What is the SEC?
The Securities and Exchange Commission (SEC) was established by the Securities and Exchange Act of 1934 as a reaction to the 1929 stock market crash. It is an independent federal agency responsible primarily for the regulation of the securities market in order to protect investors and maintain public confidence in the market.
Foundationally, the SEC was purpose-built to promote and regulate full public disclosure of companies who offer securities for sale.
What does this mean for QSBS investors?
Many QSBS investors seek or own stock in companies that are startups or small businesses which are yet to IPO. This means that the disclosure of these securities does not fall under the regulation of the SEC.
The JOBS Act (Jumpstart Our Business Startups) of 2015, further lessened the reporting regulations on these small companies and start ups to the SEC as a way to be less prohibitive to the growth and success of American startups.
It can be difficult to determine the value of a private company because they don’t report their financials publicly and there is no stock listed on an exchange. Since valuations on small businesses and startups are not performed all the time, the true market value of stock in a pre-IPO company can be hard to determine.
Whether you are seeking to participate in the QSBS incentive via crowdfunding, angel investing, or even as an employee weighing the decision to exercise your stock options, understanding the valuation of the company is a necessary component.
Looking for specific advice on QSBS and Capital Gains? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.