۱- Introduction

۲- The approach to informal institutions

۳- Methods

۴- Findings

۵- Discussion and implications

۶- Concluding comments

References

Abstract

Equity-based crowdfunding is emerging as an increasingly important source of entrepreneurial financing. This paper examines the effects of informal institutions on entrepreneurs’ ability and willingness to engage in efforts to raise equity crowdfunding. It also investigates how informal institutions are linked to investors’ response to ECF. Also reviewed are the differences in the effects of informal institutions on equity crowdfunding vis-à-vis other forms of crowdfunding. The paper also delves into factors that are likely to lead to the development of favorable informal institutions from the standpoint of equity crowdfunding. It utilizes inductive theory-building approach.

Introduction

Equity-based crowdfunding (ECF)1 is emerging as an increasingly important source of entrepreneurial financing. For instance, “business and entrepreneurship” category accounted for 27.4% of total CF volume in 2012, which increased to 41.3% in 2014 (Reuters.com, 2015). One estimate suggested that the Internet-based ECF (IECF) market was US$400 million worldwide in 2013, which increased to US$1.1 billion in 2014 (Feit, 2015). In 2014, ECF accounted for 30% of all seed capital in the U.K. (Exporter, 2015). Nonetheless, economies worldwide vary greatly in entrepreneurs’ efforts to raise and investors’ propensity to invest in ECF. For instance, per capita ECF in 2015 was estimated at US$0.003 in Latin America and the Caribbean (LAC) region, US$0.23 in Asia Pacific and US$8.32 in the U.S. (Table 1). It can be argued that like any economic phenomenon (Parto, 2005), ECF has institutional components and implications. Before proceeding, some clarifying definitions are offered. Institutions are “macro-level rules of the game” (North, 1990, p. 27), which include: a) formal institutions such as rules, laws, constitutions; and b) informal institutions such as social norms, conventions and self-imposed codes (North, 1996). Informal institutions can also be viewed as normative and cultural-cognitive pillars in Scott’s (2001) conceptualization of institutions. Legitimacy related to normative and cognitive institutions can be mapped to “morally governed behavior”, and “recognizable, taken-for-granted behavior” respectively (Scott et al., 2000, p. 238). Institutionalization is defined as the process by which a practice (e.g., ECF) acquires legitimacy and achieves a taken for-granted status (Kshetri, 2009). For instance, ECF is said to be institutionalized if this practice is legitimated by regulators, investors, entrepreneurs and other relevant actors. Institutional field is “formed around the issues that become important to the interests and objectives of specific collectives of organizations” (Hoffman, 1999, p. 352). Institutional field members are entities that have a voice in influencing institutional norms regarding the issues involved and participate in the negotiation on these issues (Kshetri, 2009).