One criticism of investment crowdfunding is that it enables retail investors, who lack financial sophistication, to participate.
While professional investors like VCs or Angels know what to look for, at times, retail money can be swayed by emotion or a sexy pitch without understanding the investing economics or whether they are buying something of value or an investment destined to go upside down or already in the queue for a down round.
Recently, KingsCrowd, a top data firm tracking online capital formation, published a blog post criticizing Reg A issuers that either do not disclose pre-money valuation or seek to obfuscate it.
To quote KingsCrowd:
“Right now, an alarming number of companies are choosing not to put their pre-money valuation front and center on their raise pages. Instead, they advertise a low share price and bury the total outstanding shares deep in their offering circulars.”
The valuation of a firm is tied directly to an equity offering. If you don’t know the firm’s valuation, why would you purchase shares in the company? Yes, there are offerings like a SAFE that typically delay valuations, but for common shares, valuations should be front and center on the Offering Document and the Offering Page.
Dumb Money.
There have been firms that have raised money under Reg A and posted outlandish valuations, increasing the odds of failure. At least if they share the valuation, you know what you are getting. But KingsCrowd reports that, out of 880 Reg A equity crowdfunding deals since March 2024, only 21.4% (56) disclosed their valuations.
The report compared issuers using Reg CF, which did far better with 88.7% of firms sharing valuation.
As the SEC must qualify Reg A offerings, it is a bit curious that the SEC staff does not send these offerings back to issuers to clearly share valuations. Or perhaps platforms that enable Reg A securities offerings should require issuers not to hide their numbers. All can do better.
If investment crowdfunding is to succeed, platforms and issuers need to adhere to higher standards. Otherwise, it will earn a reputation that will undermine online capital formation for small investors.
