings made under Regulation A and Rule 506(c), our revenues are in the form of posting fees, since we are not currently permitted to collect transaction-based compensation. We generally allow companies to use one of two fee schemes for posting Regulation A and Regulation D offerings — either a per investor payment or a flat monthly fee. In general, our posting fee per investor is $50 under Regulation A and $250 under Regulation D. Alternatively, under both Regulation A and Regulation D, companies can pay a $20,000 to $30,000 monthly posting fee. For some transactions, flat fees can be negotiated on the basis of the expected investor volume. In Regulation Crowdfunding offerings, as a funding portal we are permitted to charge commissions to the companies that raise funds on our platform. We typically charge 6% to 10% under Regulation Crowdfunding offerings for our platform fees. We also generate revenue from services, which include a consulting package called StartEngine Premium priced from $5,000 to $25,000 to help companies who raise capital with Regulation Crowdfunding. We additionally charge a $1,000 fee for certain amendments we file on behalf of companies raising capital with Regulation Crowdfunding as well as fees to run the required “bad actor” checks for companies utilizing our services.

2017 Compared to 2016

Our revenues totaled $2,046,948 in 2017 and $308,370 in 2016, an increase of 564%. The increase was primarily due to higher platform fees from Regulation Crowdfunding offerings; our platform fees increased to $866,258 in 2017 from $26,852 in 2016. The increase was due to the fact that Regulation Crowdfunding was only in effect for seven months in 2016 and majority of revenues for a Crowdfunding campaign are recognized during the latter half of a campaign. In addition, there was greater market awareness and usage of Regulation Crowdfunding in 2017. Our Regulation A posting fees increased to $515,762 in 2017 from $180,772 in 2016. Also during this period, our revenues for ancillary services increased to $414,894 in 2017 from $0 in 2016, primarily due to the $215,500 in fees generated from StartEngine Premium.

Cost of revenues for 2017 and 2016 was $729,108 and $543,725, respectively, an increase of 34%. Cost of revenues consists of internal employees, hosting fees, processing fees, and certain software subscription fees that are required to provide services to our issuers. The increase was primarily due to higher transaction costs and higher payroll costs. We believe that our payroll normalized somewhat with more consistent operations as both Regulation Crowdfunding and Regulation A processes are more established, although this trend will not likely continue if we become a broker-dealer. Accordingly, our margins increased to 64% in 2017 from a negative margin of 76% in 2016.

Our operating expenses consist of general and administrative expenses (consisting primarily of salaries, office rent, legal services and accounting services), sales and marketing and research and development. Operating expenses totaled $3,502,600 in 2017 and $2,704,474 in 2016, an increase of 30%. The primary components of this increase were:

● An increase in general and administrative costs to $2,228,369 in 2017 from $1,478,166 in 2016, a 51% increase, due to additional salaries for management personnel, higher office rent, and higher software subscription costs.

● An increase in sales and marketing costs to $918,184 in 2017 from $542,017 in 2016, a 69% increase, due to additional salaries for marketing personnel and higher lead generation costs.

10

This increase was partially offset by a decrease in research and development costs to $356,047 in 2017 from $684,291 in 2016, a 48% decrease. The higher costs in 2016 were related to the commencement of Regulation Crowdfunding operations.

In 2017, we recorded $86,793 in other expense, compared with other income of $10,172 in 2016. The components of other expense were a realized loss on available-for-sale securities of $79,100 related to the sale of mutual funds, a decrease in the fair value of warrant investments of $33,745, and dividend income of $26,052.

As a result of the foregoing, we recorded a net loss of $2,280,174 in 2017, compared to a net loss of $2,930,568 in 2016.

The Company recorded other comprehensive income in 2017 of $70,332 due to an unrealized gain on mutual funds, which we hold as an available-for-sale investment. In 2016, the Company recorded other comprehensive loss of $104,463 due to an unrealized loss on mutual funds held as available-for-sale investments.

Our comprehensive loss totaled $2,209,842 in 2017 compared with a comprehensive loss totaling $3,035,031 in 2016.

Liquidity and Capital Resources

We do not currently have any significant loans or available credit facilities. As of December 31, 2017, the Company’s current assets were $2,707,776. To date, our activities have been funded from investments from our founders, the previous sale of Series Seed Preferred Shares and Series A Preferred Shares, and an ongoing Regulation A offering.

On October 13, 2017, the Company launched an offering of its Common Stock in reliance on Regulation A in which it seeks to raise up to $5,000,000 (the “Regulation A Offering”). It is offering up to 1 million shares of its Common Stock at a price of $5.00 per share, with up to 100,000 bonus shares as defined by the offering circular. 

The Company plans to use the net proceeds of the Regulation A Offering primarily for marketing costs and operating expenses. The Regulation A Offering will terminate upon the earlier of the date when $5,000,000 worth of shares have been sold, October 13, 2018, or the date at which the Regulation A Offering is terminated by the Company in our sole discretion. As of December 31, 2017, the Company has received $1,424,430 in net proceeds from the Regulation A Offering. Since that date, the Company has received an additional $1,690,694 in net proceeds.

We believe we have the cash, available-for-sale securities, other current assets available, and increasing revenues and access to funding that will be sufficient to fund operations until the Company starts generating positive cash flows from normal operations. Depending on the amount raised in our Regulation A offering, we may need to raise additional funds, either in other securities offerings or from banks or other lenders. We do not currently have access to any line of credit or other sources of bank funding.

The Company currently has no material commitments for capital expenditures.

Trend Information

We are operating in a new industry and there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. For those reasons and because we are still in the infancy of these new regulations, we expect to continue to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding offerings and the investments into those offerings generates sufficient revenues to cover our costs.

Additionally, we would anticipate that if and when we become a broker-dealer, our costs for payroll and training will increase relative to our revenue.

