Financing Efficiency of Securities-Based Crowdfunding
62 Pages Posted: 20 Nov 2015 Last revised: 22 Jul 2018
Date Written: July 12, 2018
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
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