William & Mary Law School Research Paper No. 09 - 369
37 Pages Posted: 13 Nov 2017
Date Written: November 9, 2017
Entrepreneurs can now “crowdfund,” or sell securities to unaccredited investors over the Internet, to raise capital. But will these companies be able to attract the follow-on investors (angels and venture capitalists) that are necessary for long-term success? Angels and VCs face extreme levels of information asymmetry when deciding whether to fund a company. Signals can reduce this asymmetry. Early commentary argues a company only crowdfunds as a last resort for fear of sending a negative signal about the company’s quality to follow-on investors. This Article argues the inverse. This Article argues a successful crowdfunding campaign can send a positive signal of a company’s quality to angels and VCs.
As this Article explains, crowdfunding can be a savvy move for entrepreneurs for both social and financial reasons. Crowdfunding, perhaps more than any other strategy, shows real-world demand for a company’s product or service. For this and other reasons explored in the Article, crowdfunding sends a positive signal of firm quality, and thus should not disadvantage entrepreneurs without wealth or connections who depend on crowdfunding to raise funds. The Article also posits that crowdfunding signals may reduce the need for crowdfunding disclosures, thus making the process more affordable to entrepreneurs.
Keywords: crowdfunding, signaling, information asymmetry, entrepreneurship, disclosure
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