11

ITEM 3. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

As of December 31, 2017, our directors, executive officers and significant employees were as follows:

Name	Position	Age	Term of Office (if indefinite, give date appointed)	Approximate hours per week (if part- time)/full-time
Executive Officers:
Howard Marks	CEO	55	January 1, 2014, Indefinitely	Full-time
Mary Frances Knight	CCO/Dir. of Administration	31	May 2014 (Director of Admin) and December 2015 (CCO), Indefinitely	Full-time
Johanna Cronin	Dir. of Product, Account Services and Marketing	29	March 2014, Indefinitely	Full-time
Directors:
Howard Marks	Director	55	April 17, 2014, Indefinitely
Ronald Miller	Director and Chairman	55	April 17, 2014, Indefinitely
Significant Employees:
David Zhang	Lead Developer	25	August 2016	Full-time

Howard Marks, Co-founder, CEO and Director

Howard Marks is one of our co-founders and has served as our CEO since January 1, 2017. From our founding in March 2014 until December 2016, Howard served as our Executive Chairman. Howard founded StartEngine, an unrelated entity, in November 2011 as a startup accelerator with the mission to help make Los Angeles a top tech entrepreneurial city. In March 2014, Howard and Ron Miller founded the Company as an equity crowdfunding platform. Howard was the founder and CEO of Acclaim Games, a publisher of online games now part of The Walt Disney Company. Before Acclaim, Howard was the Chairman of Activision Studios from 1991 until 1997. As a former Board Member and Executive Vice-President of video-game giant Activision, he and a partner took control in 1991 and turned the ailing company into the $20 billion market cap video game industry leader. As a games industry expert, Howard built one of the largest and most successful games studios in the industry, selling millions of games. Howard is the 2015 "Treasure of Los Angeles" recipient, awarded for his work to transform Los Angeles into a leading technology city. Howard is a member of Mayor Eric Garcetti's technology council. Howard has a Bachelor of Science in Computer Engineering from the University of Michigan. He is bilingual and is a triple national of the United States, United Kingdom, and France.

Ronald Miller, Co-founder and Executive Chairman

Ron Miller is the executive chairman and cofounder of StartEngine. Ron served as our CEO and a director since our founding in March 2014 until December 2016. On January 1, 2017, Ron became our executive chairman. He is also currently the founder of the Disability Group Inc., and has served as its CEO since 2004. When Howard and Ron initially met in the fall of 2013, they recognized that the JOBS Act represented the greatest advancement for entrepreneurship in a generation. From direct experience as entrepreneurs, they recognized that the key to bringing new technologies and innovations to market required capital that is not readily available. As a serial start-up entrepreneur, Miller immediately went into action to advocate for SEC rulemaking to give life to the JOBS Act, raise the initial capital and built a leadership team to drive the sales and market plan to help StartEngine establish a leadership place in the market.

Prior to StartEngine, Miller founded built and sold five companies through management buyouts, private equity, private investors, and public markets. He was also nominated as a four-time Inc.500/5000 award recipient and was Ernst & Young entrepreneur of the year award finalist. As the executive chairman, Miller brings his deep experience as a leader and strategist to the company.

12

Johanna Cronin, Director of Product, Account Services and Marketing

Johanna Cronin is Director of Marketing, Product, Investor Services, Issuer Services and Marketing at StartEngine. She was the first employee and began working for StartEngine in 2014. Prior to that she served as an SEM analyst, managing paid media budgets and purchasing media placements for small businesses, for Dex Media, Inc. from March 2012 until March 2014. Johanna received her Bachelor of Arts from Northwestern University, where she was a psychology major with a Spanish minor.

Mary Frances Knight, Chief Compliance Officer and Director of Administration

Mary Frances Knight is the Chief Compliance Officer at StartEngine. She has served in that position since December 2015. Prior to her promotion, she was Director of Administration, a position she held since May 2014. At that time, she was also Director of Finance and Administration of the Disability Group, a position she held from February 2013 to May 2015. She is a native of St. Louis and a graduate of USC. She is currently studying at the UCLA Anderson School of Management in its Executive Master of Business Administration (EMBA) program.

David Zhang, Lead Engineer

David Zhang engineered the first working version of the StartEngine platform. David has been an integral part of over 12 software applications across multiple startups. He has served as our lead software engineer since August 2016. After graduation and prior to his employment on StartEngine, he was the lead developer at Colab.la, a start-up venture studio, from July 2014 until June 2016. He graduated from Indiana University Bloomington in May 2014 with a BS in computer science before teaching himself web development and infrastructure. David started his career being thrown into "rescue" jobs with hard deadlines and as a result, has developed a great appreciation for getting the work done.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

For the fiscal year ended December 31, 2017, we compensated our three highest-paid directors and executive officers as follows:

Name	Capacities in which compensation was received	Cash compensation ($)		Other compensation ($) (1)(2)		Total compensation ($)
Howard Marks	CEO	$	300,000	$	180,000	$	480,000
Johanna Cronin	Director of Product, Account Services and Marketing	$	110,000	$	16,575	$	126,575
Mary Frances Knight	CCO/Director of Administration	$	95,000	$	10,700	$	105,700

(1) The other compensation consists of cash bonus. The executives also received medical and health benefits, generally available to all salaried employees.

(2) During the fiscal year ended December 31, 2017, options for 62,496 shares granted to Johanna Cronin under the 2015 Equity Incentive Plan and options for 2,500 shares granted to Mary Frances Knight under the 2015 Equity Incentive Plan vested. On February 7, 2017, Johanna Cronin and Mary Frances Knight were each granted options for 50,000 shares, one-fourth of which will vest on January 1, 2018, and the remaining options will vest monthly over the following three years.

We did not compensate either of our directors in their capacity as a director in 2017.

ITEM 4. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

The tables below show, as of December 31, 2017, the security ownership of the Company’s directors, executive officers owning 10% or more of the Company’s voting securities and other investors who own 10% or more of the Company’s voting securities.

