Financing Efficiency of Securities-Based Crowdfunding

67 Pages Posted: 20 Nov 2015 Last revised: 4 May 2017

David C. Brown

University of Arizona - Department of Finance

Shaun William Davies

University of Colorado at Boulder - Leeds School of Business

Date Written: May 3, 2017

Abstract

Securities-based crowdfunding is characterized by (i) all-or-nothing financing, (ii) scarce investor profits, and (iii) non-cooperative investors. Privately informed investors internalize all-or-nothing financing as a hedge: good projects are likely to be funded and bad projects are likely canceled, i.e., a loser's blessing. Investors internalize scarce profits as a winner's curse: of funded projects, good projects are likely to be split among many investors and bad projects are likely to be split among fewer. Both the loser's blessing and the winner's curse adversely affect financing efficiency. If investors are not pivotal, efficiency breaks down completely and financing outcomes reflect no information.

Keywords: Crowdfunding, Financing Efficiency, JOBS Act, Sophisticated Investors, Regulation Crowdfunding, Crowdinvesting

JEL Classification: G10, G18, G24, G28

Suggested Citation

Brown, David C. and Davies, Shaun William, Financing Efficiency of Securities-Based Crowdfunding (May 3, 2017). Available at SSRN: https://ssrn.com/abstract=2692828 or http://dx.doi.org/10.2139/ssrn.2692828

David C. Brown

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-626-0746 (Phone)

HOME PAGE: http://www.davidclaytonbrown.com

Shaun William Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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