The board of directors of a publicly traded shell company with no assets have received a valuation from an investment banking firm showing that the value of the company is $2 million. Yet, the stock is trading at a value which would indicate a market capitalization of $70 million. Clearly, the market does not understand the capital structure of the company even though the company has taken efforts to explain it (90% of the equity securities are in the form of preferred stock). Can the board grant non-qualified stock options using the $2 million valuation without having a 409A problem?

When it is publicly traded, with a market cap, I have a hard time accepting a value that does not reflect the market capitalization or the impact on capitalization of the dilution if these are new shares to be issued

MND:

I had the exact same situation about a year ago. What skewed the sales price were a very limited number of sales at an artificially high price. There is no way that the company was worth what you would get if you multiplied the number of outstanding shares by the sales price of those very limited number of sales. Fortunately, the company was acquired by another for a very tiny fraction of the "market capitalizataion."

If the investment banking firm is truly independent and has the expertise to render such an opinion about the FMV of the company, then I think you can rely upon it.