Alternative investments: Motives and risks for investors on crowdfunding platforms

Abstract

With the development of financial markets and digital technologies, private companies are starting to actively use alternative financing tools, which, in turn, are becoming an alternative for investors to put money in traditional financial assets. Among these instruments, equity crowdfunding (crowdinvesting) plays a special role, an innovative method of financing through which issuers raise funds on online portals — crowdfunding platforms, and investors make investments in exchange for company shares. The subject of many academic and practical studies is the motives and risks of investing in this instrument. Due to the information asymmetry that exists between issuers and investors, the high uncertainty of future cash flows, the dominance of nonprofessional investors in the market, and a short history of the equity crowdfunding market, currently the issues of investors’ motives and risks remain poorly studied and the results of research are mixed. The purpose of this study was to identify and analyze the motives for investing in shares of small and medium-sized businesses on crowdfunding platforms, the risks associated with them, and the relationship between investment motives and characteristics of investors and crowdfunding campaigns. The research methodology was based on a review of contemporary studies on the issues under consideration. Based on the academic concepts, the experience of experts in this field and the authors’ own expertise acquired in the field of alternative investments, the authors put forward their own view building on the existing ideas. The results of the study are valuable for all participants of the equity crowdfunding process: issuing companies, investors, crowdfunding platforms. The authors contribute to the existing research on equity crowdfunding by proposing new approaches to identification of the motives of different categories of investors in relation to the factors which were not previously studied.