Crowdfunding: An Overview Of Valuation Problems

The phenomenon of crowdfunding is a novel financing option related to numerous promising benefits. New bold ideas, startups and projects, which would not be able to get financing using any other way, get a chance to get financed and become a reality. Ordinary people, who are not able to invest large amounts, get a chance to invest small ones. Governments tend to perceive crowdfunding as a way to create jobs and foster economic recovery. Therefore, governments are preparing legal acts to make crowdfunding more popular through legalizing crowdfunding for equity. After that, the scope of crowdfunding would be magnified. In the USA, the JOBS Act was signed in 2012 and provision of the rules to regulate crowdfunding was probably the most anticipated event for entrepreneurs in recent times. The rules were recently proposed by the Securities and Exchange Commission and they were in the 90 days comment period. These rules will allow private companies to offer and sell securities through online crowdfunding platforms and they are also expected to clarify the whole process. Despite the clarifying aspect of the rules, various problems arise as it often happens with novelties. In the press, several problems entrepreneurs face are outlined, including the choice of the platform, disclosure requirements and other responsibilities entrepreneurs undertake, the need to set a share price. Despite the ongoing active discussions in the business press, the phenomenon is also interesting and worth investigating from the science perspective because this way critical aspects of valuation can be identified. It is noted in the introduction that the article concentrates on the valuation problems. It is stated that this article aims at providing an overview of valuation problems associated with crowdfunding. The research question is formed as follows: what valuation problems are associated with crowdfunding and how are they solved? Value theory is applied in the article. Also, such research methods as systematic literature review and comparison are employed. The second part of the article is dedicated for introducing the crowdfunding industry - the utility it provides and the current state of its development. In the third part of the article is noted that there are currently five crowdfunding models: donation-based, rewards-based, debt-based, equity-based and royalty-based. It is noticed that valuation problems could be associated with certain models of crowdfunding. The authors outline six main problems: the existence of tangible and intangible value, uneducated investors ability to valuate, not suitable traditional valuation methods, valuation interference with the later stage, a question of what part of equity should be offered, and high liquidity risk. The discussion part provides an opinion on the current situation of how the identified problems are and could be solved.