The Introduction and Effect of SAFE in Equity-Based Crowdfunding

Abstract

This study analyzes the valuation problems surrounding equity-based crowdfunding issuers and examines the introduction of the simple agreement for future equity (SAFE) as a means of solving them. We first analyze four stocks with crowdfunding experience listed on KONEX and K-OTC. In all instances, market capitalization consistently fell below the level at the time of the crowdfunding application. We therefore suggest the introduction of SAFE in crowdfunding as a potential solution. SAFE ameliorates the over-valuation problem by setting only minimum requirements such as valuation caps and by delaying the evaluation of corporate value until a follow-up investment is made. However, investor protection should be considered when introducing SAFE in Korea. First, the definition of “subsequent investments” should be clarified to prevent the issuer from intentionally delaying the transfer of shares. Second, the inclusion of financial performance in SAFE's share conversion conditions would prevent the firm from delaying share conversion while receiving favorable cash flows. Third, the scope of companies that can issue SAFE should be clearly defined to prevent firms from misusing them to avoid managerial interference. This study contributes as the first study within the Korean academia on the introduction and effectiveness of SAFE in crowdfunding.