According to Wikipedia, The Pareto principle also known as the 80-20 rule states that, for many events, roughly 80% of the effects come from 20% of the causes.  The validity of the 80-20 rule can be seen throughout the economy.
![80-20 Rule](http://www.leadershipvibe.net/wp-content/uploads/2011/10/pareto-principle.jpg)
Why is the 80-20 rule important to consider in relation to the Crowdfunding bills that are moving through congress?  Because where Congress sets the Crowdfund Investing limits, will determine if this legislation will create or destroy jobs and innovation. The Startup Exemption framework originally suggested $10,000 or 10% of an investors Adjusted Gross Income (AGI). Our rationale for the $10,000/10% AGI was to cap the maximum an individual could invest based on their income but also cap the total amount anyone could put into one endeavor at $10,000. This was to provide significant investor protection for unaccredited investors who choose to invest in this high-risk asset class yet allow higher net worth individuals for flexibility to use their cash as they see fit.
The current bills before Congress each limit the maximum amount an investor can risk at different levels. The $10,000/10% AGI we advocate matches what is in HR2930. The Senate bills take different and more dramatically smaller positions; between $500 & $1,000.   If these lower caps from the Senate bills are enacted, it will kill the value of this legislation and will dramatically limit or eliminate the possibility of any new jobs or innovation being created via Crowdfund Investing.![quote](https://startupexemption.com/wp-content/uploads/2011/12/quote.png)
Applying the 80-20 rule to crowdfunding, the theory would assume that 80% of the crowd will provide the majority of the count of contributions but the 20% of the crowd will provide 80% of the dollar value of the financing. If this theory is true, then it is crucial that the 20% of the investors that will provide 80% of the investment dollars are able to provide larger dollar investments.
To prove this, we reached out to several of the major crowdfunding platforms and asked them for statistics on a few of their larger projects. We specifically asked for the larger projects because we anticipate the average amount entrepreneurs will seek in their initial rounds will be $50,000. Here’s what the data showed.
On Crowdcube, the UK’s first and largest crowdfunding platform that just successfully funded the first £1 million (approx. $1.57M) project (need we say any more about how powerful crowdfunding will be), the data revealed the following:
- From a group of projects that raised collectively $280,800, individuals who invested less than $1,000 accounted for 81.2% of the total number of investors.
- The remaining 18.8% of investors, who invested greater than $1,000, accounted for 93.8% of the total financing!
Indiegogo, one of the largest donation-based crowdfunding platforms which has been around longer was able to pull data from a much larger data set. (They have funded over 25,000 projects).
- The data indicated the more money one raises, the more reliant on $500+ contributions one is.
- For campaigns that raised between $500 – $5,000, 24% of funding came from $500+ contributions.
- For campaigns that raised over $5,000, 46% of total funding came from $500+ contributions.
- For campaigns that raised over $10,000, 50% of total funding came from $500+ contributions.
- For campaigns that raised over $20,000, 53% of total funding came from $500+ contributions.
- For campaigns that raised over $50,000, 65% of total funding came from $500+ contributions
Profounder, one of the first to try equity-based crowdfunding but forced to augment its model for the time being, was able to share these statistics from all projects funded on their site:
- 24% of the total number of investors contributed less than $1K. These individuals delivered just 4% of all funding raised.
- 76% of individuals who invested greater than $1,000 delivered 96% of all funds raised.
- The average investment was a little over $1,700/ investor.
- These statistics closely match what Crowdcube discovered.
The data demonstrates how important it is to allow investors the opportunity to make investment decisions at a level that is appropriate to their income/net worth, while capping the total investment level for all unaccredited investors. $10,000 or 10% of AGI (whichever is smaller) should be that limit. The larger contributions are critically important to successfully funding companies. If overly restrictive limits of $500, $1,000 or even $5,000 are enacted it would have a grossly negative impact in the potential for crowdfunding.
What this theory leaves out though is the importance of the small dollar donations from something other than money — a voice and a potential customer base. While 20% of a crowd might provide 80% of the financing, if it weren’t for the 80% who expressed interest in a company in the first place by pledging small dollar funds, those larger investors would not be stepping up to the plate with 80% of the financing. There is validity to the voice the 80% puts behind their dollars because it shows that there is interest from the crowd for the product. Market research like that prior to launching is invaluable and something any traditional financier would look for.
We urge the Senate to enact the investment limits from our framework: $10,000/10% AGI (Whichever is lower).