Eller Researcher Receives Grant to Study Equitycrowdfunding and Gender

Hands holding currency

On Friday, January 29, forms allowing new ventures to register their intent to seek equity crowdfunding with the Securities and Exchange Commission (SEC) will open. In October 2015, the SEC adopted final rules to allow companies to offer and sell securities through crowdfunding.  

While equity crowdfunding holds great promise for capital access and business growth, there is a lack of empirical research establishing and quantifying its impact. Mingfeng Lin, assistant professor of MIS at the UA Eller College of Management, has been awarded a Kauffman Foundation grant to begin that work. 

“The JOBS Act of 2012 legalized equity crowdfunding in principle,” said Lin. “Since then, many states have developed their own policies, but now the SEC has formalized its rules, which will facilitate intrastate and regional securities offerings. It’s great news for businesses, but for investors, it’s still a novelty.”  

Equity crowdfunding will offer rich data to uncover investment phenomena that were previously unavailable for study, as most startups rely on funding through venture capital firms or other private parties, and they are not required to disclose details about their investments.  

“Equity crowdfunding is essentially a mini IPO in that it gives away shares or equity in a startup,” Lin explained. “There’s typically a high threshold for retail investors investing in a traditional IPO – it’s for high net worth individuals.” In 2012, the UK launched equity crowdfunding platforms that allowed investors to invest as little as ten pounds in a startup. “These investors won’t necessarily make money on everything, with .001 percent of a company,” Lin said. “But since 75 percent of new businesses fail, the SEC wants to protect small investors with its regulations.” 

An IPO requires extensive disclosures that many investors on the crowdfunding scale would lack the knowledge to interpret. Equity crowdfunding lowers the disclosure bar for businesses, but the onus is still on the investor to properly screen investment opportunities. The companies investors choose to back – coupled with the rich data in the disclosures – offer the opportunity to reveal market dynamics that have been invisible until now.  

Lin’s Kauffman Foundation grant, for example, is focused on studying gender issues in equity crowdfunding. “We will be looking at whether equity crowdfunding expands access to capital for women entrepreneurs, whether women entrepreneurs funded by the crowd are more likely to be successful, and whether there is systematic difference in investment behavior between female investors and male investors, especially in their decision to back women entrepreneurs,” he said.  

The literature has long documented that when trying to obtain financial capital, women entrepreneurs face more challenges than men even though women founders are in fact more likely to be successful. Women are also more successful at crowdfunding through platforms such as Kickstarter.  

“That kind of reward-based crowdfunding campaign is typically designed around a one-off project,” said Lin. “Businesses require sustainable sources of funds. Although equity crowdfunding has a lot of potential to provide better access to capital, it’s not clear whether it can become a long-term solution to the financial challenge of women entrepreneurs.”