One of the criticisms of investment crowdfunding is that it allows participation by retail investors who lack financial knowledge.
While professional investors like venture capitalists or Angels know what to look for, sometimes retail money can be swayed by emotion or a sexy sales pitch without understanding the economics of investing or whether they are buying something valuable, an investment that is doomed to tumble, or whether they are already lining up for a downturn.
Lately, KingsCrowda leading data firm that tracks online capital formation, published a blog post He criticizes Reg A issuers who fail to disclose pre-money valuation or attempt to conceal it.
To quote KingsCrowd:
“An alarming number of companies are now choosing not to feature their pre-money valuations on their raise pages. Instead, they are advertising low share price and burying total outstanding shares deep within their IPO circulars.”
A firm’s valuation is directly tied to its stock offering. If you don’t know the company’s valuation, why would you buy shares in the company? Yes, there are offers like SAFE that often delay valuation, but valuations for common shares should be front and center in the Offer Document and Offer Page.
Stupid Money.
There have been firms that have raised money under Reg A and published outlandish valuations, increasing the likelihood of failure. At least if they share the valuation you know what you’re getting. However, KingsCrowd reports that of the 880 Reg A equity crowdfunding deals since March 2024, only 21.4% (56) have disclosed their valuations.
The report compared issuers using Reg CF; this fared much better, with 88.7% of companies sharing the valuation.
It is somewhat interesting that since the SEC must qualify Reg A offerings, the SEC staff does not send these offerings back to issuers to openly share valuations. Or perhaps platforms that allow Reg A securities offerings should require issuers not to hide their numbers. They can all do better.
For investment crowdfunding to be successful, platforms and issuers must adhere to higher standards. Otherwise, it will gain a reputation that will undermine online capital formation for small investors.
