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 firm was inspired by developments it has seen here in the U.S. that are opening venture capital to more individuals, from AngelList’s rolling fund program, to an imminent change in a crowdfunding regulation, Reg CF, that on Monday is set to increase 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 a notable one, especially coming on the heels of some other recent initiatives to democratize venture capital. But if crowdfunding part of traditional venture funds does become a bigger trend, it’s going to take some time. We talked with fund formation attorneys and administrators this week, and they’d barely registered that the crowdfunding limit is about to quintuple.

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 leverage contacts and expertise for companies. Think of the many funds that count CTOs as limited partners, for example, because it gives them a better understanding of the technologies those executives are looking to implement.

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 know their investors will come through with the money.

A crowdfunded component could also be a “big — and permanent — administrative burden” to deal with “potentially hundreds of equity owners for a relatively small amount of money,” notes attorney Mike Sullivan of Orrick, observing the problem exists whether an investor is raising $1 million or $5 million.

Crowdfunding part of a venture fund could further pose 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.)

Not last is the matter of blank-check companies, which are right now occupying a lot service professionals’ time in the startup industry, as well as giving retail investors a taste of what they were missing when it comes to accessing nascent tech companies. Both could slow the extent to which venture investors 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.