The Countdown To Equity Crowdfunding Begins Now

You wouldn’t have recognized the VC industry of the 1940s. It was puny. And it pretty much stayed that way throughout the 1950s, 60s and 70s.

Then the government decided to change the rules.

It issued the “Prudent Man Rule,” which allowed pension funds to invest in venture capital. It triggered a surge in VC investing.

From 1982 to 1987, VC funds raised $4.5 billion annually. It was just $0.1 billion 10 years before.

History is now repeating itself. The rules are changing once more. And the government is again opening up VC-like investing to new sources of capital.

Last time, it was the Prudent Man Rule. This time around, it’s the far more sweeping “Everyman” rules that are sure to unleash a new wave of early-stage investing.

We’ve talked about these “ground-floor investing rules for everybody” before. But in case you don’t know, they’re making it possible for everyday investors to invest in the early stages of a company’s growth through equity crowdfunding. (See here and here for more details.)

The Real Litmus Test

Aside from profit potential, there are many reasons to invest this early. (I’ll be writing a post on this very soon.)

Yet the number of investors migrating to this new way of investing has been modest.

Earlier this year, SEC Chairwoman Mary Jo White said, “The size of the 506(c) offerings are getting bigger by size, [but] not in numbers.” [506(c) raises allow startups to advertise their fundraises to the general public.]

White says that 506(b) raises “where there is not general solicitation” continues to be “a hugely vibrant market.” From when 506(c) became effective in 2013 through 2015, “you had about a $2.8 trillion-sized market for 506(b) and about a $71 billion market for 506(c).”

Why are 506(b)s dwarfing 506(c)s?

New 506(c) rules have allowed thousands of well-off but nonprofessional investors to back high-upside companies. But investing in these 506(c) companies is still limited to accredited investors only. The universe of eligible investors remains relatively small.