Are Equity Crowdfunding Investors Active Investors?

41 Pages Posted: 23 Oct 2019

See all articles by Lars Hornuf

Lars Hornuf

University of Bremen - Faculty of Business Studies and Economics; Max Planck Institute for Innovation and Competition; CESifo (Center for Economic Studies and Ifo Institute)

Tobias Schilling

Humboldt University of Berlin - Faculty of Law

Armin Schwienbacher

SKEMA Business School

Date Written: 2019

Abstract

It is often assumed that entrepreneurs retain more control of their venture when they opt for equity crowdfunding as compared to venture capital, notably because crowd investors are passive. We study whether crowd investors are indeed passive by analysing the cash flow and control rights crowd investors receive in equity crowdfunding in Germany, where more flexible contracts are offered than in many other countries. We document that in Germany many of the rights used in venture capital investment contracts are also used in equity crowdfunding contracts. We find that crowd investors are asked to pay higher prices if they receive more cash flow and exit rights, consistent with the fact that these rights are valuable to the crowd. However, these rights have no meaningful economic impact, since they do not affect campaign outcome, the likelihood of securing follow-on funding, nor the likelihood of liquidation of the venture. These results are inconsistent with control rights theory that predicts positive impacts, in contrast to results documented for venture capital contracts. Rather, our results suggest that crowd investors are passive investors whose control rights are ineffective or not exercised.

Keywords: crowdfunding, crowdinvesting, financial contracting, venture capital

JEL Classification: G340

Suggested Citation

Hornuf, Lars and Schilling, Tobias and Schwienbacher, Armin, Are Equity Crowdfunding Investors Active Investors? (2019). Max Planck Institute for Innovation & Competition Research Paper No. 19-18; CESifo Working Paper No. 7884. Available at SSRN: https://ssrn.com/abstract=3474190

Lars Hornuf (Contact Author)

University of Bremen - Faculty of Business Studies and Economics ( email )

Bremen, D-28359
Germany
+49 89 20348619 (Phone)

HOME PAGE: http://www.hornuf.com

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Tobias Schilling

Humboldt University of Berlin - Faculty of Law ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Armin Schwienbacher

SKEMA Business School ( email )

Lille
France

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