Discussion Papers
Innovation and Entrepreneurship Research
Innovation and Entrepreneurship Research
Are Equity Crowdfunding Investors Active Investors?
(2019). Are Equity Crowdfunding Investors Active Investors?CESifo Working Paper Series 7884.
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.
Also published as: Max Planck Institute for Innovation & Competition Research Paper No. 19-15