Professor Qing Burke, along with Professors Dan Wangerin and Terry Warfield from the University of Wisconsin-Madison, co-authored the paper “Assuring the Crowd: The Role of Assurance in Securities Crowdfunding Success,” which is forthcoming in Management Science, a Financial Times Top 50 journal.
The researchers examined the role of CPA financial statement assurance in securities crowdfunding. Under the SEC’s Regulation Crowdfunding (Reg CF), which took effect in May 2016, early-stage private companies (i.e., startups) can raise capital through small securities offerings on internet platforms, reaching a broad base of investors. Policymakers and business communities anticipated this regulation would broaden investment opportunities for ordinary citizens and promote entrepreneurship.
According to Reg CF, a company that seeks crowdfunding by offering securities must provide mandatory financial statement disclosures, and these must be presented with varying levels of assurance based on the total amounts it seeks to raise—in the form of a CPA review or a CPA audit.
The study utilized SEC filings and hand-collected datasets from various sources to investigate how CPA assurance impacts the capital raised in securities crowdfunding. The authors uncovered notable findings:
- There is a high rate of noncompliance by companies seeking crowdfunding, which seems to affect the crowdfunding outcomes. This result suggests crowdfunding investors view noncompliance as a negative signal, resulting in a reduced willingness to invest. It also explains the results from prior research showing that higher levels of assurance are associated with better crowdfunding results.
- Companies tend to set their total offering amounts just below the assurance thresholds, ostensibly to avoid the costs of financial statement assurance.
- Generally, companies do not voluntarily provide higher levels of assurance than is required. Additional assurance is more likely when ventures have higher leverage (i.e., have loan agreements with banks and other accredited investors.)
Overall, this research offers new insights for crowdfunding issuers, investors, and regulators, shedding light on the role of assurance in this emerging market for startup capital formation.