Final Regulations Under Section 409A Released

As you may recall, Brad and I have been blogging about 409A since the initial proposed regulations were released. You can find our series here.

The final regulations were released.  The work of artistry is 397 pages.  Since most of you will not find the need to read all 397 pages, you might be asking “so what’s the deal with the final regs?”

Basically, the final regs reaffirmed everything that we’ve been saying about 409A.  Nothing major has changed, although the tax experts are still sifting through the regulations and we’ll update you as info is delivered to us. 

One thing that the final regs did articulate (better, not great) was regarding start up companies potentially using their own internal finance people to conduct their 409A valuations.  As you might recall, our guidance was that all private companies should use an outside valuation firm, as the internal valuation method was too tough to comply with and potentially would lead to liability for the company and its financial officer.

Specifically, the regs say that an internal finance person can conduct a presumably valid 409A valuation if the person has “significant experience.”   This generally means at least five years of relevant experience in business valuation or appraisal, financial
accounting, investment banking, private equity, secured lending or other comparable experience in the line of business or industry in which the service recipient operates.

I don’t know if we have any financial folks at our start ups who fall under these guidelines.  It’s a pretty tough standard to meet.  Our original thoughts stand that the safest way is to employ outside valuation experts.

We’ll keep our eyes on all the different interpretations of the final regs and post from time to time on the latest and greatest thoughts.

  • Well, after four americanos and a long Sunday afternoon, I actually was hoping to find some meaningful changes (or clarity) in the final 409A regs. As you know, not much changed. The one significant variation however, was the Treasury’s reduction of the projected timeline for a transaction, under the illiquid start-up scenario. What used to be one year was reduced to six months for an IPO and three months for a change of control. My guess is that many companies (and their council) will focus on to this presumption and continue to postpone the process. Any thoughts on what types of companies (life sciences, pre-revenue, etc.) will take this approach? Does this mean that most A round companies don’t have to worry about this? (A question I receive from one company.)
    Our observation has been that the final regs remain a distant concern. The auditors continue to play the role of common stock valuation police. As one big four partner put it, “The regs went final; So What? The AICPA practice aid didn’t change did it? We still have to value the common stock for GAAP purposes.” A sound valuation approach shifts the burden to the IRS, however a thorough valuation allows your auditor to sign off on your financials.