13

Title of class	Name and address of beneficial owner (1)	Amount and nature of beneficial ownership		Amount and nature of beneficial ownership acquirable			Percent of class (2)
Common Stock	Howard Marks (4)		3,440,000		200,000	(5)		50.9	%
					340,334 Proxy Shares	(6)
								54.6	%(3)
Common Stock	Miller Family Trust 1/2/96		2,580,000		200,000	(5)		38.2	%
	(Ron Miller)							40.0	%(3)
Common Stock	All executive officers and		6,020,000		400,000	(5)		89.1	%
	directors as a group							90.2	%(3)
	(including Howard Marks and Ron Miller)				340,334 Proxy Shares	(6)
					278,531 shares available under stock options	(7)
Series Seed Preferred Stock	Howard E. Marks Living Trust U/A Dtd 12/21/2001 (Howard Marks)		200,000					5.7	%
Series Seed Preferred Stock	Miller Family Trust 1/2/96 (Ron Miller)		200,000					5.7	%
Series Seed Preferred Stock	AC Ventures, LLC 370 Convention Way, Redwood City, CA, 94063		400,000					11.4	%
Series A Preferred Stock	SE Agoura Investment LLC 333 South Grand Avenue Suite 1470 Los Angeles, CA 90071 (8)		3,201,024					98.4	%

(1) The address for all the executive officers and directors is c/o StartEngine Crowdfunding, Inc., 750 N San Vicente Blvd, Suite 800 West, West Hollywood, California 90069.

(2) Based on 6,754,501 shares of Common Stock, 3,500,000 shares of Series Seed Preferred Stock, and 3,254,261 shares of Series A Preferred Stock outstanding.

(3) This calculation is the amount the person owns now, plus the amount that person is entitled to acquire. That amount is then shown as a percentage of the outstanding amount of securities in that class if no other person exercised their rights to acquire those securities. The result is a calculation of the maximum amount that person could ever own based on their current and acquirable ownership, which is why the amounts in this column may not add up to 100% for each class.

(4) These shares are held by Howard E. Marks Living Trust U/A Dtd 12/21/2001 (Howard Marks) and Marks Irrevocable Trust (Howard Marks).

(5) Shares available through conversion of Preferred Stock.

(6) The Proxy Shares are the 340,334 common shares sold in the Regulation A offering, that Mr. Marks as CEO, has voting control over pursuant to the subscription agreement governing that offering.

(7) The options were granted under the 2015 Equity Incentive Plan.

(8) SE Agoura Investment LLC is beneficially owned by Aubrey Chernick.

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ITEM 5. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

In March 2016, the company entered into a three-year Platform Network Collaboration and Data Licensing Agreement (the “Platform Agreement”) with NextGen Crowdfunding, LLC, an entity affiliated with one of our significant preferred stockholders, SE Agoura Investment LLC, which is beneficially owned by Aubrey Chernick. The Platform Agreement calls for the Company and the outside entity to collaborate and for the Company to provide data and certain information to the entity for tracking crowdfunding statistics. In consideration, the company is to receive $75,000 per annum, with the first $75,000 being subject to certain milestones being met as defined by the Platform Agreement. The Company received $25,000 upon execution of the Platform Agreement in 2016, and the remaining $50,000 was earned and received in 2017. The second $75,000 was received in March 2017 and will be earned ratably over 12 months.

ITEM 6. OTHER INFORMATION

Not applicable.

15

ITEM 7. FINANCIAL STATEMENTS

TABLE OF CONTENTS	Page
Independent Auditors’ Report	17
Consolidated Balance Sheets as of December 31, 2017 and 2016	18
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016	19
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016	20
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016	21
Notes to Financial Statements	22

16

INDEPENDENT AUDITORS’ REPORT

To Board of Directors and Stockholders

StartEngine Crowdfunding, Inc.

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of StartEngine Crowdfunding, Inc. and subsidiaries (collectively the “Company”) which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of StartEngine Crowdfunding, Inc. and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ dbbmckennon

Newport Beach, CA

April 30, 2018

17

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2017			2016
Assets
Current assets:
Cash	$	954,599		$	149,177
Available-for-sale securities		1,566,192			2,645,909
Accounts receivable, net of allowance		159,100			97,578
Other current assets		27,885			-
Total current assets		2,707,776			2,892,664
Property and equipment, net		7,005			7,228
Investments - warrants		201,124			75,162
Intangible assets		20,000			20,000
Other assets		20,950			29,835
Total assets	$	2,956,855		$	3,024,889
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	163,627		$	18,594
Accrued liabilities		398,834			126,869
Deferred revenue		219,425			-
Total current liabilities		781,886			145,463
Total liabilities		781,886			145,463
Commitments and contingencies (Note 5)		-			-
Stockholders' equity:
Series A Preferred Stock, par value $0.00001, 3,500,000 shares authorized, 3,254,261 issued and outstanding at December 31, 2017 and 2016, respectively		5,566,473			5,566,473
Series Seed Preferred Stock, par value $0.00001, 3,500,000 authorized, issued, and outstanding		1,750,000			1,750,000
Common stock, par value $0.00001, 25,000,000 shares authorized, 6,754,501 and 6,414,167 shares issued and outstanding at December 31, 2017 and 2016, respectively		68			64
Additional paid-in capital		1,638,426			27,778
Subscription receivable		(105,267	)		-
Accumulated other comprehensive income		(34,131	)		(104,463	)
Accumulated deficit		(6,640,600	)		(4,360,426	)
Total stockholders' equity		2,174,969			2,879,426
Total liabilities and stockholders' equity	$	2,956,855		$	3,024,889

See accompanying notes to consolidated financial statements.

18

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Year Ended December 31,
	2017			2016
Revenues	$	2,046,948		$	308,370
Cost of revenues		729,108			543,725
Gross profit (loss)		1,317,840			(235,355	)
Operating expenses:
General and administrative		2,228,369			1,478,166
Sales and marketing		918,184			542,017
Research and development		356,047			684,291
Total operating expenses		3,502,600			2,704,474
Operating loss		(2,184,760	)		(2,939,829	)
Other expense (income):
Interest income		-			(359	)
Other expense		33,745			-
Other income		(26,052	)		(68,824	)
Realized loss on available-for-sale securities		79,100			8,929
Realized loss on warrant exercise		-			50,082
Total other expense (income)		86,793			(10,172	)
Loss before provision for income taxes		(2,271,553	)		(2,929,657	)
Provision for income taxes		8,621			911
Net loss	$	(2,280,174	)	$	(2,930,568	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments		70,332			(104,463	)
Total other comprehensive income (loss)	$	70,332		$	(104,463	)
Comprehensive loss	$	(2,209,842	)	$	(3,035,031	)
Weighted average earnings per share - basic and diluted	$	(0.35	)	$	(0.41	)
Weighted average shares outstanding - basic and diluted		6,427,350			7,135,153

See accompanying notes to consolidated financial statements.

