I wrote an opinion piece for the Helsingin Sanomat newspaper in July 2014 where I said that crowdfunding needs clear ground rules. Now, just under two years later, this is finally happening.
The Finnish government issued its proposal for a crowd funding act on 7 April. Small- and medium-sized companies will have an easier time getting financing with more sources of money available.
Lending money to a company directly without intermediaries offers the potential for good returns with reasonable risk. Buying shares in a start-up allows anyone to help very early stage companies grow. Following the entry into force of the new act, crowdfunding platforms will no longer need an investment service company permit even if the financing instruments being brokered are transferrable securities.
This is a long-awaited act in the field. It clarifies the ambiguous situation that was created when the Finnish Financial Supervisory Authority changed its interpretation of the law in the summer of 2014. Small financial companies, fintech start-ups, have faced the challenge of playing a game with fuzzy rules and difficult to predict referee calls.
Now the rules are being clarified and the referee’s room for interpretation is narrowing. Crowdfunding brokers will no longer have to join the Investors’ Compensation Fund, and the capital requirements relating to investment service legislation have been dropped to a sensible level. A light registration process and equal rules across the industry also improve investor protection. Fly-by-night players can be kicked off the field if need be.
The New Act: Restriction or Opportunity?
The most significant part of the new act is not the result, but the essential—and hopefully increasingly common—shift in the paradigm of the traditional legislative process that it represents.
First and most important of all, the crowdfunding act is the first national legislative project relating to economic competitiveness in which Finland is blazing a trail rather than trailing behind as usual. For once, EU level regulations were not looked at with fear, but were interpreted with courage and objectivity and in accordance with the principle of proportionality. This lead to an economically efficient result without violated the mandatory obligations set by the directives (MiFID).
Second, the legislative process emphasised genuine interaction to an exceptional degree. The actors and interest groups active in the industry were not just heard formally, there was a genuine desire to understand their needs and desires.
Thanks to the high-quality of preparation, the opposing interests of market freedom and investor protection have been balanced in the new legislation. There was also another benefit to the process: the discussions held prior to enactment strengthen the approval of the new act. Under the rule of law, it is not enough that the result is justified, the process also has to be legitimate.
Whether we like it or not, in a market economy, a welfare state can only be maintained by ensuring that the economy is efficient. This new act is a good tool provided that we have the skill and courage to use it properly.
The open-minded approach that the Ministry of Finance took to drafting this legislation is just what the sputtering Finnish economy needs. Legislation doesn’t always have to create restrictions, it can also create opportunities.
Finland Leading the Way
Finland’s trailblazing attitude will likely lead to alliances being formed between small crowdfunding platforms and finance giants over the coming year. These kinds of alliances will turn the small vibrations of better allocation of resources into a pounding base beat, which will help energise all of society.
One can only hope that the parliamentary hearing of the crowdfunding act will also lead to Parliament enacting the fundraising act toppled during the term of the previous government. The arguments presented for opposing the law seem objectively strange—perhaps strong lobbying had something to do with it.
The fact of the matter is that crowdsourcing is something that needs to be harnessed not only in investing, but also in charity. Offering help to those in need should not be something requiring extensive authority processes. The threshold between those in need of aid and those in a position to offer it must be lowered.
New electronic distribution channels and operating models in both investing and charity are an opportunity, not a threat. The need for help is now stronger than ever due to the eroding tax base and migration.