Financial literacy and security‐based crowdfunding

• Published date: 01 January 2022
• Author: Michele Meoli,Alice Rossi,Silvio Vismara
• Date: 01 January 2022
• DOI: http://doi.org/10.1111/corg.12355

SPECIAL ISSUE ARTICLE

Financial literacy and security-based crowdfunding

Michele Meoli

1

| Alice Rossi

1

| Silvio Vismara

2

1

Department of Management, Information and

Production Engineering, University of

Bergamo, Bergamo, Italy

2

Department of Management, University of

Bergamo, Bergamo, Italy

Correspondence

Silvio Vismara, Department of Management,

University of Bergamo, Via dei Caniana

2, 24127 Bergamo, Italy.

Email: silvio.vismara@unibg.it

Abstract

Research Question/Issue: This study investigates the relationship between financial

literacy and the survival profile of the security-based crowdfunding platforms.

Security-based crowdfunding has recently emerged as a novel market that allows

small investors to engage directly in financing entrepreneurial ventures. However, a

certain level of financial literacy is required to understand and manage these digital

finance tools. A better understanding of the impact of financial literacy is, therefore,

central to the development of these markets and the achievement of their inclusive

potential.

Research Findings/Insights: Using data of the universe of 432 security-based

crowdfunding platforms in 37 OECD countries from 2007 to 2019, we find higher

platforms' survival profiles where the level of financial literacy is high. Financial liter-

acy, however, needs to combine with specific platform characteristics to take full

effect, as it matters more to those platforms that deliver voting rights and that pro-

vide poorer value-added services to crowdfunding investors.

Theoretical/Academic Implications: This study provides empirical support to the role

of governance mechanisms at the platform level for differences in the level of finan-

cial literacy across countries. As such, it contributes to literature both on financial lit-

eracy and corporate governance. Additionally, it extends previous research in

crowdfunding to the platform level.

Practitioner/Policy Implications: This study calls for the attention of policymakers

interested in the development of crowdfunding markets. The importance of financial

literacy varies with the presence of governance mechanisms and information produc-

tion at the platform-level.

KEYWORDS

corporate governance, crowdfunding, financial literacy, platforms, survival profile

1|INTRODUCTION

Security-based crowdfunding has recently emerged as a popular

funding method. This success is partly due to its inclusionary nature.

Crowdfunding provides ordinary investors with the opportunity, for

the first time, “to go online and invest in entrepreneurs that they

believe in.”

1

Although early-stage finance is traditionally limited to

sophisticated investors,such as venture capitalists and business angels,

security-based crowdfunding is associated with a large pool of small

investors. The disintermediation provided by crowdfunding platforms

enables individuals to directly invest in promising entrepreneurial ven-

tures or seek capital to finance their businesses. Thus, security-based

crowdfunding is expected to democratize and improve the efficiency

of financial markets (Cumming,Meoli, & Vismara, 2019a).

Through disintermediation, security-based crowdfunding encour-

ages direct valuation and investment, thereby delivering unprece-

dented investment opportunities to small investors. Although the role

as gatekeepers of crowdfunding platforms is certainly relevant

Received: 18 June 2020 Revised: 12 November 2020 Accepted: 14 December 2020

DOI: 10.1111/corg.12355

Corp Govern Int Rev. 2022;30:27–54. wileyonlinelibrary.com/journal/corg © 2020 John Wiley & Sons Ltd 27

(Cumming, Johan, & Zhang, 2019), the final decision on which ven-

ture to finance is left to the investors. Nevertheless, small inves-

tors are likely to have neither the ability nor the incentives to

research and evaluate entrepreneurial ventures extensively. Conse-

quently, there are concerns about the potential risk for small inves-

tors in security-based crowdfunding (Schwienbacher, 2018). The

lack of financial literacy on the supply side (i.e., investors seeking

investment opportunities) might pair with adverse selection prob-

lems on the demand side (i.e., entrepreneurs seeking finance).

Walthoff-Borm, Schwienbacher, and Vanacker (2018) find that

entrepreneurs searching for external finance often consider

security-based crowdfunding as a last resort when they lack alter-

natives such as internal funds or debt financing. Blaseg, Cumming,

and Koetter (2020) show that security-based crowdfunding attracts

entrepreneurial ventures tied to distressed banks, proxying low

quality. Accordingly, the analysis of the comments submitted by

stakeholders to the Securities and Exchange Commission (SEC) in

response to U.S. equity crowdfunding regulations reveals that one

of the major concerns for the development of the market is that

low-quality entrepreneurs seek financing through crowdfunding to

take advantage of unsophisticated small investors (Cummings,

Rawhouser, Vismara, & Hamilton, 2020). Crowdfunding might thus

empower entrepreneurs to exploit inexperienced and uncoordinated

investors with behavioral and herding biases.

