Crowdfunding’s Hidden Trade-Off: Due Diligence vs. Scale

A crowdfunding campaign reaches its target, hundreds of investors commit, and the funding bar turns green. It looks like collective confidence has confirmed the opportunity. But what, exactly, has the crowd confirmed?

That question sits at the heart of a new study by Matthew Ellman and Sjaak Hurkens, Optimal Investment-Based Crowdfunding: Crowdblessing Versus Scale.¹ Their theoretical analysis shows how funding thresholds and promised returns influence whether investors research a project, commit without researching, or stay out.

The implications extend beyond crowdfunding. As financial technology makes investing easier, the harder challenge is preserving the incentives that turn participation into informed capital allocation. A platform can attract more money while weakening the information behind investment decisions.

How Crowdfunding Turns Investor Decisions Into Information

The researchers model an entrepreneur financing a risky project through an all-or-nothing campaign. Investors receive their money back if commitments fall short of a specified threshold. If funding succeeds, the project proceeds.

In the model, a good project repays investors with interest, while a bad project loses their invested capital. Investors can pay to acquire an imperfect signal about project quality before deciding whether to participate. The entrepreneur chooses both the funding threshold and the offered interest rate.

The threshold performs two jobs. It determines whether enough investors commit, and it aggregates information embedded in their decisions. When investors are more likely to participate after receiving encouraging information, good projects have a better chance of reaching the target.

The authors call this screening benefit “crowdblessing.” Campaign success improves the relative likelihood that the funded project is good. It does not guarantee success, eliminate losses, or certify that the investment suits an individual investor.

Why Higher Crowdfunding Returns Can Weaken Due Diligence

The counterintuitive finding concerns promised returns. At a fixed funding threshold, increasing the offered interest rate can encourage more investors to commit without acquiring information.

Someone who researches only invests after receiving a positive signal. Someone who commits blindly participates regardless. A higher promised payout therefore benefits the blind strategy more often, shifting the balance toward participation without inspection.

This raises funding scale but reduces the screening contribution of the crowd. The effect comes from incentives within the model, rather than an assumption that investors are irrational or easily manipulated.

Raising the threshold creates another tension. Holding investor strategies unchanged, a tougher target improves screening. However, greater protection from the crowd can reduce the incentive to research personally. Investors may reason that other participants will prevent a bad project from being funded.

If everyone relies on that protection without contributing information, its foundation disappears. Designing a campaign therefore requires balancing the quality of the collective decision against the amount of capital committed.

Why More Research Is Not Always Better

The paper also challenges the assumption that every investor should conduct more research. Information has a cost, and imperfect research can produce false negatives. Investors may reject projects that are actually good, leaving useful capital uncommitted.

Consequently, some participation without research can be efficient. The relevant question is whether enough informed participation remains to support useful screening.

The researchers also find that profit-maximizing entrepreneurs can sometimes induce excessive information acquisition to reduce investor surplus. Here, “welfare” means the combined economic benefit to the entrepreneur and investors after accounting for research costs. Maximizing the entrepreneur’s profit can produce a different outcome.

This creates a useful editorial distinction: thorough research, successful fundraising, and attractive investor outcomes are separate measures. A campaign can perform well on one without maximizing the others.

Better Crowdfunding Needs Better Information Infrastructure

A practical implication is that platforms should examine how information is produced, rather than treating a rising funding total as their main quality signal. Standardized financial disclosures, documented assumptions, and accessible risk explanations could make independent evaluation less costly.

FrontFundr’s 2025 Community Capital Report illustrates the role of screening alongside online distribution. The Canadian platform reports that more than 97% of applicants were not approved following its multistage due diligence process. That is a company-reported selection statistic, not proof of superior investment returns.

Nevertheless, it highlights a commercial choice: access can expand while admission remains selective. The paper does not model platform screening directly, but its emphasis on information incentives gives a reason to investigate how professional review and investor research interact.

Shared research could reduce duplicated effort. It could also create dependence on a single assessment. The design challenge would be preserving the ability to question assumptions and identify conflicting evidence, rather than having many investors repeat the same conclusion.

What Investors Should Check Beyond The Funding Bar

For investors, the most useful response is to distinguish evidence of demand from evidence of investment quality. A funded campaign shows that commitments cleared a target. Its meaning depends on what participants knew and why they invested.

• Check what evidence supports revenue, repayment, or growth assumptions.
• Understand the security’s rights, fees, and potential dilution.
• Ask who performed due diligence and how their incentives align.

Security structure matters because buying equity, lending money, and acquiring a convertible instrument create different claims. Securities.io’s recent guide to equity dilution provides useful context for how subsequent financing can change ownership.

The fundraising route also shapes disclosures and participation. The comparison of Reg CF, Reg A+, and Reg D helps explain those differences. Separately, the SEC’s Regulation Crowdfunding overview describes intermediary and disclosure requirements. Regulatory compliance and economic attractiveness still require separate assessment.

Happen And The Economics Of Digital Lending

These information and funding challenges also create opportunities for businesses building digital credit infrastructure. For investors seeking public-market exposure to that sector, Happen, formerly LendingClub, offers a relevant example.

Happen combines digital banking, credit underwriting, and a marketplace funding model. In a September 2026 structured lending update, the company reported crossing $10 billion in personal loans sold through its HAPS and LENDR certificate programs.

HAPS divides loan exposure into a senior note retained by the bank and a residual certificate sold to a marketplace investor. LENDR offers multiple rated note tranches. These structures illustrate how a digital lender can organize funding around different investor requirements.

Happen is an adjacent example rather than a direct implementation of the paper’s crowdfunding mechanism. Its investment relevance lies in underwriting, distribution, and funding design. Assessing the business requires examining credit performance, funding demand, and profitability, rather than assuming larger loan volumes establish better outcomes.

Latest Happen (HAPN) News and Developments

When Crowdfunding Confidence Becomes Useful Evidence

The study is theoretical, uses simultaneous investor decisions, and assumes signals are independent conditional on project quality. Real campaigns involve changing funding totals, communication, and potentially correlated information. Its predictions need empirical testing.

Its constructive message remains valuable: crowdfunding can aggregate dispersed knowledge, but that knowledge must first be produced. Better information tools and carefully designed incentives could help platforms expand access while preserving scrutiny. The next measure of progress should include how effectively capital is evaluated, alongside how quickly it is raised.

References:

¹ Ellman, M., & Hurkens, S. (2026). Optimal investment-based crowdfunding: Crowdblessing versus scale. Games and Economic Behavior. Advance online publication. https://doi.org/10.1016/j.geb.2026.104052