It has been apparent for some time that banks are facing increasing competition in their traditional business areas, particularly deposits and lending. The tougher capital and liquidity requirements under Basel III / CRD IV are leading to a drop in bank lending. This shortage of bank loans is causing companies to look for other sources of financing (alternative lending). These alternatives are sometimes collectively described as shadow banking, although this is not entirely accurate. Alternatives to traditional bank loans can increasingly also be found in the regulated sector. One of the latest trends in alternative lending is so-called “crowdfunding”.
This type of financing is now becoming increasingly popular in Germany. Crowdfunding originated in the USA, where it is mainly used to finance private spending and is generally directed at consumers. Crowdfunding refers to financing of projects or companies via a large number of individuals acting as lenders. Seekers of capital generally use Internet platforms to attract support from investors for their idea, project or company.
The potential target group is larger with crowdfunding than with traditional investment options because interested individuals can acquire a stake by investing just a very small amount. For start-ups in particular, crowdfunding platforms offer an attractive opportunity to find lenders without needing the support of banks. Experts predict strong growth opportunities in the crowdfunding arena.
Regulators, however, are wary of this alternative form of financing. In the UK, the Financial Services Authority (FSA) recently warned about crowdfunding and the associated risks, citing the often highly complex investment structures, lack of transparency and the fact that this form of investment is very illiquid. In the United States, new legislation is planned to regulate crowdfunding. The German Federal Financial Supervisory Authority, BaFin, has also recently issued a statement regarding the supervisory requirements for crowdfunding (see BaFinJournal 09 / 12, accessible on the Internet via the BaFin homepage).
Depending on how a crowdfunding platform is structured, it may well involve a provision of financial services for which authorisation is required. In some cases, the platform operator engages in investment brokerage, contract brokerage or the placing of financial instruments. If the operator of the crowdfunding platform accepts monies from investors and passes them on to the offeror, it is also possible that payment services which require authorisation under the German Payment Services Supervision Act (“Zahlungsdiensteaufsichtsgesetz” – ZAG) are involved. Providers or issuers of the investment should also take into account the obligation to provide a prospectus, which applies to public offers for EUR 100,000 and more under the Securities Prospectus Act (“Wertpapierprospektgesetz” – WpPG) and the Capital Investment Act (“Vermögensanlagengesetz” – VermAnlG). Providers must also check whether they are obliged to prepare a key information document. While crowdfunding can be an attractive alternative to traditional banks for investors as well as those seeking capital, crowdfunding platforms ultimately need to be integrated into the established regulatory environment and must meet regulatory requirements. A review is therefore required in each individual case as to whether the specific business model obliges those involved to obtain authorisation or whether exceptions or exemptions apply.