19

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Series A Preferred Stock				Series Seed Preferred Stock				Common Stock						Additional Paid-			Subscription			Accumulated Other Comprehensive			Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Shares			Amount			in Capital			Receivable			Income (Loss)			Deficit			Equity
December 31, 2015		3,215,574	$	5,500,000		3,500,000	$	1,750,000		7,274,167		$	73		$	17,606		$	-		$	-		$	(1,429,858	)	$	5,837,821
Sale of Series A Preferred Stock		38,687		66,473		-		-		-			-			-			-			-			-			66,473
Restricted common stock repurchased		-		-		-		-		(860,000	)		(9	)		(77	)		-			-			-			(86	)
Stock option compensation		-		-		-		-		-			-			10,249			-			-			-			10,249
Net loss		-		-		-		-		-			-			-			-			-			(2,930,568	)		(2,930,568	)
Other comprehensive loss		-		-		-		-		-			-			-			-			(104,463	)		-			(104,463	)
December 31, 2016		3,254,261	$	5,566,473		3,500,000	$	1,750,000		6,414,167		$	64		$	27,778		$	-		$	(104,463	)	$	(4,360,426	)	$	2,879,426
Sale of common stock		-		-		-		-		340,334			4			1,629,536			(105,267	)		-			-			1,524,273
Offering costs		-		-		-		-		-			-			(99,843	)		-			-			-			(99,843	)
Stock option compensation		-		-		-		-		-			-			80,955			-			-			-			80,955
Net loss		-		-		-		-		-			-			-			-			-			(2,280,174	)		(2,280,174	)
Other comprehensive gain		-		-		-		-		-			-			-			-			70,332			-			70,332
December 31, 2017		3,254,261	$	5,566,473		3,500,000	$	1,750,000		6,754,501		$	68		$	1,638,426		$	(105,267	)	$	(34,131	)	$	(6,640,600	)	$	2,174,969

See accompanying notes to consolidated financial statements.

20

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2017			2016
Cash flows from operating activities:
Net loss	$	(2,280,174	)	$	(2,930,568	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		2,517			876
Bad debt expense		70,700			60,006
Fair value of warrants received for fees		(159,707	)		(75,162	)
Change in fair value of warrant investments		33,745			-
Realized loss on cashless warrant exercise		-			50,082
Realized loss on available-for-sale securities		79,100			-
Stock-based compensation		80,955			10,249
Changes in operating assets and liabilities:
Accounts receivable		(132,222	)		(155,584	)
Other current assets		(27,885	)		-
Accounts payable		145,033			(47,377	)
Accrued liabilities		271,965			11,446
Deferred revenue		219,425			-
Net cash used in operating activities		(1,696,548	)		(3,076,032	)
Cash flows from investing activities:
Purchase of property and equipment		(2,294	)		(8,104	)
Purchase of available-for-sale securities		(577,307	)		(4,413,468	)
Sale of available-for-sale securities		1,648,256			1,703,573
Deposits and other		8,885			(10,891	)
Net cash provided by (used in) investing activities		1,077,540			(2,728,890	)
Cash flows from financing activities:
Proceeds from sale of common stock		1,524,273			-
Offering costs		(99,843	)		-
Proceeds from sale of Series A preferred stock		-			66,473
Repurchase of restricted common stock		-			(86	)
Net cash provided by financing activities		1,424,430			66,387
Increase (decrease) in cash and cash equivalents		805,422			(5,738,535	)
Cash and cash equivalents, beginning of year		149,177			5,887,712
Cash and cash equivalents, end of year	$	954,599		$	149,177
Supplemental disclosures of cash flow information:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	8,621		$	911
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities	$	70,332		$	(104,463	)
Fair value of warrants received	$	159,707		$	75,162

See accompanying notes to consolidated financial statements.

21

STARTENGINE CROWDFUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS

StartEngine Crowdfunding, Inc was formed on March 19, 2014 (“Inception”) in the State of Delaware. The Company was originally incorporated as StartEngine Crowdsourcing, Inc, but changed to the current name on May 8, 2014.  The consolidated financial statements of StartEngine Crowdfunding, Inc. (which may be referred to as “StartEngine,” the "Company," "we," "us," or "our") are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s headquarters are located in West Hollywood, California

The Company aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding, Inc. operates under Title IV of the Jumpstart our Business Startups Act (“JOBS Act”), allowing private companies to advertise the sale of stock to both accredited and non-accredited investors. StartEngine Crowdfunding Inc. has wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. StartEngine Capital LLC, a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA), operates under Title III of the JOBS Act. StartEngine Secure LLC is a transfer agent registered with the SEC. StartEngine Primary LLC was formed in October 2017 and is in the process of seeking approval to operate as a registered broker-dealer and alternative trading system. The Company’s mission is to empower thousands of companies to raise capital and create significant amounts of jobs over the coming years.

Management Plans

The Company’s revenue producing activities commenced in 2015 with the approved start of Title IV of the JOBS Act which created new rules for Regulation A and increased in 2016 based on the start of Regulation Crowdfunding under Title III of the JOBS Act. Because this is a new industry, there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. Because there is a level of uncertainty and because we are still at the early stages of these new regulations, the Company is expected to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding campaigns and the investments into those campaigns is sufficient for revenues derived from those campaigns and other services to cover our costs. These factors indicate substantial doubt about the Company’s ability to continue as a going concern.

During the next twelve months, the Company intends to fund its operations through its current working capital, its ongoing Regulation A offering, and increasing revenues. Based on our current capital and ability to reduce cash burn if needed, as well as the increasing revenues as Regulation A and Regulation Crowdfunding become more widely used, Management believes that any substantial doubt about the company’s ability to continue as a going concern has been alleviated.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of StartEngine Crowdfunding, Inc.’s wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. Significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of expenses during the reporting periods. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term.

