This article discusses why securities offerings using crowdfunding should not be exempted from the registration requirements of the federal securities laws in USA. First, it introduces the concept of crowdfunding and the five different categories of crowdfunding. Then it discusses the registration requirements under the Securities Act of 1933, why registration is not feasible for most crowdfunded ventures, and the conflicts between crowdfunding and the current registration exemptions. Finally, the article discusses why crowdfunding should not be exempted from the registration requirements, specifically focusing on how such an exemption would severely weaken investor protections and open the door for fraud to permeate the market.
This article addresses crowdfunding, a relatively new form of informal financing of projects and ventures. It describes its principle characteristics and the range of players in this market. The different business models of crowdfunding intermediaries are explored and illustrated. A first attempt is made to classify the different forms of funding and business models of crowdfunding intermediaries. Based on the available empirical data the paper discusses the economic relevance of crowdfunding and its applicability to start-up financing and funding creative ventures and research projects.
This paper analyses the incentives in the markets for crowdfunding. Authors are able to take advantage of the elimination of origination fees (group leader rewards) in an online social lending market and use a difference-in-difference approach to see how the same lenders behave when the origination fees are eliminated. The results show that there is a marked change in the incentives of these group leaders, which affect the kind of loans being originated and the performance of these loans. When group leaders earn rewards, the default rates are substantially higher for the loans that they originate, while, after the abolition of rewards, group leaders originate loans with significantly lower borrower default rates. The results provide important implications for the incentives in crowdfunding as well as the question of how retail consumers can be protected against unscrupulous lending and thus the ongoing debate about the proper regulatory framework for consumer lending.
This paper analyses the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries. Critics suggest these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depends on the underlying incentives. The document provides evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular it looks at group leader bids in the presence of origination fees and finds that these bids are (wrongly) perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results provide important implications for crowdfunding, its structure and regulation.
The authors use hand-collected data from four German crowdinvesting portals to analyze what determines individual investment decisions. In contrast with the crowdfunding campaigns on Kickstarter, where the typical pattern of project support is U-shaped, they find crowdinvesting dynamics to be L-shaped under a first-come, first-serve mechanism and only U-shaped under a sealed-bid second-price auction. The evidence further shows that investors base their decisions on information provided by the entrepreneur in form of updates during the campaign and by the investment behavior and comments of other crowd investors. They also find evidence for herding behavior.
This study provides a theoretical framework and empirical evidence regarding the impact of the online community on platform performance. It is theorized that online platforms, such as Kickstarter, consist not of a single community but rather a hierarchy of multiple, partially competing communities. The proposed framework allows to identify such communities’ changes and, consequently, to better identify pivotal members of online communities and predict their lifetime value as potential backers.
The document demonstrates the growth of the different community types and estimates their different impacts on crowdfunding performance over time. Interestingly, it is found that some communities, despite high participation rates, had negative impacts on crowdfunding campaign success. It is discussed managerial and practical implications of our theory and findings.
Crowdfunding among IT Entrepreneurs in Sweden: A Qualitative Study of the Funding Ecosystem and IT Entrepreneurs’ Adoption of Crowdfunding
This report is the result of a study around how entrepreneurs, and in particular IT entrepreneurs, have responded to the increased availability of crowdfunding in Sweden. Much of the focus in international and regional studies has been on making crowdfunding attractive for potential funders, assuming that it is inherently attractive to would-be entrepreneurs. This report tests this assumption by interviewing entrepreneurs within the IT field in Sweden, as well as other actors within the Swedish start-up funding ecosystem.
This paper contributes by reducing the gap in crowdfunding research by drawing on insights from new product preannouncement literature. To this end, a common definition of crowdfunding is derived and used to characterize commonalities with new product preannouncement. This theoretical discussion is complemented by empirically testing the derived hypotheses about common success factors. Conclusions are drawn from the logistic-regression, using the technology category of a project dataset with 45,400 observations. Research shows that while timing and communication are key success factors, common to both new product preannouncement and crowdfunding, other success factors may already be standard and cannot separate the successful crowdfunding projects from the unsuccessful.
This study investigates characteristics of crowdfunded projects and drivers of success. In line with the community view of crowdfunding, results indicate that much of the funds provided are either donations or are entitled to receive a final product created by the project, rather than equity or cash payments. Moreover, crowdfunding initiatives that are structured as non-profit organizations tend to be significantly more successful than other organizational forms, even after controlling for various project characteristics. This finding is in line with theoretical arguments developed by the contract failure literature (e.g., Glaeser and Shleifer, 2001) that postulates that not-for-profit organizations may find it easier to attract money for initiatives that are of interest for the general community due to their reduced focus on profits.
Gender dynamics in crowdfunding (Kickstarter): evidence on entrepreneurs, investors, deals and taste based discrimination
The authors investigate gender dynamics and biases in the process of raising funding to new projects via the leading crowdfunding platform - Kickstarter. They find women made up about 35% of the project leaders and 44% of the investors on the platform. On average, men seek significantly higher levels of capital than women for their projects, and also raise more funds than women. However, women enjoy higher rates of success in funding their projects, even after controlling for category and goal amount. Multivariate analysis indicated significant positive correlation between the gender of the project leader and the percentage of the same gender investors.
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