Equity Crowdfunding: Lemons or Lollipops?

Abstract

Equity crowdfunding (ECF) has potential benefits that might be attractive to high-quality entrepreneurs (“lollipops”), including fast access to a large pool of investors and obtaining feedback from the market. However, there are potential costs associated with ECF due to early public disclosure of entrepreneurial activities, communication costs with large pools of investors, and equity dilution that could discourage future equity investors; these costs suggest that ECF attracts “lemons.” In this paper, we hypothesize that entrepreneurs tied to more risky banks are more likely to be lemons. A large sample of ECF campaigns in Germany shows strong evidence that connections to distressed banks push entrepreneurs to use ECF. We find some evidence, albeit less robust, that entrepreneurs who can access other forms of equity are less likely to use ECF. Finally, the data indicate that entrepreneurs who access ECF are more likely to fail.

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Daniel Blaseg
Assistant Professor of Entrepreneurship

Assistant Professor of Entrepreneurship