Securities-Based Crowdfunding by Startups: Does Auditor Attestation Matter?

Abstract

We examine financing outcomes for small businesses seeking to sell public securities in a setting
characterized by high information asymmetry, weak requirements for auditor participation, and a
complete absence of Big N auditors. Issuers that raise capital from small, unsophisticated
investors through crowdfunding, under the Securities and Exchange Commission’s Regulation
Crowdfunding (RegCF), often need no auditor attestation or need only weak attestation in the
form of reviews, not audits, of their financial statements. We find that auditor reviews are
positively associated with both the probability of crowdfunding success and the total amount
raised. Further, we compare outcomes for issuers that procure auditor reviews voluntarily and
mandatorily, and document that issuers with voluntary reviews have better outcomes. We
conjecture that, for issuers that voluntarily procure reviews, the reviews serve as signals of high
future prospects. Finally, the positive effect of reviews is concentrated in PCAOB-registered
auditors.

Keywords: crowdfunding, JOBS Act, auditor reviews, voluntary auditor attestation

JEL Classification: G18, M41, M42, M48