SEC Frowns on Black-Scholes

Agency backs more sophisticated methods for valuing warrants.

The Securities and Exchange Commission is cracking down on companies that use the Black-Scholes formula to value complicated warrants in an effort to get them to switch to more sophisticated methods.

The problem comes when companies rely on Black-Scholes to value warrants that can be exercised early or have provisions like a down round feature that protects investors in case the company goes out to raise additional funds, says Tony Alfonso, president of BDO Valuation Advisors.

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