Conclusions
Several European countries as well as the United States and Canada have changed their securities regulation in recent years to promote equity crowdfunding activities, while also ensuring that investors obtain a minimum level of investor protection (Cumming and Johan, 2013; Hornuf and Schwienbacher, 2017b). Most of these issuances remain outside the scope of the general prospectus regime, so issuing securities for startups involve limited costs. We find that a key factor influencing investments by the crowd is how the portal allocates investment tickets. In particular, funding dynamics are affected by how securities are allotted to investors. Consistent with our predictions, an auction mechanism induces late investments, while an FCFS mechanism induces quick investments during the very first days. Given the difference in dynamics, the timing of information disclosure is crucial. Moreover, our study finds that crowd investors do react to information disclosure during the campaign, but investment decisions are also rooted in the collective network interactions. Consistent with research on consumer behavior in the digital economy, we also observe a sharp decay of activities after the first couple of days, which indicates that information is so plentiful on the Internet that attention becomes quickly limited. Furthermore, the study offers evidence that investors regard investments by larger, more sophisticated investors as valuable signals. This finding is important, as many regulators have legally limited the amount that can be invested by a single investor. A worthy follow-up research question is whether the market mechanism affects campaign outcome and, ultimately, firm performance. While the FCFS mechanism helps obtain early momentum, the auction mechanism could reduce overall funding costs for the entrepreneur if the campaign enters a fierce auction process. We leave these issues open for future research.
