Institutional quality and success in U.S. equity crowdfunding

Abstract

In equity crowdfunding, establishing legitimacy is crucial for firms to mitigate the information asymmetry investors face. We propose that the strategic selection of incorporating a business in Delaware—a jurisdiction recognized for its investor-friendly legal framework—sends a quality signal to investors, enticing greater participation in capital raises. While prior studies indicate a diminishing relevance of Delaware incorporation for later-stage and mature ventures, our study presents a contrasting story for smaller, nascent equity crowdfunding firms. Utilizing a comprehensive dataset of U.S. regulated equity crowdfunding offerings from May 2016 to December 2021, our empirical analysis uncovers a positive and meaningful relationship between Delaware incorporation and crowdfunding success in the United States. These findings underscore the significance of Delaware's legal infrastructure for firms confronting heightened challenges of establishing trust due to otherwise limited governance mechanisms. By highlighting the importance of institutional quality, this research contributes to understanding how legal frameworks influence investment outcomes and entrepreneurial motivations, offering insights for entrepreneurs, investors, and policymakers.