Equity crowdfunding is “a crowd-based form of issuing company shares in exchange for capital” (Heieck et al., 2018). It is mainly used to finance seed and early-stage startups as they are considered “too risky for bank loans, too small for venture capital and too large to be funded by founders, family and friends” (Wilson and Testoni, 2014). The OECD Directorate of Financial and Enterprise Affairs observes that despite strong efforts to facilitate access to credit, small and medium-sized enterprises (SMEs) based in the US and European countries still cannot secure enough funds. It notes that securing a bank loan is challenging due to the bureaucratic complexity and high costs of the lending process as well as strict collateral requirements for SME loans. The lack of eligibility for bank loans and other forms of financing causes an undersupply of funding for early-stage ventures, known as the early-stage financing gap. It is believed that equity crowdfunding has the potential to close that financing gap by providing startups with needed capital and flexibility.
Blockchain technology can be used to create securities known as cryptoequity by issuing cryptographic tokens which represent shares in a crowdfunded project. According to De Filippi (2015), “[…] in a cryptoequity-based crowdfunding campaign, backers are in fact investing in the project they fund; they become actual shareholders of the project, and the success of their investment thus becomes inherently dependent on the success or failure of the project.” In her opinion, that creates a more symmetrical relationship between backers and fundraisers as backers can also benefit financially from any potential increase in the value of shares in which they have invested. That in turn establishes the position of the crowd as a new investor class.
Blockchain technology has the potential to increase the transparency and accountability of crowdfunding campaigns. Blockchain-based software can record and verify multi-party transactions and any other relevant information, thus bypassing brokers and other mediators. Smart contracts are used as guarantees for potential investors that fundraisers will keep their promises. They help ensure that milestones set by a project community will be met: if a startup has not made enough progress, the money placed in escrow will not be released. Furthermore, blockchain enforces transparency and accountability during crowdfunding campaigns through crowd voting. Smart contracts allow crowd investors to decide what startups should do next by casting their votes. The weight of each vote depends on the amount of the investment made. This voting mechanism actively engages the crowd in business decision-making, thus democratizing the decision-making process: entrepreneurs cannot make any decision without getting the approval of crowd shareholders.
In their Delphi study on blockchain-based equity crowdfunding, Heieck et al. (2018) have identified 10 driving forces (DF) of the equity crowdfunding market: (DF1) cost savings and financial benefits, (DF2) the facilitation of the financing process, (DF3) the satisfaction of intrinsic and social needs, (DF4) the outreach of projects and products, (DF5) costs related to equity crowdfunding, (DF6) risks related to equity crowdfunding, (DF7) the educational gap, (DF8) investor protection, (DF9) the provision of finance for the economy as well as (DF10) monitoring problems and asymmetric information. Having analyzed expert evaluations of the impact of those driving forces on equity crowdfunding, the researchers have distinguished 6 market-driving forces with a positive impact (DF1–5, DF9) and 4 market-driving forces with a negative impact (DF6–8, DF10). They have found that the facilitation of the financing process (DF2) and the outreach of projects and products (DF4) have the most positive impact on equity crowdfunding (mean score: 1.11), followed by cost savings and financial benefits (DF1) and the provision of finance for the economy (DF9) (1.00). The most negative impact on equity crowdfunding is associated with risks related to equity crowdfunding (DF6) (-1.00) as well as monitoring problems and asymmetric information (DF10) (-0.89).
Furthermore, Heieck et al. (2018) have observed that there is strong expert agreement that blockchain technology has a positive impact on all the identified driving forces of the equity crowdfunding market. More specifically, blockchain reinforces the positive impact of cost savings and financial benefits (DF1), the facilitation of the financing process (DF2), the satisfaction of intrinsic and social needs (DF3), the outreach of projects and products (DF4), costs related to equity crowdfunding (DF5) and the provision of finance for the economy (DF9). However, the strength of that effect varies. Blockchain has the most positive impact on the facilitation of the financing process (DF2) (mean score: 1.33), cost savings and financial benefits (DF1) (1.22) as well as reducing costs related to equity crowdfunding (DF5) (1.00). It has a moderate positive impact on the outreach of projects and products (DF4) (0.89), followed by the provision of finance for the economy (DF9) (0.67) and the satisfaction of intrinsic and social needs (DF3) (0.44).
The analysis of the expert responses has also shown that blockchain technology counteracts the impact of the 4 negative driving forces of the equity crowdfunding market, i.e. risks related to equity crowdfunding (DF6), the educational gap (DF7), investor protection (DF8) as well as monitoring problems and asymmetric information (DF10). More specifically, blockchain influences 3 of those market-driving forces – namely risks related to equity crowdfunding (DF6), investor protection (DF8) as well as monitoring problems and asymmetric information (DF10) – equally positively (mean score: 0.89), while its impact on closing the educational gap (DF7) is considerably lower (0.11). Heieck et al. (2018) note that the overall negative impact of those 4 market-driving forces could be reduced further through regulatory intervention.
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