Brokers and Finders in Startup Offerings

Abstract

I use novel data to document new facts on brokered startup offerings, where 60% of brokers are FINRA-registered and 40% are unregistered ``finders.'' Issuers with few sophisticated investors and more brokers in their zip code are more likely to match with brokers. While VCs seldom participate in brokered offerings, non-accredited investors heavily participate in offerings involving unregistered brokers. Using instrumental variables, data show that even though brokers help issuers raise funding, the issuers that use them have fewer successful exits and more closures post funding. Overall, these findings are consistent with brokers mitigating search costs for issuers that are left out of the market for VC funding.

Keywords: Brokers, Finders, Startups, Private placements, Venture capital, IPO, Acquisition, Retail investors, Entrepreneurial finance, Regulation D, Form D, BrokerCheck

JEL Classification: L26, M13, G24, G29, G34