Lower Taxes, Smarter Crowd? The Impact of Tax Incentives on Equity Crowdfunding

Abstract

We empirically study whether and how tax incentives impact fundraising and success of early-stage businesses and investor behavior in equity crowdfunding. With tax incentives, investors may gravitate toward incentive-eligible opportunities at the expense of those ineligible. Due to such movement of investors, it is not clear whether the market’s screening efficiency of these highly risky enterprises will be improved or damaged. Our analysis exploits the implementation of the Seed Enterprise Investment Scheme (SEIS) in the United Kingdom (UK) as a natural experiment. Using a comprehensive transaction-level dataset from a leading online equity crowdfunding platform in the UK, we find that while the performance of SEIS-eligible firms does not seem to change, both the survival and growth of non-SEIS firms funded after the policy decrease. We attribute this to the shift of investments and attention to SEIS-eligible firms, thus decreasing the crowd’s screening ability of non-SEIS firms. These results reveal important but heretofore undocumented, unintended consequences of tax incentives.

Keywords: Equity Crowdfunding, Tax Incentives, Seed Enterprise Investment Scheme, Wisdom of Crowd, Screening