22

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2- Include other inputs that are directly or indirectly observable in the marketplace.

Level 3- Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. The following are level 1, 2 and 3 assets.

Level 1

Investments: Available-for-sale securities are made up of mutual and money market funds and shares of common stock that are valued based on quoted prices in active markets

Level 2

Investments - warrants (public portfolio): Fair value measurements of warrants of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable volatility assumptions based on comparable public companies.

Level 3

Investments - warrants (private portfolio): Fair value measurements of warrants of private portfolio companies are priced based on a modified Black-Scholes option pricing model to estimate the asset value by using stated strike prices, warrant expiration dates modified to account for estimates to actual life relative to stated expiration, risk-free interest rates volatility assumptions based on comparable public companies. Option volatility assumptions used in the modified Black-Scholes model are based on public companies who operate in similar industries as companies in our private company portfolio. For these warrants the fair value of the underlying stock may be estimated based on recent raises or based on information received from the portfolio company. Certain adjustments may be applied as determined appropriate by management.

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017:

	Level 1		Level 2		Level 3		Total
Cash	$	954,599	$	-	$	-	$	954,599
Available-for-sale securities
Mutual and money market funds		1,556,070		-		-		1,556,070
Common stock equities		10,122		-		-		10,122
Investments - Warrants		-		-		201,124		201,124
	$	2,520,791	$	-	$	201,124	$	2,721,915

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The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016:

	Level 1		Level 2		Level 3		Total
Cash	$	149,177	$	-	$	-	$	149,177
Available-for-sale securities
Mutual funds		2,605,432		-		-		2,605,432
Common stock equities		40,477		-		-		40,477
Investments - Warrants		-		-		75,162		75,162
	$	2,795,086	$	-	$	75,162	$	2,870,248

The following table presents additional information about transfers in and out of Level 3 assets measured at fair value on a recurring basis for 2017 and 2016:

	Investments -  Warrants
Fair Value at December 31, 2015		90,559
Receipt of warrants		75,162
Exercise of warrants for common stock investment		(90,559	)
Fair Value at December 31, 2016		75,162
Receipt of warrants		159,707
Change in fair value of warrants		(33,745	)
Fair Value at December 31, 2017	$	201,124

The following range of variables were used in valuing Level 3 assets during the years ended December 31:

	2017			2016
Expected life (years)		1-10			10
Risk-free interest rate		1.8-2.4	%		2.4	%
Expected volatility		44-134	%		75-100	%
Annual dividend yield		0	%		0	%

Cash and Cash Equivalents

For purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance for doubtful accounts as of December 31, 2017 and 2016 was $22,700 and $32,000, respectively. Bad debt expense for 2017 and 2016 was $70,700 and $60,006, respectively

Uncollectible Advances and Write-offs

At times, we advance issuers money for marketing expenses related to a Regulation Crowdfunding offering according to our policies. These advances are meant to be paid back out of proceeds of the offering and are non-interest bearing. In the event that an issuer offering is not successful and does not raise funds sufficient to cover the advance, we assess the advance for collectability. These advances are considered for a full or partial charge-off or reserve based on how long the advance is past due and management’s assessment of collectability. These advances and relating reserves are included in net accounts receivable in the accompanying consolidated balance sheet.

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Investment Securities

Available-for-Sale Securities

Our available-for-sale securities consist of mutual funds and common stock equities that are tradable in an active market. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of the Company’s stockholders' equity, until realized.

We analyze available-for-sale securities for other-than-temporary impairment quarterly or as there is indication that such review is necessary.

We apply the other-than-temporary impairment standards of Accounting Standards Codification (“ASC”) 320, Investments-Debt and Equity Securities.

Non-Marketable and Other Securities

Non-marketable and other securities include investments in non-public equities. Our accounting for investments in non-marketable and other securities depends on several factors, including the level of ownership and the power to control. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) equity method accounting, and (iii) cost method accounting.

Investments - Warrants

In connection with negotiated platform fee agreements, we may obtain warrants giving us the right to acquire stock in companies undergoing Regulation A offerings. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from these warrants.

We account for warrants in certain private and public (or publicly traded under the provisions of Regulation A) client companies as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815, Derivatives and Hedging. In general, the warrants entitle us to buy a specific number of shares of stock at a specific price within a specific time period. Certain warrants contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events. Our warrant agreements typically contain net share settlement provisions, which permit us to receive at exercise a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These warrants are recorded at fair value and are classified as Investments - warrants on our consolidated balance sheet at the time they are obtained.

The grant date fair values of warrants received in connection with services performed are deemed to be revenue and recognized upon receipt.

Any changes in fair value from the grant date fair value of warrants will be recognized as increases or decreases to investments on our balance sheet and as net gains or losses in other (income) expense, a component of consolidated net income.

In the event of an exercise for shares, the basis or value in the securities is reclassified from Investment - warrants to available-for-sale securities or non-marketable securities, as described below, on the consolidated balance sheet on the latter of the exercise date or corporate action date. The shares in public companies, or companies that trade over-the-counter as allowed by Regulation A, are classified as available-for-sale securities (provided they do not have a significant restriction from sale). Changes in fair value of securities designated as available-for-sale, after applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. The shares in private companies without an active trading market are classified as non-marketable securities. Typically, we account for these securities at cost and only record adjustments to the value at the time of exit or liquidation though gains or losses on investments securities, in non-interest income, a component of consolidated net income.

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The fair value of the warrants portfolio is a critical accounting estimate and is reviewed semi-annually. We value our warrants using a modified Black-Scholes option pricing model, which incorporates the following significant inputs, in addition to certain adjustments for general lack of liquidity:

∙ An underlying asset value, which is estimated based on current information available in valuation reports, including any information regarding subsequent rounds of funding or performance of a company.

∙ Stated strike price, which can be adjusted for certain warrants upon the occurrence of subsequent funding rounds or other future events.

