The discrepancy points to a possible lack of awareness of Reg CF. The assistant professor also contends that investors’ biases, whether conscious or subconscious, may lead them to miss out on lucrative opportunities with high-potential ventures.
“What I find most interesting is that women, Black, and Hispanic/Latino entrepreneurs participating in Reg CF have comparable or even superior pre-offering financial performance compared to their male and white counterparts,” Chang added. “However, they still face significant funding disparities.”
According to Chang, this finding highlights the need for targeted interventions and support to bridge these funding gaps and ensure equitable access to capital for all entrepreneurs. Chang’s presentation to the SEC provided recommendations, including strategies for effective investor engagement and campaign organization, subsidizing fundraising costs, and implementing anti-bias training for potential investors.
“Addressing these challenges to create a more inclusive and equitable entrepreneurial ecosystem requires concerted efforts from policymakers, platforms, and all stakeholders in the entrepreneurial ecosystem, including traditional startup investors,” Chang said.
Marshall News asked Professor Chang for more details about her research and what could be done to equalize capital access for underrepresented entrepreneurs.
Interviewer: Is Reg CF similar to the types of crowdfunding most individuals are aware of … you set a funding goal and if you fall short, you don’t receive any of the amount raised?
Melody Chang: Many people confuse equity crowdfunding with a pre-existing form of crowdfunding (e.g., Kickstarter project). The two forms of crowdfunding are notably different. In reward-based crowdfunding, well-known for Kickstarter projects, you’re becoming early customers of these projects and there aren’t many uncertainties or risks involved. In equity crowdfunding, you’re investing in a company and betting on the future value of these companies. So, you can think of it as stock investing but the difference is that you’re investing not in publicly listed firms but private, early-stage startups.
As an investor, what benefit do I receive from equity crowdfunding? If the company gets acquired and “exits”, do I retain my investment/share or will it be eliminated?
MC: As an investor in a Reg CF campaign, you receive securities in the company, such as equity or debt, depending on the terms of the offering. If the company gets acquired or goes public (an “exit”), the specifics of your investment return will depend on the type of security you hold and the deal terms. Typically, in an acquisition, your shares would be converted into cash or shares of the acquiring company, depending on the [terms of the] acquisition agreement. Your investment would not be eliminated; rather, it would be converted or liquidated according to the terms of the exit event. Yet, not all startups achieve a successful exit, with the vast majority of early-stage companies failing to yield any returns for their investors.
For the limited number of startups that successfully exit, this event usually occurs 5–10 years after their inception. Since Reg CF started in 2016 until March 2024, I find that there have been 14 IPOs and 71 acquisitions known to date, though the precise terms of these acquisitions and the exact proceeds distributed to investors are often not disclosed.
Your research finds that “All-Female,” followed by “Mixed Gender” and “All Non-White” companies have a propensity to generate more revenue than “All-Male” and “All-White” companies. Why do you think underrepresented entrepreneurs are still disadvantaged?
MC: There could be two investor-driven explanations. First, although the investor base is broader, equity crowd investors may not be more diverse in terms of gender and race and ethnicity than traditional venture capitalists or angel investors. If most investors are still predominantly white male, they might inadvertently prefer to invest in “All-Male” or “All White” teams. Second, even if the investor base is more diverse than the traditional investors, this does not necessarily mean it is free from inherent biases and stereotypes. Investors, regardless of expertise, may hold perceptions that women-led, Black-led, or Hispanic/Latino-led businesses lack growth potential and/or are riskier investments.
In offering government-backed incentives, would that have to be approved by Congress or does the SEC have the ability to implement and fund these types of initiatives and changes?
MC: Implementing government-backed incentives typically requires approval from Congress, as it involves the allocation of federal funds and changes to existing regulations. While significant changes and funding would likely need legislative approval, the SEC and the Small Business Advisory Committee can propose and support initiatives. I believe a policy white paper such as mine could play a role in informing the current Reg CF framework, highlighting parts that are working well and shortcomings that require more attention and measures from policymakers, entrepreneurs, and investors.
What can be done by the private sector or by women, Black, and Hispanic/Latino startups to continue to increase their funding gains and reduce the funding gap?
MC: If the SEC enacts none of the [paper’s] suggested changes, the private sector can take several steps to support startups led by underrepresented social groups. For instance, investors or non-profit organizations can design funding programs and grants specifically for underrepresented entrepreneurs. Investors and platforms can organize mentorship and networking programs to help women and Black entrepreneurs build valuable connections. Platforms can educate investors about the benefits of diverse investment portfolios and encourage inclusive investment practices. They can highlight many successful entrepreneurs underrepresented in terms of gender and race to inspire others and attract investments.
