Are Equity Crowdfunding Investors Active Investors?

A common assumption is that entrepreneurs retain more control of their venture when opting for equity crowdfunding (ECF) rather than venture capital. In this article, we investigate the relevance of cash-flow, control, and exit rights awarded to crowd investors in Germany, where more flexible ECF contracts are offered than in many other countries. In Germany, many of the rights used in venture capital investment contracts are also prevalent in ECF contracts. We find that crowd investors are asked to pay higher prices if they receive more cash-flow and exit rights, consistent with the view that these rights are valuable to the crowd. However, we find no evidence that these rights affect campaign outcome, the likelihood of securing follow-on funding, or the insolvency likelihood of the venture. We interpret this as indirect evidence that crowd investors are passive. Furthermore, crowd investors neither actively trigger insolvency proceedings nor mention the enforcement of their contractual rights in investor communication blogs or popular media. These results are in contrast with control rights theory and the results documented for venture capital contracts. Our research thus suggests that crowd investors are rather passive investors whose control rights are either ineffective or not exercised.