∙ Price volatility or risk associated with possible changes in the warrant price. The volatility assumption is based on historical price volatility of publicly traded companies within indices or companies similar in nature to the underlying client companies issuing the warrant.

∙ The expected remaining life of the warrants in each financial reporting period.

∙ The risk-free interest rate is derived from the Treasury yield curve and is calculated based on the risk-free interest rates that correspond closest to the expected remaining life of the warrant on the date of assessment.

Property and Equipment

Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over the estimated useful life of three (3) to five (5) years. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.

Internal Use Software

We incur software development costs to develop software programs to be used solely to meet our internal needs and cloud-based applications used to deliver our services. In accordance with ASC 350-40, Internal-Use Software, we capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed, the software will be used to perform the function intended, and the value will be recoverable. Reengineering costs, minor modifications and enhancements that do not significantly improve the overall functionality of the software are expensed as incurred. To date, we have not capitalized any costs.

Intangible Assets

Intangible assets are amortized over their respective estimated lives, unless the lives are determined to be indefinite and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The impairment testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.

Impairment of Long-Lived Assets

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

Preferred Stock

ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.

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Management is required to determine the presentation for the preferred stock as a result of the liquidation and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, derivative liability accounting is not required by the Company.

Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock.

Dividends which are required to be paid upon redemption are accrued and recorded within preferred stock and accumulated deficit.

Equity Offering Costs

The Company accounts for offering costs in accordance with ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2017, offering costs of $99,843 for the Regulation A offering were charged to stockholders’ equity. No offering costs were incurred during the year ended December 31, 2016.

Revenue Recognition

The Company recognizes revenues from platform fees, marketing services branded under the name “StartEngine Premium,” sponsorship, and related services when (a) persuasive evidence that an agreement exists; (b) the service has been performed; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts due is reasonably assured. Sponsorships that are for greater than one month are deferred and recognized over the sponsorship period. Platform fees can consist of both cash and warrant consideration and are generally recognized when paid. Warrant consideration is valued at the time the warrants are earned using the Black-Scholes pricing model and recorded as revenue. Certain services performed by the Company, including StartEngine Premium services, are deferred over three (3) to twelve (12) months based on the expected timeline in which the services are expected to be rendered.

For the years ended December 31, 2017 and 2016, revenues consisted of the following:

	2017		2016
Platform and posting fees	$	1,416,370	$	207,624
StartEngine Premium services		215,500		-
Other revenues		415,078		100,746
	$	2,046,948	$	308,370

Cost of Revenues

Cost of revenues consists of internal employees, hosting fees, processing fees, and certain software subscription fees that are required to provide services to our issuers.

Advertising

The Company expenses the cost of advertising and promotions as incurred. Advertising expense for the years ended December 31, 2017 and 2016 was approximately $20,000 and $24,000, respectively.  

Research and Development

We incur research and development costs during the process of researching and developing our technologies and future offerings. Our research and development costs consist primarily of non-capitalizable engineering fees for both employees and consultants related to our website and future product offerings, email and other tools that are utilized for client related services and outreach. During the years ended December 31, 2017 and 2016, research and development costs were $356,047 and $684,291, respectively.

Stock Based Compensation

The Company accounts for stock options issued to employees under ASC 718 Share-Based Payment. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model.

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock or equity award on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

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Income Taxes

The Company applies ASC 740 Income Taxes.  Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax expense for the period, if any and the change during the period in deferred tax assets and liabilities.

ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions.  A tax benefit from an uncertain position is recognized only if it is “more likely than not” that the position is sustainable upon examination by the relevant taxing authority based on its technical merit.

The Company is subject to tax in the United States (“U.S.”) and files tax returns in the U.S. Federal jurisdiction and California state jurisdiction.  The Company is subject to U.S. Federal, state and local income tax examinations by tax authorities for all periods since Inception.  The Company currently is not under examination by any tax authority.

Earnings per Common and Common Equivalent Share

The computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from the exercise of securities outstanding using the treasury stock method and the average market price per share during the year. Stock options totaling 685,000 and 350,000 shares, as well as convertible preferred stock, were excluded from the calculation of diluted earnings per share for the years ended December 31, 2017 and 2016, respectively, because their effect is anti-dilutive.

Concentration of Credit Risk

The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy.  Balances are insured by the Federal Deposit Insurance Corporation up to $250,000.  At times, the Company may maintain balances in excess of the federally insured limits.

At times, the Company may have certain vendors or customers that make up over 10% of the balance at any given time. However, the Company is not dependent on any single or group of vendors or customers, and accordingly, the loss of any such vendors or customers would not have a significant impact on the Company’s operations.

Risks and Uncertainties

The Company’s operations are subject to new laws, regulation and compliance. Significant changes to regulations governing the way the Company derives revenues could impact the company negatively. Technological and advancements and updates as well as maintaining compliance standards are required to maintain the Company’s operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for the Company beginning January 1, 2018. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

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In February 2016, the FASB issued a new accounting standard update (ASU 2016-02, Leases (Topic 842)), which will require for all operating leases the recognition of a right-of-use asset and a lease liability, in the balance sheet. The lease cost will be allocated over the lease term on a straight-line basis. This guidance will be effective on January 1, 2019, on a modified retrospective basis, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated financial statements.

NOTE 3 – MARKETABLE SECURITIES AND INVESTMENTS

Available-for-Sale Securities

Available-for-sale securities consisted of the following as of December 31:

	2017		2016
Mutual funds	$	1,556,070	$	2,605,432
Common stock		10,122		40,477
	$	1,566,192	$	2,645,909

The Company had $70,332 and $104,463 in unrealized gains and losses, respectively, on mutual funds and common stock held, which is included as unrealized gain (loss) within other comprehensive loss in the consolidated statement of operations and comprehensive loss, for the years ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, the Company had realized losses on mutual funds sold of $79,100 and $8,929, respectively.

Investments – Warrants

Equity warrants, as described in Note 2, are equity warrants received for services provided. The warrants are valued on the date they are earned and revalued each reporting period. The change in value of the warrants was a decrease of $33,745 for the year ended December 31, 2017 and inconsequential for the year ended December 31, 2016.

