Brokered Private Placements: The Next Apple--Or The Next Debacle?

Abstract

Focusing on equity offerings by small private firms, I test whether broker intermediation mitigates adverse selection costs when investors are also uncertain about broker quality. After accounting for 1) the endogenous decision to hire a broker and 2) two-sided matching between firms and brokers, I find that broker intermediation increases equity investments in these firms by 35%. Relative to offerings intermediated by brokers with no past misconduct, offerings intermediated by brokers with past misconduct result in 12% lower offering proceeds. Broker intermediated offerings involve firms that have successful exits post-financing, irrespective of broker record. For the first time, I document the effect of broker intermediation in the market for early-stage financing. My results suggest that policymakers might alleviate the financing constraints of small firms by adopting policies that encourage broker intermediation in the market for early-stage funding.

Keywords: Broker Misconduct, Private Placements, Start-up funding, Regulation D, Form D, BrokerCheck, Adverse Selection

JEL Classification: L26, G20, G24, G29, G33, M13