Here is an interesting article on how the JOBS Act will affect the distribution of stock.
I’d like to see another one be written about how these emerging channels (i.e., CrowdClear, Early Shares, CircleUp, Angell List, etc.), which widen access by accredited investors access to private offerings, will approach the matter of valuation.
Will these broker-dealers consider whether the issuer’s valuation is “reasonable” when deciding to sell shares? If so, what factors will be considered?
Whether they do or don’t, it is likely that similar companies will be presented to investors with dissimilar valuations and other terms. In other words, greater access to capital will make it likely that an issuer that crowdfunds its capital will followed by competitors who also use crowdfunding.
For example, say the first company to crowdfund in a particular space do so by giving itself a valuation of, $30 million. Because the space is growing and competitive, another company decides to do the same thing. Although its at a similar phase of development, it claims attributes that make it more likely than the first company to generate revenue faster and more profitably. Does it assign itself a valuation higher than $30 million?
What about additional competitors? Might an addtional competitor decide to raise twice the amount the other two do but at a lower valuation?
One thing seems certain–the JOBS Act will leads to more companies raising capital from a much wider pool of investors than before.
It follows that Wild West style variability in valuation and terms will increase as a result. That’s because of (a) the difficulty of establishing a fair valuation for an early-stage company and (b) the challenge of finding “comps”.
Issuers that adopt the Fairshare Model will compete by offering accredited investors and, if its a public offering, small investors, a low valuation and superior investor protections.
In additon to being able offer stock options on Investor Stock, they will be able to offer an interest in their Performance Stock pool. Since Performance Stock only becomes valuable when the team performs, these companies will be better equiped to compete because they will have an advantage in recruiting and managing talent.