Early-stage investors excited for new $5M crowdfunding limit

U.S. companies can now raise up to $5 million per year from unaccredited investors, a nearly fivefold bump from the previous $1.07 million limit.

Why it’s important: New SEC regulations that took effect on March 15 allow early-stage firms to use crowdfunding as a means to raise meaningful growth capital. More later-stage firms will also likely try crowdfunding as the former threshold kept many on the sidelines. After all, when you're raising millions for IPO unicorns, $1.07 million doesn't even get these folks out of bed.

Investors react: TinySeed general partner Rob Walling told me that the option to raise more than $1 million means more companies will be open to crowdfunding than ever before.

Walling — whose firm just raised $25 million to invest in 100+ companies — said that while funding doesn’t guarantee success, “it allows companies to survive those early days, and move faster to get to the point of self-sustainability.”

“Anything that allows more people to diversify their investments by making small bets on startups AND provides more funding for early-stage companies is a good thing in my book.” —Rob Walling, TinySeed

The pitfalls: Walling acknowledges there will likely be an “epic failure” — such as a crowdfunding con artist or a company failing to deliver — that the media will devour.

He’s also concerned founders' time may be strained by demands from the hundreds of new investors they gained through crowdfunding.

“As a founder, having 1,000 investors, even if they are a single line-item on your cap table, is going to be a challenge for many. As with price-sensitive customers in SaaS, some price-sensitive investors may want a lot of reassurance their investment will make money, or demand more updates and information than a founder would usually be asked to provide. If you imagine 1% of investors as ‘high needs,’ that’s 10 people (out of 1,000) who could be sending you Twitter DMs asking why your revenue is not growing quickly enough.” —Rob Walling, TinySeed

Funding diversity: John Fein, managing partner of Firebrand Ventures, told Indie Hackers he thinks the new funding threshold will be a broad boost for startup investors, startups, and funds.

“Overall they seem to have a net benefit in terms of making it easier for startups and funds to raise capital and enabling more non-accredited folks to invest in startups and funds." —John Fein, Firebrand Ventures

Fein also hopes that the new rules will inspire more investing in diverse founders. About 77 percent of VC dollars went to companies with a white founder regardless of gender, according to data from Crunchbase. And about 70 percent of startups that raise venture capital have a white male cofounder who went to Stanford and/or Harvard University.

“The venture capital and limited partner worlds have been woefully non-diverse so, hopefully, the new regulations will help a little with that. Separately, I do hope that if people are investing in startups for the first time they’re investing money they can afford to lose because as we all know startups are a very risky asset class.” —John Fein, Firebrand Ventures

Democratizing early-stage investing: Brian Belley, the founder of crowdfunding research site Crowdwise, told Axios that the higher threshold will undoubtedly draw more startups to crowdfunding and create more startup investors.

“When more companies do this, they're bringing their audience and customers, which brings in a whole bunch of new investors in the market." —Brian Belley, founder of Crowdwise

Companies quickly capitalize: Several companies — including Backstage Capital, the NYC Opportunity Fund, the biotech firm Cytonics and several others — have already surpassed the previous crowdfunding threshold since it took effect March 15. And a few have already hit the new limitation, including Gumroad, which hit its $5 million fundraising goal in less than 24 hours.

Additional impacts: Republic, a crowdfunding platform for early-stage ventures, sees the $5 million limitation as a gamechanger for startups that couldn’t scale the same with a $1.07 million round.

“The increase to $5 million is large enough to allow a startup to raise a full Series A funding round, to provide all the equity required for a sizable real estate development project, or to buy a museum-quality piece of art. In our estimation, these changes will increase the total addressable universe of companies from billions to trillions in total value, creating an enormous opportunity for the platforms poised to facilitate this investment.”

The feds are pumped: Even the stogy SEC shared their enthusiasm for the regulatory shift.

“We believe that the amendments adopted in this release will enable small businesses generally to access capital through exempt offerings more effectively and we encourage further specific, tangible suggestions for action by the [SEC] and are committed to continued engagement on this topic.”

The road ahead: About 1,000 U.S. companies raised $215 million from equity crowdfunding in 2020. While it’s a tiny fraction of the $156 billion venture capitalists poured into U.S. companies in 2020, the amended regulations will likely help set a record number of dollars for equity crowdfunding in 2021.

What do you think? Are you planning to crowdfund your company this year? Will crowdfunding rules shake-up the modern fundraising process?