On Crowdfunding Regulation in Europe

Announcement of the EU to help CrowdfundingCrowdFundBeat Eric Schreyer, 27.03.2014 – Communication on Crowdfunding in the European Union. Excerpt:

4. What are the benefits of crowdfunding?

Crowdfunding has real potential to finance different types of projects, such as innovative, creative and cultural projects, or activities of social entrepreneurs, that have difficulties in accessing other forms of financing. SMEs can also benefit as crowdfunding can respond to the needs of many small start-ups that do not manage to access bank finance, venture capital or reach the stage of IPO. Crowdfunding could thus contribute to bridging the finance gap for small firms and innovative projects and usefully complement other sources of finance. Better access to finance for small businesses would promote entrepreneurship and ultimately contribute to growth and job creation. One study estimates that in Spain alone 7,500 direct ‘crowd-jobs’ were created through some 2,800 successful crowdfunding projects.

Crowdfunding creates opportunities for more people, who otherwise would not have access to traditional channels of finance, to become small-scale entrepreneurs. It creates competition for other sources of finance, and as it is often used by innovative, artistic and social projects, it promotes innovation, culture and social entrepreneurship.

5. What are the risks of crowdfunding?

Some of the most relevant issues for all crowdfunding models are:

· advertising and advice by promoters or platforms may be misleading;

· how platforms treat payments, whether reclaimable contributions are returned;

· risk of fraud (when the money collected is not used for stated purposes).

Financial return models may entail further risks:

· legal uncertainty arising from divergent national laws;

· financial risk, i.e. the risk of their investment being unprofitable or the risk of losing the invested capital as a result of project failure;

· lack of an exit option (liquidity risk).

If there were a large scale scandal, it could undermine people’s trust and stifle the growth of this form of financing. This is why it is important to have an adequate policy framework that addresses excessive risks, while promoting the growth of crowdfunding. Besides the general risks of crowdfunding mentioned here, financial return models also entail certain investment risks.

8. Is EU regulatory intervention necessary?

At the moment the European Commission does not intend to come up with legislative measures. In the first place it plans to further explore the market developments around crowdfunding and get a better overview on how this form of financing fits in the wider financial environment. The Communication proposes a number of actions aimed at promoting, raising awareness and building confidence in crowdfunding. At the same time the Commission will continue monitoring developments in this market and, if justified, it will consider whether further EU action is necessary. The Communication aims to develop, in cooperation with stakeholders, a common understanding at EU level and prepare the ground for possible future actions. The objective of this Communication is to accompany the development of crowdfunding in Europe, not to regulate donations, including to charities or political parties.

9. What action does the European Commission propose in this Communication?

Stakeholders responding to the public consultation identified some of the key challenges that need to be tackled for crowdfunding to flourish. These include a lack of awareness and understanding, lack of information concerning the applicable rules, risks of insufficient or misleading information disclosure, the functioning of crowdfunding within the Single Market and the issue of matched financing. The actions proposed in the Communication aim to address these issues in order to exploit the full potential of crowdfunding in the EU. The Commission will:

· carry out a study to explore market developments and the potential of crowdfunding to finance research and innovation

· raise awareness, provide information and training modules for project owners, especially for financial return crowdfunding (crowd lending and crowd investing)

· encourage exchange of industry best practices and standards, and facilitate the development of a European ‘quality label’ to build trust with users

· establish an expert group, called the European Crowdfunding Stakeholder Forum, that will advise the Commission on some of the above actions

· assess the possibilities for using public funds to support projects through crowdfunding

· hold regulatory workshops with national regulators to discuss obstacles to convergence of national regulations on financial return models and, where relevant, issuing recommendations to encourage Member States to avoid inconsistencies in national approaches

· closely monitor the market and legal developments and regularly assess whether further EU action is needed.

(End of excerpt)

The European Crowdfunding Network

expected to further highlight the potential this sector has in shaping the future economy of Europe. However, no details have emerged prior to the expected statement, so we are drawing on our experience in working with the European Commission over the past two years in making some basic assumptions. In particular we hope to see the following aspects from our 2012 recommendations included:

  • Continue to raise the awareness of crowdfunding to entrepreneurs, investors, other stakeholders and the general public
  • Help the crowdfunding industry in order to create best practices with the aim of self regulation and customer protection
  • Intensify support for research to increase available data on the sector and its impact on the European economy
  • Take a leading role with national regulators and Governments in order to increase awareness of crowdfunding in order to create public support on national level
  • Further the understanding of existing European and national regulation with respect to crowdfunding with the aim to potentially regulate aspects of the sector on European level

Communication on Crowdfunding in the European Union

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