NOTE 4 – COMPOSITION OF CERTAIN ASSETS AND LIABILITIES

As of December 31, 2017 and 2016, property and equipment consisted of the following:

	2017			2016
Computer equipment	$	6,744		$	4,450
Software		3,654			3,654
Total property and equipment		10,398			8,104
Accumulated Depreciation		(3,393	)		(876	)
	$	7,005		$	7,228

Depreciation expense for the years ended December 31, 2017 and 2016 was $2,517 and $876, respectively.

As of December 31, 2017 and 2016, accrued liabilities consisted of the following:

	2017		2016
Accrued compensation	$	278,760	$	100,000
Other accrued liabilities		120,074		26,869
	$	398,834	$	126,869

NOTE 5 – COMMITMENTS AND CONTINGENCIES

We are currently not involved with or know of any pending or threatening litigation against the Company or any of its officers.

The Company maintains offices on a month-to-month lease.

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In March 2016, the company entered into a three-year Platform Network Collaboration and Data Licensing Agreement (the “Platform Agreement”) with NextGen Crowdfunding, LLC, an entity affiliated with one of our significant preferred stockholders, SE Agoura Investment LLC, which is beneficially owned by Aubrey Chernick. The Platform Agreement calls for the Company and the outside entity to collaborate and for the Company to provide data and certain information to the entity for tracking crowdfunding statistics. In consideration, the company is to receive $75,000 per annum, with the first $75,000 being subject to certain milestones being met as defined by the Platform Agreement. The Company received $25,000 upon execution of the Platform Agreement in 2016, and the remaining $50,000 was earned and received in 2017. The second $75,000 was received in March 2017 and will be earned ratably over 12 months.

NOTE 6 – STOCKHOLDERS’ EQUITY

Preferred Stock

We have authorized the issuance of 7,000,000 shares of our preferred stock with par value of $0.00001. Of these authorized shares 3,500,000 are designated as Series Seed Preferred Stock (“Series Seed”) and 3,500,000 are designated as Series A Preferred Stock (“Series A”).

Series A Preferred Stock

The Series A have liquidation priority over the Series Seed. The Series Seed has liquidation priority over common stock. In the event of the liquidation, dissolution or winding up of the Corporation the Series A shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders’, before any payment is made to the Corporation’s Series Seed or Common stock an amount equal to $1.7182 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Corporation legally available for distribution are insufficient to permit the payment the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A ratably in proportion to the full preferential amounts for which they are entitled. The Series A votes on an as converted basis. The Series A is convertible by the holder at any time after issuance at the conversion price which equates to a one to one basis for common stock. The Series A is automatically convertible into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covert the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Corporation of not less than $15,000,000. In addition, the Series A has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

Series Seed Preferred stock

The Series Seed have liquidation priority over the common stock. In the event of the liquidation, dissolution or winding up of the Corporation the Series Seed shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders’, after any payment made to Series A, but before any payment is made to the Corporation's Common stock an amount equal to $0.50 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Corporation legally available for distribution are insufficient to permit the payment the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A first, then ratably in proportion to the full preferential amounts for which they are entitled to the Series Seed. The Series Seed votes on an as converted basis. The Series Seed is convertible by the holder at any time after issuance at the conversion price which equates to on a one to one basis for common stock. The Series Seed is automatically converted into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, convert the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Corporation of not less than $15,000,000. In addition, the Series Seed has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

Private Placement – Series A

During 2016, the Company received a cash investment of $66,473 and issued 38,687 shares of Series A, or approximately $1.72 per share.

Common Stock

We have authorized the issuance of 25,000,000 shares of our common stock with par value of $0.00001.

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Upon Inception, the Company issued 9,000,000 shares of restricted stock to its founders which vest over four years. During 2016, 860,000 unvested shares were repurchased from certain founders for $86. As of December 31, 2017, 326,900 shares of stock remained unvested and will vest in 2018.

During the year ended December 31, 2017, the Company sold 340,334 shares of common stock through its Regulation A offering. The Company recognized gross proceeds of $1,629,540 and a subscription receivable of $105,267 related to the sale of these shares. The subscription receivable was collected subsequent to December 31 ,2017. In connection with the offering, the Company recognized offering costs of $99,843, which reduced additional paid-in capital. The Company’s Regulation A offering was ongoing as of December 31, 2017.

Stock Options

In 2015, our Board of Directors adopted the StartEngine Crowdfunding, Inc. 2015 Equity Incentive Plan (the “2015 Plan”).  The 2015 Plan provides for the grant of equity awards to employees, and consultants, including stock options, stock purchase rights and restricted stock units to purchase shares of our common stock.  Up to 2,030,000 shares of our common stock may be issued pursuant to awards granted under the 2015 Plan. The 2015 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board. 

In 2017 and 2016, the Company granted 335,000 and 100,000 stock options, respectively, under the 2015 Plan to various employees and a contractor. Of these, 75,000 in 2017 were related to a contractor and the remaining were for employees. The granted options had exercise prices ranging from $0.29 to $0.79 for the 2017 granted options and $0.29 for the 2016 granted options and expire in ten years. The 2017 and 2016 granted options vest over four years. The grant date fair value of employee stock options for the years ended December 31, 2017 and 2016 was approximately $148,000 and $14,000, respectively. The stock options were valued using the Black-Scholes pricing model as indicated below:

	December 31, 2017			December 31, 2016
Expected life (years)		6.1-6.3			6.3
Risk-free interest rate		1.9-2.0	%		1.0	%
Expected volatility		50	%		50	%
Annual dividend yield		0	%		0	%

The risk-free interest rate assumption for options granted is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company's employee stock options.

The expected term of employee stock options is calculated using the simplified method which takes into consideration the contractual life and vesting terms of the options.

The Company determined the expected volatility assumption for options granted using the historical volatility of comparable public company's common stock. The Company will continue to monitor peer companies and other relevant factors used to measure expected volatility for future stock option grants.

The dividend yield assumption for options granted is based on the Company's history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

The Company currently recognizes option forfeitures as they occur as there is insufficient historical data to accurately determine future forfeiture rates.

