Economics of Mandatory Disclosure in the Equity Crowdfunding
Abstract: Crowdfunding represents a new form of financial intermediation that entails raising funds from a large number of dispersed investors via web-based platforms. The main regulatory challenge in this industry concerns the question whether mandatory disclosure, the most widely used tool in conventional financial markets, is an appropriate solution to information asymmetry. Drawing on insights from the economics of voluntary disclosure, this paper theoretically examines whether market forces alone are expected to generate sufficient information. After discussing incentives for fundraising firms to unravel information, the paper addresses the issue whether crowdfunding platforms as two-sided markets are expected to design optimal disclosure rules. The desirability of mandatory (regulatory) disclosure is finally discussed in the light of conditions that might lead to the failure of voluntary disclosure.