For a long time, investing in startups was a privilege reserved for the wealthy. Those who met specific income or net worth requirements were considered accredited investors – those with the financial sophistication to take on the high-level of risk associated with startup investing. That all changed with the JOBS Act of 2012, allowing the everyday person to put small amounts of money into startups through a registration exemption called Regulation Crowdfunding. The accredited investor definition has since expanded to include those with a high-level of financial knowledge, but the rise of non-accredited investors and their impact on startups has grown. In this blog, learn more about the rise of non-accredited investors and how Regulation Crowdfunding helped democratize startup investing.

The Rise of Non-Accredited Investors

The Origins of Crowdfunding

Before the JOBS Act took effect, investing in startups was reserved for the (typically) wealthy, also known as accredited investors. This was due to the high risk of losing the total amount of the original investment. This requirement was in place to help prevent investors with limited incomes and net worth from putting significant amounts of capital into startups and losing their entire investment. However, after the 2008 financial crises, the JOBS Act was passed to encourage economic growth and make it easier for startups and small businesses to raise the capital needed to grow their businesses.

Key Aspects of the JOBS Act

One of the benefits of the JOBS act was easing securities regulations to help startups raise capital and enable the general public to also participate in startup investing. Originally enacted with lower offering and investment limitations, Regulation Crowdfunding currently includes the following:

• Allows startups to raise up to $5M in a 12 month period from both accredited and non-accredited investors
• Requires broker-dealers and funding portals, the intermediaries that facilitate the capital raises, to be registered with the SEC and be a member of FINRA.
• Sets investment limits based on income/net worth to help protect non-accredited investors from overexposure and some level of risk.
• No investment limits for accredited investors.

Enabling the average person to invest in startups has opened up new avenues for startups to raise capital and for more people to participate in this alternative asset.

Crowdfunding By the Numbers

Since the JOBS Act was passed, Regulation Crowdfunding has gained traction. According to Kingscrowd, startups raised $74M in 2018 using a combination of equity crowdfunding and debt crowdfunding. That number increased to $209M in 2020 and reached an all-time high of $496M in 2021. The total eased after that peak year reaching $422.7M in 2023 and $343.6M in 2024.

 

Increasing Access

Crowdfunding has evolved over the years, with some changes to make it easier for startups to raise capital and investors to participate. For example in 2021, the amount a startup could raise in a 12 month period was increased to $5M. Additionally, rules were loosened for general solicitation and publicly marketing startups, investment limits were removed for accredited investors, and the accredited investor definition was expanded to include those with certain financial licenses and knowledge of private markets. These changes helped expand access to Regulation Crowdfunding for both startups and non-accredited investors through additional investors who were now able to participate in this method of investing in startups.

Challenges & Risks of Regulation Crowdfunding

Investing via Regulation Crowdfunding is not without its challenges and risks.

High Failure Rate

First and foremost, investing in startups is risky. 90% of startups fail, and that means that with every investment, there is the chance of total investment less. Investors should consider their risk level before deciding to invest in startups and make an informed decision on whether or not they are comfortable losing that amount of money.

Liquidity Issues

Next, investing in startups is inherently illiquid. There are long holding periods associated with startups before an exit event, like merger, acquisition, IPO, or failure. If investors need ready access to their investment capital, investing in crowdfunding and startups may not be for them. Liquidity concerns should be carefully considered before investing in Regulation Crowdfunding.

The Future of Non-Accredited Investing

While Regulation Crowdfunding is still in its nascent stage, we can think about what the future of Regulation Crowdfunding and non-accredited investing might look like in the future. Could the future bring higher fundraising caps? Will the accredited investor definition be expanded further? Will more startups choose to utilize Regulation Crowdfunding as their preferred capital raising method? Is Regulation Crowdfunding ever going to see mainstream adoption? While the future is unclear, there is plenty of room for crowdfunding to grow.

Final Thoughts

Regulation Crowdfunding helped fundamentally change how startups can raise capital from investors. Startups are no longer limited to high-net-worth elites and venture capital firms, but accessible to the masses. As we look to the future, it is possible than accessibility could expand and more investors may choose to invest in Regulation Crowdfunding.

Are you looking to invest in startups utilizing Regulation Crowdfunding? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following blogs to learn more:

• Choosing the Right Path: Direct versus Fund Investments
• Understanding Equity Deal Terms
• Common, Preferred, & Convertible: Financial Instruments Explained
• Risk and Reward: Building Your Ideal Portfolio

*****

The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.