The Incentive Problems with the All-or-Nothing Crowdfunding Model
489 - 519
Hastings Business Law Journal
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This paper discusses how the all-or-nothing model can disincentivize crowd investors to perform due diligence over the fraud or failure risks of a crowdfunding campaign. Specifically, the major upside of this model is that a project cannot be funded without a critical mass investing. If enough individuals in this critical mass of crowd investors perform their due diligence to check whether projects will become successful, then the model functions correctly; instead, this paper argues that this model incentivizes the crowd to produce noisy information that cannot be relied upon. In the all-or-nothing model, sequential investments encourage rational investors to not perform their due diligence because they relied on the self-interest of prior investors to perform their own due diligence while non-fully rational investors may rely on the belief that prior investors have better information than they might gather. Allowing campaigns to be overfunded can exacerbate some of the all-or-nothing model characteristics. This paper concludes by discussing how the platforms, campaign creators, and crowd investors can be incentivized to better filter projects in order to assure that crowdfunding fulfills its potential.