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The role of lead investors in equity crowdfunding campaigns with a secondary market

Author

Listed:
  • Sophie Pommet

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Université Côte d’Azur)

  • Alexandra Rufini

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Université Côte d’Azur)

  • Dominique Torre

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Université Côte d’Azur)

Abstract
We explore two recent phenomena in equitycrowdfunding platforms: the development of dedicated secondary markets and the crucial role of institutional investors (lead investors in terms of pledge). First, we propose a theoretical model in which crowd and lead investors choose to finance campaigns posted by entrepreneurial firms that are heterogeneous with respect to their target and long-term return. We suppose that lead investors make huge pledges in the highest return campaigns but bear the cost of illiquidity whereas the crowd invests in all campaigns. The platform sets up a secondary market to enhance asset liquidity, but all entrepreneurial firms with successful campaign are not automatically listed. If they are listed, second-hand transactions send signals on the chance of success of the funded campaigns. Theoretical results show that increasing the number of lead investors or their pledge improves fundraising but always reduces access to the secondary market for some entrepreneurial firms. If the lead investors' cost of illiquidity is particularly low, it may even decrease the share of entrepreneurial firms that have access to the secondary market. We then test these predictions using data from one of the most important ECF platforms that covers the period November 2018–October 2020. We empirically show that the number of lead investors and their pledge are positively correlatedwith the success of the fundraising campaign and negatively correlated with the access the entrepreneurial firms have to the secondary market. These results suggest that the illiquidity of shares is not of first importance for lead investors, who tend to make long-term commitments to crowdfunding campaigns. The implementation of secondary market is thus a useful tool to attract crowd investors but should be finely monitored by the platform to retain lead investors.

Suggested Citation

  • Sophie Pommet & Alexandra Rufini & Dominique Torre, 2023. "The role of lead investors in equity crowdfunding campaigns with a secondary market," Post-Print hal-04222288, HAL.
    • Handle: RePEc:hal:journl:hal-04222288
    DOI: 10.1007/s11187-023-00811-0
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D26 - Microeconomics - - Production and Organizations - - - Crowd-Based Firms
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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