Can Equity Crowdfunding Democratize Access to Capital and Investment Opportunities?

MIT Innovation Initiative Lab for Innovation Science and Policy Report, 2016

16 Pages Posted: 16 May 2016

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Calibra, Inc.; National Bureau of Economic Research (NBER)

Catherine Fazio

MIT Innovation Intitiative

Fiona Murray

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center

Date Written: May 16, 2016

Abstract

Ever since Kickstarter, Indiegogo, and others launched crowdfunding platforms, there has been great demand for crowdfunding to move beyond in-kind rewards to equity, so that a broader group of people might share in the returns of the “next big idea.” However, for the vast majority of people, getting in on the ground floor of an innovative, new startup via owning shares was not just out of reach, but out of bounds as well. To protect people from investing more than they could afford to lose and to guard against fraud, U.S. Securities laws made it illegal for early-stage startups to sell shares to regular people through online platforms. That is all about to change. Today, implementing rules for Title III go into effect, allowing for the first time, startups to solicit funds from anyone in exchange for shares via online platforms. However, the question remains, are equity crowdfunding platforms likely to attract the next “billion-dollar startup” and offer real opportunities for everyday investors to share in the profits? This policy brief considers this question through the emerging field of innovation science, applying a simple economic analysis to evaluate the likely impact and effect of the new equity crowdfunding rules. In short, the briefing finds: 1) Title III is not likely to provide either everyday investors or high-growth startup founders with significant new markets for funding the “next great idea”; 2) Title III could lead to novel opportunities for investment and experimentation, opening new avenues of funding for small businesses, means of building a committed user base, and vehicles for marketing and branding; 3) Through experimentation with new market design rules, data streams (e.g. integration with verifiable growth metrics) and milestone-based funding, equity crowdfunding platforms could improve the quality and type of startups they are able to attract; 4) Regulators should not lose sight of Title II — the provision of the JOBS Act permitting accredited investors to use equity crowdfunding — as an alternative pathway for achieving some of Title III’s initial goals. While equity crowdfunding under Title III may not evolve as many may have originally hoped, it still may bring new forms of capital to small businesses and offer new and beneficial ways for people to connect with companies and causes about which they are passionate.

Suggested Citation

Catalini, Christian and Fazio, Catherine and Murray, Fiona E., Can Equity Crowdfunding Democratize Access to Capital and Investment Opportunities? (May 16, 2016). MIT Innovation Initiative Lab for Innovation Science and Policy Report, 2016, Available at SSRN: https://ssrn.com/abstract=2780551 or http://dx.doi.org/10.2139/ssrn.2780551

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty-and-research/faculty-directory/detail/?id=58777

Calibra, Inc.

1 Hacker Way
Menlo Park, CA 94025
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Catherine Fazio

MIT Innovation Intitiative ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
617-324-9702 (Phone)

Fiona E. Murray

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center ( email )

United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
750
Abstract Views
2,680
rank
35,737
PlumX Metrics