On March 15th, the law that Wefunder uses - Regulation Crowdfunding - was reformed by the Securities and Exchange Commission (SEC). These reforms are a Very Big Deal. We expect many more companies will now want to be funded on Wefunder.
In 2012, we set out to convince Congress to allow anyone to invest as little as $100 in the startups they believed in. We succeeded and were invited to watch President Obama sign the JOBS Act into law. But when those laws rolled out in 2016, they were very flawed. Not enough startups wanted to use them.
Today, the laws have been fixed to be much better for both startups and their investors.
How the law was improved
Here are the four most important improvements.
I. Companies can raise $5M per year from unaccredited investors (up from $1M).
We expect the increase will appeal to later-stage, more mature companies that have a large audience of customers who already know and love them.
II. Companies can start raising in minutes instead of months
Previously, founders had to spend weeks putting together CPA reviewed GAAP financial statements before they could even find out if investors wanted to invest. Now, they can get reservations immediately while doing the accounting and compliance work in parallel. We expect many more early-stage founders to "test the waters" by asking their friends and family if they are ready to fundraise.
III. Investors are allowed to invest more money each year
Before, the amount investors were allowed to invest each year was the "lessor of" a fraction of their net worth or net income.
Now, the amount investors are allowed to invest each year is based on the "greater of" their net worth or income - 10% if over $100,000 or 5% if under $100,000.
For accredited investors, there are no longer any investment limits at all.
IV. SPVs are now legal for Regulation Crowdfunding
SPVs are "Special Purpose Vehicles", which allow individual investors to be rolled up into one line on a company's cap table. SPVs are very common in early stage startup investing, and widely understood by lawyers and VCs.
Why is this important? Startups want to use an SPV to ensure their follow-on financing won’t be at risk. Venture capitalists are often uncomfortable when startups have many small investors (they don’t like collecting thousands of signatures). With an SPV, all those smaller investors are represented by one large entity, with one lead investor who can sign documents on their behalf.
SPVs are not only better for startups, but also investors. The lead investor aggregates the voting power of all the smaller investors and can fight for their interests.
Going forward
We built Wefunder to democratize startup investing; to help anyone be an angel investor and invest as little as $100 in the companies they believe in. With these be law changes, we expect many more companies will now be willing to allow their fans to invest. We're excited to drive forward on our vision!