Although the inclusive potential of digital finance is high, using

these tools and managing the associated risk requires a certain level

of financial literacy.

2

Prior studies indicate that investors with higher

financial literacy have a higher capacity to assess investment opportu-

nities (Lusardi, Mitchell, & Curto, 2010; OECD, 2005), and a higher

degree of financial literacy increases financial inclusion at a country

level (Grohmann, Klühs, & Menkhoff, 2018). According to the study

by Vaznyte, Andries, and Manigart (2020), the perceived socioeco-

nomic environment with positive cues about entrepreneurial

endeavors contributes to crowdfunding awareness, which is recog-

nized as an important precedent to actual engagement in

crowdfunding. However, people with low financial literacy are less

likely to accumulate wealth and manage wealth effectively

(Hilgert, 2003; Stango & Zinman, 2009). They are less likely to partici-

pate in stock markets (van Rooij, Lusardi, & Alessie, 2011) and are

more frequently harmed in digital financial markets (Tomilova &

Dashi, 2019). Therefore, we argue that financial literacy is central to

the development of digital finance markets and their potential to

achieve inclusive objectives. Accordingly, in this paper, we study, for

the first time, the relationship between financial literacy and security-

based crowdfunding.

Security-based crowdfunding platforms allow individuals to invest

in securities issued by entrepreneurial ventures. The most diffuse type

of security-based crowdfunding is equity crowdfunding (Block, Groh,

Hornuf, Vanacker, & Vismara, 2020), but it includes other types of

portals such as real estate crowdfunding, profit sharing and debt-

based contracts. Although security-based crowdfunding is a recent

phenomenon, valuable research on the topic is already available. Most

extant studies take uniquely either the perspective of the demand of

capital by focusing on the characteristics of ventures (e.g., Ahlers,

Cumming, Günther, & Schweizer, 2015; Block, Colombo, Cumming, &

Vismara, 2018; Hornuf & Schwienbacher, 2017; Vismara, 2016) or of

the supply of capital by focusing on investors (e.g., Hervé, Manthé,

Sannajust, & Schwienbacher, 2019; Hornuf & Schwienbacher, 2018;

Vismara, 2018). Crowdfunding platforms have been the focus for only

few studies. Among them, Dushnitsky, Guerini, Piva, and Rossi-

Lamastra (2016) studied country-level factors influencing platform

creation in 15 European countries and documented variations across

crowdfunding models. Rau (2019) investigated how country charac-

teristics affect the volumes of crowdfunding and found that the qual-

ity of the regulation, financial development, and ease of access to the

Internet are the main determinants of the development of

crowdfunding. Cumming et al. (2019) studied Canadian crowdfunding

platforms and found that those that followed higher standards of due

diligence were more likely to list successful offerings and raise higher

amounts of capital. Rossi and Vismara (2018) focused on the array of

services provided by platforms, distinguishing between prelaunch,

ongoing, and postoffering services. They showed that higher post-

campaign services increased the number of successful offerings.

All the studies mentioned take a static perspective and perform

cross-sectional analyses on the different aspects of the functioning of

crowdfunding platforms. Security-based crowdfunding platforms,

however, often do not survive long. We observe that the number of

active platforms has not substantially increased over the last 5 years

because of an increasing number of failures of crowdfunding plat-

forms despite the establishment of new platforms each year. There-

fore, it is meaningful to study their survival profiles. We track

security-based crowdfunding platforms over time and argue that

financial literacy is a necessary condition for the development and

survival of these markets. Financial literacy has been recognized as a

significant element of stability and financial growth (OECD, 2013).

Therefore, we expect this to hold for security-based crowdfunding

markets.

Although crowdfunding is about including small investors, their

involvement in the governance of the ventures they finance varies

across platforms: some platforms deliver voting rights whereas others

do not. This is a significant difference, if we consider that corporate

finance studies show that firm value decreases when voting rights of

controlling shareholders exceed cash-flow rights (e.g., Claessens,

Djankov, Fan, & Lang, 2002; La Porta, Lopez-De-Silanes, Shleifer, &

Vishny, 2002). Consistent with this literature, Cumming, Meoli, and

Vismara (2019b) study dual-class shares in security-based

crowdfunding and find that a higher separation between ownership

and control lowers the likelihood of a successful offering and the pos-

toffering performance of funded ventures. As corporate governance

mechanisms affect investment decisions, the delivery of voting rights

should impact the development of these platforms and possibly mod-

erate the relationship between the level of financial literacy and the

survival profile of security-based crowdfunding platforms.

Security-based platforms are responsible for the quality of the

information exchanged between entrepreneurs and investors. The

value-added services offered are crucial to alleviate the information

28 MEOLI ET AL.