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It finally happened! At the beginning of the current year, the Securities and Exchange Commission (SEC) issued the long-awaited regulatory Proposal on the practice of evaluating registered investment companies and business development companies.

The essence of an investment company is to profit from trading stocks, bills, bonds and other securities on stock exchanges. Before starting an investment company, it is necessary to acquire the relevant knowledge, otherwise there is nothing to do in the stock markets. In this article, we will analyze the main provisions of the Proposal, which will be of interest to those who intend to register an investment company in the United States.

Determining fair value on US exchanges

So, what is new to the fair value determining? According to the Proposal, from now on this process can be entrusted to the consultant.  When conducting the assessment, the consultants should:

  • verify the correctness and accuracy methodologies when conducting a fair assessment of securities in the USA;
  • provide an assessment of pricing services;
  • record the assessment process.

However, there’s one essential addition: the board should supervise the evaluation process on a regular basis.

Potential Risks to Consider

The published quotes in the active market should be used to evaluate a financial instrument, this will be a confirmation of the market value of a security. Quoted prices can be easily and regularly obtained and such prices reflect actual and regularly executed market transactions between independent parties, that is, the data will be reliable.

You can proceed from the price in the most favorable market, even if the operation was actually completed in another one.

The new regulatory proposal sets out a requirement to periodically evaluate any material risks in determining fair value, including: 

  • potential market fluctuations;
  • possible conflicts of interest;
  • over-reliance on service providers;
  • use of outdated methodologies.

If you want to establish an investment company in the United States, the correct methodology by which you can determine the fair value of assets can be selected in section 820 of ASC. Please keep in mind that you should comply with regulatory requirements for the storage of private data, as well as put maximum efforts to properly analyze the benefits and risks of your investment company.

Determining the Fair Value of US Securities

Normally, this is done either based on the quoted market prices or using special valuation techniques which are based on assumptions about the possibility of selling these securities in the future.

If the market for this security is not active or not organized (i.e., transaction volumes are insignificant relative to the total number of traded units of a financial instrument to be valued), then the fair value is determined using several technical valuation methods:

  • the discount method for future cash flows expected from security at a prevailing market interest rate for similar financial instruments at the value date;
  • comparisons with the cost of a similar instrument;
  • mathematical models of option pricing.

If necessary and/or reliable information on market prices is not available, then an expert assessment can be applied.

An acceptable valuation method should consider all the factors that market participants take into account when setting prices. It must comply with the approved pricing methods for financial instruments. The amount generally paid or received for a financial instrument is the best initial estimate of fair value.

In this context, the issue of choosing the price of an active securities market is essential. The fact is that there can be many active markets and their prices can seriously differ from each other. Here, investment specialists have complete freedom to choose any active market and choose the most favorable price as a fair price. The logic of this choice is simple: fair value is the value at which these securities can be sold in the shortest possible time.

Legal assistance

In 2021, final provisions will be published on how to determine the fair value of securities in America. We actively monitor legislative changes and monitor all updates. If you need legal support in registering an investment company in the USA, IQ Decision UK seasoned specialists are ready to provide their services.

Entrepreneurs can open their own investment company in the US and try to implement in it all the innovations that they dream of, and which will allow other investors to make a profit with comfort. Should you need legal advice on how to establish an investment company in the USA, please contact us directly using the form below.