Today there are a number of research companies that use this exact same information, as reported by public companies as part of those company's obligations to the SEC, to evaluate investment risk and opportunity. Their services go from 'free' (as in Charles Schwab will send you a copy of their research department's report on a company or a segment if you're an account holder) to 'extortionate' which some of the larger trading houses keep in their back pockets to help them pick winners and losers.
As a collection point for this information about privately held companies, it puts you in a nearly unassailable position to do research on which of these companies are likely to be successful or not (your own sort of buy/hold/sell ratings) This isn't even possible today because, as the article mentions. everyone goes to different places to get their 409A valuations. So no single entity has enough of the puzzle to assemble a recognizable picture, yet by offering this valuation service, and attracting a very large number of customers, you create the opportunity to be that single source of information.
I would venture a guess that there are venture capitalists that would pay handsomely for a 'peek' at the state of the industry 'yet to come' as it were. That would not involve you (Preferred Return) owning any equity in any company, all you'd need to do it offer up research reports at $500,000 a copy describing the state of the industry :-)
I am in awe of how amazingly clever this whole scheme is!
To do what you propose would involve trading our large, primary revenue stream for an untested one-shot reporting product that would be extremely unpopular with everybody and put us out of business overnight. It makes little sense to me. You draw analogies to public markets, but there's a reason private companies are called private companies.
In addition to our standard engagement terms that forbid such use of client data, we are happy to sign customer NDAs and regularly do so. We have never earned a cent from client data and have no intention of doing anything of the sort.
Happy to discuss over the phone if you have any further suggestions on this front.
I don't think Chuck was referring to you personally, since that would be a magnificently foolish thing to do. He was probably referring to the possibility of a wink or a nod to certain family members, or perhaps even to a friendly VC that sends you deal flow.
Once again, I'm getting downvoted for illustrating how the vast majority of insider trading goes on unprosecuted. I'm not alleging it in this case, I'm merely pointing out that it's possible.
Pointing out that some winks and nods get caught does not mean that most of them get caught.
> the two equally split the illicit profits in their shared brokerage accounts.
I mean come on! If you're going to do something illegal do it with some god damn panache; multiple separate accounts, multiple people, smaller orders, stock only, no paper trails, cash transfers, etc.
Can you sell the data?
I for one refuse to work with an accountant who refuses to sell my tax returns on Scribd.
The issue is someone could conceivably sell the information without your knowledge, or create aggregated data products from that information which aren't so clearly "your information", like "this is where you are compared to your industry as a whole, based on deals we've seen" (which is probably ok).
Because of this, there needs to either be a regulatory control to prevent it, or serious effort from the valuator to convince customers their data is being handled safely.
So I shouldn't use sarcasm because some people don't care for it?
> Because of this, there needs to either be a regulatory control to prevent it...
Do you know if appraisers are considered fiduciaries? Do you know if any of the societies appraisers commonly belong to have codes of ethics that would prevent the use of client data in any of the ways you describe? I don't, but I suspect that if you were really interested, you could find out in 10 minutes using Google. That would seem to make a lot more sense than screaming "Regulation!" before you knew what appraisers can and can't do currently.
That notwithstanding, I'm always amazed at how quickly folks overlook the importance of trust and reputation in professional service businesses. Do you realize how fast an appraiser would destroy its business if its clients learned that it was using their most sensitive financial information in an unauthorized way?
Doesn't mean they won't do it. I don't know why I'm being downvoted here. It's a statement of fact. You see the same thing happening with investment banks, with the buy side front running sell side clients across that oh so opaque Chinese wall every so often.
This stuff happens. I'm not saying it will happen in this case, but it is a reasonable possibility.
The qualification for insider trading is that it be a public company. Private companies don't fall under insider trading laws and public companies don't do 409a's.
That's far different from what OP is suggesting -- a wink/nod to a third party indicating to buy or sell.
A company can trade on inside information with its own shareholders, since the company is using information it has access to which its own shareholders may not.
If a non-involved person somehow acquires "inside" information (without getting it from one with a fiduciary responsibility) it's not insider trading even if the information is non-public.
You should read up on the insider trading case law--a good number of the cases involve companies which are not traded on a stock exchange.
Assuming that the SEC regs only apply to public companies is a common misunderstanding. These regs actually apply to all companies which solicit investment, unless a specific exemption applies (i.e., solely intra-state, limited placement private offering, etc.)
I'm curious, anyone know what the typical formula is?
"There are tons of large and small firms to choose from. Almost all firms valuing early stage companies use the Option Pricing Model (OPM) (Black Scholes or Binomial) valuation method. So if you have a recently priced round, every firm will give you basically the same answer."
- The IRS doesn't use such an algorithm. In this case, how can an IRS audit overcome the "there's no evidence we acted incorrectly, the IRS is just picking on us" defense? If there's no objective standard, how can the IRS ever figure out if anyone's valuation's too low?
- The IRS does use such an algorithm. In this case, what's preventing companies that issue the shares from just using the same algorithm the IRS uses?
I assume most of the cost of these 409a's is for the backside covering aspect - if the IRS says how did your come up with your pricing you can point them in the direction of someone "serious" and blame them if they typed in the wrong numbers.
Unless you were selected at random, no one reads the paperwork you submit until someone thinks you've done something wrong. They're just evidence that will be examined in the future, so it needs to check out.
For one accounting is fiendishly complex but I would also bet that there is some tiny, irreducible step you need a human being to glance at the paperwork and say "it doesn't look like they're trying to scam us".