False signaling by platform team members and post-campaign venture outcomes: Evidence from an equity crowdfunding platform

Abstract

In equity crowdfunding (ECF), early investments serve as signals of venture potential to prospective investors, making them more likely to join an offering. We argue that ECF platform team members can exploit this mechanism and convey false signals to unsophisticated investors. Data from a prominent ECF platform indicate that platform team members “invest” in ventures that exhibit weaker post-campaign outcomes. However, in ventures that successfully fundraise, platform team members typically withdraw their investment (after it incentivized others to join), and these ventures show even weaker post-campaign outcomes. Finally, ventures' post-campaign outcomes are particularly weak when this “invest-and-withdraw” tactic is executed by the platform's upper echelons, whose investments can further be perceived as endorsement signals by the crowd, despite significant goal incongruence between the upper echelons and the crowd. Our study presents novel theoretical and empirical insights into the signaling, financial misconduct, and ECF literature, and holds important policy implications.