Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T20:32:57.642Z Has data issue: false hasContentIssue false

Brokers and Finders in Startup Offerings

Published online by Cambridge University Press:  12 December 2023

Emmanuel Yimfor*
Affiliation:
Columbia University Columbia Business School
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This study analyzes Form D filings to understand brokered startup offerings. About 60% of brokers are FINRA-registered; the rest, “finders,” are not. Startups with fewer seasoned investors and more local brokers tend to use brokers. Venture capital firms rarely join brokered offerings, but non-accredited investors do, especially offerings with finders. Overall, brokers aid in raising capital. Yet, startups using finders often fail to exit successfully and close following funding. This implies finders might be directing funds from non-accredited investors to lower-quality startups. Brokers help startups raise money without VC support, but the effectiveness of this capital allocation is unclear.

Type
Research Article
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This article is based on part of my dissertation at Rice University. I thank Alex Butler, Alan Crane, Xun Tang, and James Weston (Chair) for many insightful discussions. I also thank the anonymous referee, Jarrad Harford (the editor), Kerry Back, Elizabeth Berger, David Brophy, William Diamond, Michael Ewens, Gustavo Grullon, Yael Hochberg, Andrey Malenko, Nadya Malenko, Erik Mayer, Jared Stanfield, Laura Starks, Heather Tookes, seminar participants at the SEC, FINRA, Yale School of Management, University of Pennsylvania, University of Michigan, University of Toronto (Workshop on Gender, Race, and Entrepreneurship), Indiana University, Purdue, Virginia Tech, Southern Methodist University, University of Iowa, Baruch College, University of South Carolina, University of Oklahoma, Kent State University, and Rice University, and participants at the 2022 American Finance Association Annual Meeting for helpful comments. I am also grateful to Crunchbase for giving me access to its database. I also thank Mathew Dellorso and Patrick Whelchel for their insights from their experience as brokers selling private placements. I appreciate the research assistance of Alexander Tuft and Murray Green. All errors are mine.

References

Agrawal, A., and Lim, Y.. “Does General Solicitation Improve Access to Capital for Small Businesses? Evidence from the JOBS Act.” Evidence from the JOBS Act (Jan. 31, 2021).Google Scholar
Bauguess, S.; Gullapalli, R.; and Ivanov, V.. “Capital Raising in the US: An Analysis of the Market for Unregistered Securities Offerings, 2009–2014.” Washington, DC: U.S. Securities and Exchange Commission (2015).Google Scholar
Bernstein, S.; Korteweg, A.; and Laws, K.. “Attracting Early-Stage Investors: Evidence from a Randomized Field Experiment.” Journal of Finance, 72 (2017), 509538.Google Scholar
Bolton, P.; Santos, T.; and Scheinkman, J. A.. “Cream-Skimming in Financial Markets.” Journal of Finance, 71 (2016), 709736.Google Scholar
Booth, J. R., and Smith, R. L. II. “Capital Raising, Underwriting and the Certification Hypothesis.” Journal of Financial Economics, 15 (1986), 261281.Google Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 10451067.Google Scholar
Carter, R. B.; Dark, F. H.; and Singh, A. K.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285311.Google Scholar
Chemmanur, T. J., and Fulghieri, P.. “Investment Bank Reputation, Information Production, and Financial Intermediation.” Journal of Finance, 49 (1994), 5779.Google Scholar
Cumming, D. J.; Pandes, J. A.; and Robinson, M. J.. “The Role of Agents in Private Entrepreneurial Finance.” Entrepreneurship Theory and Practice, 39 (2015), 345374.Google Scholar
Dahl, M. S., and Sorenson, O.. “The Embedded Entrepreneur.” European Management Review, 6 (2009), 172181.Google Scholar
Dai, N.; Jo, H.; and Schatzberg, J. D.. “The Quality and Price of Investment Banks’ Service: Evidence from the PIPE Market.” Financial Management, 39 (2010), 585612.Google Scholar
Egan, M.; Matvos, G.; and Seru, A.. “The Market for Financial Adviser Misconduct.” Journal of Political Economy, 127 (2019), 233295.Google Scholar
Ewens, M., and Malenko, N.. “Board Dynamics over the Startup Lifecycle.” New York, SSRN 3640898 (2020).Google Scholar
Ewens, M., and Townsend, R. R.. “Are Early Stage Investors Biased Against Women?Journal of Financial Economics, 135 (2020), 653677.Google Scholar
Fang, L. H.Investment Bank Reputation and the Price and Quality of Underwriting Services.” Journal of Finance, 60 (2005), 27292761.Google Scholar
Fernando, C. S.; Gatchev, V. A.; and Spindt, P. A.. “Wanna Dance? How Firms and Underwriters Choose Each Other.” Journal of Finance, 60 (2005), 24372469.Google Scholar
FINRA. “Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings.” Washington, DC: FINRA (2010).Google Scholar
Garmaise, M. J., and Moskowitz, T. J.. “Informal Financial Networks: Theory and Evidence.” Review of Financial Studies, 16 (2003), 10071040.Google Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169197.Google Scholar
Jiang, W.Have Instrumental Variables Brought Us Closer to the Truth.” Review of Corporate Finance Studies, 6 (2017), 127140.Google Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (1977), 371387.Google Scholar
Megginson, W. L., and Weiss, K. A.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879903.Google Scholar
Petersen, M. A., and Rajan, R. G.. “The Benefits of Lending Relationships: Evidence from Small Business Data.” Journal of Finance, 49 (1994), 337.Google Scholar
Rubinstein, A., and Wolinsky, A.. “Middlemen.” Quarterly Journal of Economics, 102 (1987), 581593.Google Scholar
Sorensen, M.How Smart is Smart Money? A Two-Sided Matching Model of Venture Capital.” Journal of Finance, 62 (2007), 27252762.Google Scholar
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” NBER Working Paper No. 0284 (2002).Google Scholar
Yavas, A.Middlemen in Bilateral Search Markets.” Journal of Labor Economics, 12 (1994), 406429.Google Scholar
Supplementary material: File

Yimfor supplementary material

Yimfor supplementary material
Download Yimfor supplementary material(File)
File 259.1 KB