The European Commission has published a report presenting the results of its monitoring of the evolution of the crowdfunding sector (here). According to the Report, the Commission will not be taking any legislative action on crowdfunding in the immediate future but will continue to monitor the development of the sector and the degree of convergence of national frameworks.
On 30 September 2015 the Commission launched its Capital Markets Union ("CMU") Action Plan, which is intended to build a true single market for capital across the 28 EU Member States (see our related briefing here and an earlier briefing here). One of the CMU's key objectives is to broaden access to finance. For many firms, in particular small and medium enterprises, access to finance remains problematic. The Commission intends to alleviate this problem by strengthening sources of alternative financing such as crowdfunding.
Overview of the Report
The Report, which is published in the form of a Commission Staff Working Document, focuses on investment and lending based crowdfunding. As well as taking stock of recent work carried out by the Commission services on crowdfunding, it reviews the current status of crowdfunding in the EU, gives an overview of domestic regulatory and supervisory arrangements in EU Member States, appraises the extent of cross border funding activities and sets out some conclusions.
Current Status: crowdfunding has developed rapidly in various Member States with an estimated EUR 4.1 billion raised through crowdfunding platforms across the EU in 2015. Emerging trends in crowdfunding include:
- the institutionalisation of crowdfunding, with increased involvement by banks, mutual funds, hedge funds, pension funds, asset management companies as well as local authorities and national development banks. Institutional involvement is particularly strong in consumer loans crowdfunding, while in equity-based crowdfunding a growing number of venture capital and angel investors are co-investing alongside or in parallel with `crowd investors';
- the consolidation of crowdfunding platforms, including a decline in the number of new platform launches and the disappearance of some existing platforms;
- the internationalisation of crowdfunding platforms, driven by the need to increase economies of scale and thus expand both the investor base and the pipeline of projects seeking funding;
- the emergence of organised secondary markets for securities or loans in crowdfunding projects; and
- increased awareness of the opportunities and risks of crowdfunding among potential investors.
Regulatory Environment: Austria, Spain, France, United Kingdom, Italy, Germany and Portugal have introduced bespoke regulatory frameworks for crowdfunding activities while some of the other Member States are planning to introduce similar regimes. Overall these domestic regimes are consistent in their approach as they share the goal of developing crowdfunding as a source of funding, while addressing key risks that may arise, notably for investors. However, those regimes are tailored to local markets and domestic regulatory approaches. Annex 2 of the Report gives an overview of the crowdfunding regulatory framework in a selection of EU Member States.
Extent of Cross-border Activities: Crowdfunding remains largely national, with cross-border activity still very limited. Despite the overall consistency of national regimes, there are concerns that divergences in national regulatory frameworks could impede the development of cross-border activities.
Conclusions: Crowdfunding still remains relatively small in the EU, however it is developing rapidly and could be a key source of financing for the SMEs in future.
Given the predominately local nature of crowdfunding, the Commission considers that there is no strong case for EU level policy intervention at this junction. However, given the sector's dynamism and the potential for cross border expansion, it will be important to monitor the sector's development and the effectiveness, and degree of convergence of national regulatory frameworks. The Commission will continue to assess the development of the cross-border business and in particular the investor protection aspects so as to ensure that it is able to respond in a timely manner if further steps are needed to support the convergence of regulatory approaches.
Other Crowdfunding Developments
The Commission's latest report is part of a series of recent measures on crowdfunding. In February 2015 it published a Green Paper on building a CMU, in which the Commission sought stakeholder views on whether there are barriers to the development of appropriately regulated crowdfunding or peer to peer platforms, including on a cross border basis, and how these barriers should be addressed.
Subsequently, in the CMU Action Plan, the Commission committed to taking stock of the situation of European crowdfunding markets and of the regulatory landscape as a basis for a future decision on how to best enable this funding channel to serve the European economy while appropriately addressing any potential risks. Since then, the Commission has held two regulatory workshops, as well as commissioning studies and launching projects to improve the general knowledge of developments in crowdfunding markets, business models and regulatory frameworks.
In addition, in December 2014, the European Securities and Markets Authority published advice and an opinion on investment-based crowdfunding, and in February 2015, the European Banking Authority published its opinion on lending-based crowdfunding.
IOSCO, the world association of national securities regulatory commissions, has also published a Survey Report on crowdfunding (see our related briefing here).
While a number of EU Member States have put in place a bespoke legislative framework for crowdfunding, Ireland is not one of those Member States. Nevertheless, as recognised in the Report, there are a number of legal requirements which may apply to crowdfunding, depending on the type of crowdfunding involved. This includes, for example, requirements regarding anti-money laundering, consumer lending, unfair commercial practices, unfair contractual terms, and data protection. In addition, investmentbased crowdfunding platforms generally have to be authorised under the MiFID Directive 2004/39.
As recognised by the Commission, the expansion of crowdfunding can be viewed as part of the evolution of FinTech, with these technological innovations having the potential to transform the financial system. However, it is difficult to say at this stage to what extent crowdfunding will provide an alternative funding source to SMEs, given the impossibility of forecasting how such a fast-changing phenomenon will evolve in the future. Nevertheless, the preliminary indications in this regard appear encouraging.