This is part 3 of 4 in our series explaining key aspects of the Seedrs Secondary Market. In this post we’ll look at fair market value and bidding.
What do we mean by fair market value?
During the beta launch of the Secondary Market, buyers and sellers will be able to buy and sell shares at the fair market price, which is set by Seedrs in accordance with our Portfolio Valuation Policy.
Every day we assess each company that has successfully raised money on Seedrs and perform an assessment of their fair market price. The purpose of this is to provide investors with a current value of each business that they have invested in. This fair market value is then used to calculate the investor’s internal rate of return (IRR) on their portfolio of Seedrs businesses that they’ve invested in.
When a business raises funds on Seedrs, the fair market price is the price per share which was set during that crowdfunding round. We then perform this daily assessment to decide whether the price per share should go down, go up, or remain the same.
This assessment is taken in accordance with our Valuation Policy which was developed in line with the industry-standard International Private Equity and Venture Capital Valuation (IPEV) Guidelines and has also been reviewed and signed off on by Ernst & Young.
In brief, the valuation policy works as follows:
Firstly where the company has raised a further round of equity capital within the last three years, and (1) the capital was raised for shares of the same class of shares as, or a class of shares substantially the same as, the class held by Seedrs investors, and (2) the company is continuing or preparing to trade, we have valued the shares at the value of that most recent fundraising round.
Secondly where the company has not raised additional capital for the same or substantially the same class of shares since its Seedrs round, but (1) the Seedrs round closed within the last three years, and (2) the company is continuing or preparing to trade, we have valued the shares at the value of the Seedrs round.
Thirdly, where the company has not raised capital for the same or substantially the same class of shares for over three years, through Seedrs or other means, but it is continuing or preparing to trade, we have conducted a substantive valuation analysis with a presumption of decline in value. Note that this is the only situation where, in theory, we could mark the fair value of an investment as worth more than the share price in its latest round of finance, but we would only do so based on recognised financial metrics.
And finally where the company has wound up, indicated its intention to wind up or ceased (or taken measures to cease) trading or preparing to trade, we have valued the shares at zeros.
We are able to obtain this detailed information about the company because we, as nominee on behalf of the investors, have comprehensive information rights within our shareholder agreement that we sign with the company.
All investors are able to view the current price of their shares in accordance with this policy in their Seedrs Portfolio.
The alternative – bidding
By setting the price at the fair market value, this does mean that buyers are not able to make an offer to purchase shares at a lower price than this fair market price…yet. We recognise the importance of bidding in any market place, and will be looking at ways to implement this in the near future.
We took the view that with such a new product, introducing a complex feature such as bidding right from the start would not have been the right approach. Instead, we wanted to launch a market which offered the most stable environment for both buyers and sellers, and as always we will be looking to work with our customers on developing a bidding function that works for them.
Next we’ll cover:
- How the Seedrs nominee structure make it easy for the market to work?