Effect of Non-Gaap Emphasis and Voluntary Disclosures on Nonprofessional Investor Decision Making in the Equity Crowdfunding Environment

While the JOBS Act expanded the ability of startups to raise equity crowdfunding capital, concerns have been raised about nonprofessionals’ ability to evaluate such offerings. In 2x2x2 experiment, we examine how two novel crowdfunding disclosure choices, the nature of managemnt’s responses to online questions (detailed or vague) and the level of attestation (audit or review), can interact with financial projections frequently used by startups (GAAP or non-GAAP emphasis) to impact nonprofessionals’ investment decisions. When the information environment is weaker due to managemnet’s vague responses to online questions, nonprofessionals invest more when GAAP versus more favorable non-GAAP metrics are emphasized, given weaker assurance due to a mandatory review. When the information environment is stronger due to detailed responses, investors invest more when non-GAAP versus GAAP metrics are emphasized, but only when the firm also chooses stronger assurance (a voluntary audit). Findings suggest nonprofessionals use sophisticated valuation models when evaluating equity crowdfunding.