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A summary of the Company’s stock options activity and related information is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted average Remaining Contractual Term
Outstanding at December 31, 2015		250,000		$	0.25		9.5
Granted		100,000			0.29		10.0
Exercised		-			-		-
Expired/Cancelled		-			-		-
Outstanding at December 31, 2016		350,000		$	0.26		8.8
Granted		335,000			0.43		10.0
Exercised		-			-		-
Expired/Cancelled		(10,000	)		0.29		8.9
Outstanding at December 31, 2017		685,000		$	0.35		8.5
Exercisable at December 31, 2016		175,619		$	0.25		8.5
Exercisable at December 31, 2017		271,865		$	0.26		7.6

Stock option expense for the years ended December 31, 2017 and 2016 was $80,955 and $10,249, respectively. The Company expects to recognize the remaining value of the employee options through 2021 approximately as follows: $44,000 in 2018, $40,000 in 2019, $40,000 in 2020, and $5,000 in 2021. The outstanding stock options have a weighted average remaining vesting period of approximately 2.1 years. Contractor options are revalued each reporting period.

Stock option expense of $80,955 for the year ended December 31, 2017 was allocated as follows: $1,654 to cost of revenues, $46,149 to general and administrative expenses, $14,322 to sales and marketing expenses, and $18,830 to research and development expenses. Stock option expense of $10,249 for the year ended December 31, 2016 was allocated entirely to general and administrative expenses.

NOTE 7 – RELATED PARTY TRANSACTIONS

The Company entered into a Platform Agreement with a related party as described in Note 5. 

NOTE 8 – INCOME TAXES

The following table presents the current and deferred tax provision for federal and state income taxes for the years ended December 31:

	2017			2016
Current tax provision:
Federal	$	-		$	-
State		8,621			911
Total		8,621			911
Deferred tax provision:
Federal		(2,206,309	)		(1,440,876	)
State		(378,410	)		(247,115	)
Total		(2,584,719	)		(1,687,991	)
Valuation allowance		2,584,719			1,687,991
Total provision for income taxes	$	8,621		$	911

Reconciliations of the U.S. federal statutory rate to the actual tax rate are as follows for the period ended December 31:

	2017			2016
Federal tax benefit at statutory rate		34.0	%		34.0	%
Permanent differences:
State taxes, net of federal benefit		5.2	%		5.7	%
Meals and entertainment		-0.5	%		-0.3	%
Stock option compensation		-1.3	%		-0.1	%
Temporary differences:
Change in valuation allowance		-37.0	%		-39.3	%
Total provision		0.4	%		0.0	%

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The components of our deferred tax assets (liabilities) for federal and state income taxes consisted of the following as of December 31:

	Asset (Liability)
	2017			2016
Depreciation and amortization	$	(56	)	$	(848	)
Reserves and accruals		93,750			94,239
Net operating loss carryforwards		1,647,436			1,658,294
Valuation allowance		(1,741,130	)		(1,751,685	)
Net deferred tax asset, non-current	$	-		$	-

Based on federal tax returns filed, or to be filed, through December 31, 2017, we had available approximately $6,139,815 in U.S. tax net operating loss carryforwards, pursuant to the Tax Reform Act of 1986, which assesses the utilization of a Company’s net operating loss carryforwards resulting from retaining continuity of its business operations and changes within its ownership structure.  Net operating loss carryforwards start to expire 2034 or 20 years for federal income and state tax reporting purposes. 

In December 2017, the Tax Cuts and Jobs Act, which provides tax relief for certain corporations, effective January 1, 2018, was passed. The Company reflected the income tax effects of those aspects of the Act to the deferred tax assets and liabilities. We are required to recognize the effect of the tax law changes in the period of enactment. The Company’s deferred tax assets decreased $843,589 due to the decrease in the federal statutory rate from 35% to 21%.

NOTE 9 – SUBSEQUENT EVENTS

Subsequent to December 31, 2017, the Company granted 660,000 options to employees and non-employees which will vest over four years. Additionally, the Company has drawn $1,814,511 in cash out of escrow and recognized an additional subscription receivable of approximately $133,000 related to 394,287 shares that have been issued through the Company’s ongoing Regulation A offering. 

The Company has evaluated subsequent events that occurred after December 31, 2017 through April 30, 2018, the issuance date of these consolidated financial statements. There have been no other events or transactions during this time which would have a material effect on these consolidated financial statements.

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ITEM 8. EXHIBITS

The documents listed in the Exhibit Index of this report are incorporated by reference or are filed with this report, in each case as indicated below.

2.1	Second Amended and Restated Certificate of Incorporation (1)
2.2	Bylaws (2)
3	Amended and Restated Investors’ Rights Agreement (3)
4	Form of Subscription Agreement (4)
6.1	2015 Equity Incentive Plan (5)
6.2	Platform Agreement with NextGen CrowdFunding dated March 24, 2016 (6)
6.3	Employment Agreement entered into January 2016 (Howard Marks) (7)
6.4	Employment Agreement entered into January 2016 (Ronald Miller) (8)
6.5	Severance Agreement and General Release dated November 2, 2016 (Ronald Miller) (9)
6.6	Observer Rights Agreement dated November 2, 2016 (Ronald Miller) (10)
8	Form of Escrow Agreement (11)

(1) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename3.htm

(2) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename4.htm

(3) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename5.htm

(4) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename6.htm

(5) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename7.htm

(6) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename8.htm

(7) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename9.htm

(8) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename10.htm

(9) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename11.htm

(10) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417033714/filename12.htm

(11) Filed as an exhibit to the StartEngine Crowdfunding, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10738 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1661779/000114420417046787/v474608_ex8.htm

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SIGNATURE

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant	StartEngine Crowdfunding, Inc.
Date: April 30, 2018	By:	/s/ Howard Marks
	Howard Marks
	Chief Executive Officer

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.

Date: April 30, 2018	By:	/s/ Howard Marks
	Howard Marks
	Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Director
Date: April 30, 2018	By:	/s/ Ronald Miller
	Ronald Miller
	Director and Chairman

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