Crowdfunding limits are poised to change next week, but most VCs aren’t paying attention — yet

Passion Capital, the early-stage venture firm in London, told TechCrunch earlier this week that — in an apparent first for a European fund —  it plans to crowdfund the final stage of its third and latest vehicle. Specifically, it’s carving out around half a million dollars for anyone who wants to invest in the vehicle, as long as they are a high net worth individual.
Firm founder Eileen Burbidge says the outfit was inspired by developments it has seen here in the U.S., from AngelList’s rolling fund program, to an imminent change in a crowdfunding regulation, Reg CF, that on Monday is set to bump up the maximum amount that can be raised through a crowdfunding campaign from $1.07 million in any twelve-month period to $5 million — a nearly five-fold increase.
The move is interesting, especially coming on the heels of some other recent initiatives to democratize venture capital. But if crowdfunding a piece of traditional venture funds does become a bigger trend, it’s not going to happen overnight. We talked with fund formation attorneys and administrators this week, and they’d barely registered that the crowdfunding limit is about to quintuple because they aren’t being asked about it.
Why not? One fund formation attorney said he doesn’t think it will become a viable fundraising path — unless other paths aren’t available — because of the benefits of having investors who can provide contacts and expertise to portfolio companies. Think of the many funds that count CTOs as limited partners, for example; VCs can learn a lot about the kinds of technology they’re looking to implement by bringing them into the fold.
There are other pragmatic concerns, too. VCs like to personally know their limited partners because they call down capital on a deal-by-deal basis and want to be sure their investors will come through with the money.
A crowdfunded component could also be a “big  and permanent administrative burden,” given that it could involve “potentially hundreds of equity owners for a relatively small amount of money.” So notes attorney Mike Sullivan of the global law firm Orrick.
A less obvious reason VCs might not be thinking much about crowdfunding ties to complications when it comes to a firm’s internal rate of return. VCs don’t like to have money sitting around on their balance sheet; they like to call down the capital as they need it, because the clock doesn’t start ticking on an investment until they do this. (That gives them more time to hopefully shepherd an investment into an eventual success story that they can later tweet about.)
Asked about why the new crowdfunding cap isn’t on his colleagues’ radar yet, one fund administrator tells us it’s because they’re all too busy dealing with with SPACs, those special purpose acquisition companies that are springing up like mushrooms.
That many of these blank-check outfits are taking public fairly nascent tech companies — giving retail investors access to the kinds of high-risk, high-reward startups that be otherwise out of reach —  could also slow the extent to which VCs begin incorporating more “ordinary” investors into the asset class.
Still, absent a last-minute change by the Biden administration — and it doesn’t that appear one is coming (at least, Gary Gensler’s nomination to serve as SEC chairman still requires full Senate confirmation) — Reg CF is on the cusp of changing.
It’s worth paying closer attention to what ripple effects — and opportunities — might result.

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