Equity Crowdfunding ‘Rules’: Compliance with Mandated Ongoing Financial Reporting in an Unenforced Environment

with Greg Burke
Working Paper
SSRN working paper available here. BibTeX citation available here.

Abstract: Using the regulated, but largely unenforced setting of U.S. equity crowdfunding (ECF) we consider why managers comply with ongoing financial reporting regulations beyond enforcement and litigation risk. In a market with billions of dollars invested by millions of investors, over half of ECF issuers fail to file their mandated annual report, with only a third issuing timely. Using rich offering-level data, we show compliance is negatively associated with compliance costs and tardy filings are partially explained by the desire to issue additional securities. However, despite our rich data, the overall explanatory power of predicting financial reporting compliance is low using observational data. Using a randomized intervention, we show compliance increases from messages emphasizing the regulatory risk of non-compliance, but not those emphasizing the potential economic benefits of compliance. Further, we show, despite low compliance, investors demand annual report information via EDGAR log data. This paper provides the first evidence on ongoing reporting behaviors of ECF issuers and insights into reasons managers comply with financial reporting mandates more broadly.