On 8th of March, the European Commission has unveiled an Action Plan on how to harness the opportunities presented by technology-enabled innovation in financial services (FinTech). As a first major deliverable, the Commission is also putting forward new rules that will help crowdfunding platforms to grow across the EU’s single market.
Many innovative companies face financing difficulties particularly in the early stages of their business. At the same time, smaller investors often do not find appropriate investment opportunities. While crowdfunding platforms are gaining importance as an alternative to bank financing on a national level, diverging legislation across the EU makes operating across-borders cumbersome. EU rules will make it easier for crowdfunding platforms to operate across other Member States. This will widen the pool of investors and the number of projects to pick from.
The Commission’s proposal introduces an optional EU regime which enables crowdfunding platforms to easily provide their services across the EU Single Market. Instead of having to comply with different regulatory regimes, platforms will have to comply with only one set of rules, both when operating in their home market and in other EU Member States. For investors the proposal will further provide legal certainty as regards the applicable investor protection rules.
Crowdfunding improves access to funding especially for start-ups and other small businesses. A start-up can present its project on an online platform and call for support in the form of a loan (‘peer-to-peer lending’) or equity. Investors receive a financial return for their investment. It is currently difficult for many platforms to expand into other EU countries. This is why crowdfunding in the EU is underdeveloped as compared to other major world economies, and the EU market is fragmented. One of the biggest hurdles is the lack of common rules across the EU. This considerably raises compliance and operational costs and prevents crowdfunding platforms from expanding across borders.
Crowdfunding is an innovative funding opportunity that allows entrepreneurs to make an „open call” to the wider public for the collection of financial support for a specific business project. This is generally done through an internet-based platform, which matches the supply and demand of the funds.
Crowdfunding provides a much-needed alternative to bank lending, which is currently the main source of external finance for small and medium enterprises (SMEs). The type of bank lending currently available for entrepreneurs, start-ups and small enterprises is often expensive or difficult to access due to the lack of credit history or a lack of tangible collateral. The survey on the access to finance and enterprise (SAFE) identified the lack of funds as the second most important reason why start-ups fail. Crowdfunding is vital as it helps companies tap into new sources of funding. At the same time, it provides new investment opportunities for smaller investors and consumers.
Crowdfunding is particularly important in the early stages of business financing as it often is the main funding tool – apart from funds provided by family, friends and own funds.
Legislation today in EU
Today crowdfunding is mainly conducted on the basis of national legislation, which means that platforms are subject to diverging rules depending on the country in which they operate. This makes it particularly difficult for platforms to provide their services cross-border. Several Member States have adopted bespoke regimes for investment-based and lending-based crowdfunding. A few other Member States do not specific rules but allow investment-based crowdfunding to be provided under Markets in Financial Instruments Directive (MiFID2) rules. A full description of the current legal context is provided in the impact assessment report accompanying this proposal.
Furthermore, the Commission’s proposal envisages several mechanisms to protect investors:
Investors will be informed about the risks associated with crowdfunding and will be warned about the inadequacy of these instruments as saving products. Crowdfunding webpages will need to display a series of disclaimers and recommendations to that end.
Before having the possibility to invest, investors will need to take a knowledge test aiming to assess their understanding of financial products. They will be offered the possibility to assess their ability to bear financial losses. Should the resulting investor profile show excessive vulnerability, a clear disclaimer would warn the investor that the service offered is not appropriate for them.
Crowdfunding service providers and project owners will have the duty to disclose a comprehensive set of information for each crowdfunding offer in a clear and transparent way to allow investors to assess the risks before investing. This includes information about the project owner and the crowdfunding project, the main features of the crowdfunding process and conditions for raising funds or lending money, information related to the securities, information on the issuer, investor rights, fees, and legal redress. All this information must be included in the KIIS (Key Investor Information Sheet).
Crowdfunding service providers must obtain the best possible result for their clients when exercising discretion in how they carry out clients’ orders. They will have the duty to avoid and prevent conflicts of interest – such as having any financial participation in the crowdfunding offers on their crowdfunding platform. Platforms will be prohibited from accepting fees to induce clients towards certain projects.
For more information: European Commission – Proposal for a Regulation on European Crowdfunding Services for Business