New crowdfunding rules: First words from FundersClub, AngelList, others

Alex Mittal

FundersClub CEO Alex Mittal worries that $1 million a year limits on crowdfunding proposed by the SEC are too low.

Leaders on the front lines of crowdfunding got a first look at 500 pages of new investment rules and their initial reactions ranged from guarded to outright negative.

The guidelines from the Securities and Exchange Commission allow startups and small businesses to raise as much as $1 million a year from anyone, rather than the pool of wealthy investors who previously were eligible. Leaders at AngelList, FundersClub, WeFunder and CircleUp, who are still digging into the rules, shared their first take with me.

Groups like AngelList and the others are crucial to the crowdfunding proposals because the SEC envisions them potentially acting as portals where the investing public can connect with companies.

“I think the community is still trying to figure out what this will mean but a $1 million a year limit on crowd-funding from unaccredited investors is too low,” Alex Mittal, co-founder of FundersClub, said. “If you look at the companies that make a major impact, they all raise many millions of dollars. Most, if not all, of our portfolio are over $1 million in early funding.”

FundersClub offers highly curated series of pooled deals to an invitation-only network of private investors who meet current SEC wealth requirements. That means they have liquid net worth of at least $1 million or annual income of $200,000 or more.

Mittal called the SEC’s decision not to require startups to verify the income levels of their investors “a huge step in the right direction.”

Naval Ravikant, co-founder and CEO of AngelList’s huge network of founders and qualified funders, said he doesn’t have a problem with the $1 million funding limit but hasn’t had time to form opinions on other aspects the new rules yet.

“The average raised on AngelList is right around $1 million,” he told me. “Many companies raise $750,000. Many raise $1 million to $2 million. If it’s a $1 million max from the crowd, that seems reasonable to me, assuming that the rest can still be raised in the same offering from accredited and institutional investors. Hopefully it’ll keep pace with (startup) inflation, etc., too.”

Nick Tommarello, CEO of Boston-based WeFunder, said he was worried that the SEC would prohibit startups from raising more than $1 million per year total from unaccredited investors and wealthier funders.

“We’re relieved to see that wasn’t the case,” he told me. “We are also somewhat relieved that it appears the SEC will accept self-verification by investors. It’s not completely clear yet but it looks like that will be the way it works.”

Ryan Caldbeck and Rory Eakin, co-founders of San Francisco-based CircleUp, panned the proposed rules, saying they don’t think any qualified startup will want to raise money under the proposed regulations.

Their network focuses exclusively on the consumer-product and retail startups that some say are the real targeted beneficiaries of the crowdfunding called for in last year’s JOBS Act.

The CircleUp execs are worried by the SEC’s proposals to require any annual reports and audits from any startup that raises more than $500,000 from unaccredited investors.

“It’s going to be very difficult to attract quality startups who will agree to those conditions,” Eakin told me. “These rules may work for some small businesses in some parts of the country but they aren’t going to be of much use to the fast-growing companies that we work with.”

Caldbeck said that startups often find they need to raise more money than they planned and more than $1 million in a 12-month period. “The limit may seem reasonable at first but pose a problem later.”

None of the leaders of the four startup funding networks are ready to say whether they plan participate in the type of crowdfunding outlined in this week’s SEC proposals. CircleUp and WeFunder are already registered as broker-dealers, so they could do so without meeting any further SEC qualifications.

“If somebody says they are ready to proceed under the rules announced today, they were already going to do so anyways,” Mittal told me. “We prefer to take the same cautious and measured approach that we are hearing from members of the venture and legal communities we talk to here in Silicon Valley.”

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