A recent journal article published in a leading management journal, Academy of Management Perspectives, explores a research agenda for governing equity crowdfunding.
The paper explores a key challenge with equity crowdfunding. Equity crowdfunders own small amounts of equity in a company. Investors don’t have the resources to ensure governance using similar mechanisms that large shareholders in publicly traded firms would such as activist investors, Board Seats, and ongoing research into the manager’s decision-making.
Without a Governance mechanism, the market for equity crowdfunding could fail as firms perform poorly and fail to return value to shareholders. The equity crowdfunding market has little information as to what constitutes good private and public sector governance of equity crowdfunded firms.
Toward a Model of Governance
The report offers Governance mechanisms specifically for each aspect of the equity crowdfunding lifecycle.
- Allow “testing the waters” so that entrepreneurs can obtain non-binding approval before launching a campaign.
- Improved analysis and tracking functions from the media and press.
- More self-reporting and press analysis.
- Crowdfunding portals better screen poor companies and ensure governance mechanisms are in place between firm and investor.
- Stronger national regulation including investor protections.