American Inventor Protection Act and the Market for Venture Financing

Investment in innovative private companies involves a significant information problem, where entrepreneurs know more about the quality of the project than investors. To overcome such information frictions, private companies may disclose information to investors. However, these disclosures may have a negative impact on company prospects and future value if there are knowledge spillovers to competitors. A key channel for disclosing technological knowledge that reduces appropriability concerns is through the patent system. The American Inventor Protection Act (AIPA) of 1999 facilitated the disclosure of technological knowledge through the accelerated publication of patent applications. This chapter examines AIPA’s impact on innovative private firms and focuses on funding raised through corporate venture capital (CVC) and exit through mergers and acquisitions (M&A).