The Non-Pecuniary Value of Equity Crowdfunding

Abstract

Startups have successfully used crowdfunding to pre-sell products, fund charitable efforts and capitalize artistic endeavors. But securities laws have prevented equity crowdfunding whereby ordinary people can obtain a profit interest in the startups they fund – until now. Now that securities laws are changing, and equity crowdfunding will be legal, some are predicting a flood of new crowdfunding enterprises. Yet equity crowdfunding is fraught with problems, including the fact that it’s about six times more expensive than startup financing by other means. Many critics therefore argue that equity crowdfunding will create a “market for lemons” in which no sane person would invest. This paper takes a different approach by recognizing that while equity crowdfunding doesn’t make economic sense at first blush, it can be effectively used to predict the popularity of a consumer product, which may in turn encourage venture capitalists to invest more money in that enterprise.