Financing Efficiency of Securities-Based Crowdfunding

62 Pages Posted: 20 Nov 2015 Last revised: 22 Jul 2018

David C. Brown

University of Arizona - Department of Finance

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Date Written: July 12, 2018

Abstract

We analyze early-venture fundraising from dispersed, privately-informed investors. A principal optimally sets the offering price and quantity, and investors communicate their private information by either contributing capital or by abstaining. The principal uses the information conveyed by fundraising amounts to decide whether to invest raised capital in a risky venture. His decision threshold resembles the ubiquitous "all-or-nothing" rules used in Internet-based crowdfunding. The decision threshold hedges investors against bad projects, creating a "loser's blessing" that encourages contributing despite negative private information. The loser's blessing reduces financing efficiency and financing efficiency worsens as the crowd becomes larger.

Keywords: Crowdfunding, Loser's Blessing, Entrepreneurial Finance, FinTech

JEL Classification: G10, G18, G24, G28

Suggested Citation

Brown, David C. and Davies, Shaun, Financing Efficiency of Securities-Based Crowdfunding (July 12, 2018). 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 Davies (Contact Author)

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

Boulder, CO 80309-0419
United States

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