Syndicated Equity Crowdfunding and the Collective Action Problem

Collective action problems arise in equity crowdfunding (ECF) markets due to coordination failures linked to the free rider problem and due to the costs of undertaking due diligence and monitoring. ECF platforms have responded to this challenge by combining aspects of the pure and angel ECF models into the syndicated ECF model. The latter mitigates collective action problems by requiring a lead investor syndicate (group) to garner pledges for 20% or more of the target capital prior to the campaign going public. The lead investor’s own stake incentivizes her to conduct thorough due diligence and to monitor the ECF firm until exit. The nominee structure is ideal for syndicated ECF as it mitigates conflicts by assigning equal ownership and voting rights to all investors, enabling angels to exploit the wisdom of the crowd and alleviating potential principal-principal conflicts between angels, other accredited investors and the crowd. The data examined support these predictions insofar as syndicated nominee ECF campaigns exhibit better short- and long-run performance than their direct ownership counterparts. Our findings offer valuable governance insights to platform managers and policymakers who promote nominee schemes.