Investment Consensus: How an Important Safeguard in Crowdfunding Could Mislead Investors

It is important to understand how recent regulation allowing small businesses to issue equity through crowdfunding can impact investors' decision-making. One unique feature of crowdfunding presented to investors is an issuer's fundraising goal (i.e., minimum target) and how much money has currently been pledged toward that goal by other investors. However, it is unknown whether investors are sensitive to the level at which the minimum target is set, which can influence the perception of the level of support an investment has received from other investors. While holding the amount of capital pledged to an issuer constant, we conduct an experiment to examine how the minimum level of an issuer's fundraising goal impacts the likelihood of investment by investors. We predict that lower minimum goals will facilitate a perception that an issuer has strong support from other investors and will lead to a change in how investors perceive that issuer. We find that, regardless of the financial strength of the issuer, lower minimum fundraising goals lead to greater investment likelihood compared to higher minimum fundraising goals. We also find that issuers with weak financial strength tend to benefit from this effect more than stronger firms. Finally, this effect is mediated by investors' perceptions of the support of other investors in the company. The results of our study have both practical and theoretical contributions.