The European Commission recently released its report on the state of the crowdfunding industry in the EU, underscoring that startups are “crucial to the future of jobs and economic growth in Europe”. To foster the financing of these innovative companies that the Commission considers crucial to a healthy European economy, it has created the Capital Markets Union Action Plan. The “Plan” at its core aims to broaden access to sources of alternative finance, given countries, even those whose economies remained stable following the global financial crisis, nonetheless struggle to finance young and innovative firms.
We’ll step you through the key tenets of the Plan’s process to promote equity crowdfunding, as well its findings on the crowdfunding industry in the EU today.
How does the European Commission describe crowdfunding?
The positive terms used to outline the benefits of crowdfunding are distinctive, recognising its importance as a non-bank financier supporting job creation, growth and competition. The report acknowledges that in 2015, over €4 billion was raised using these platforms, and owing to the relative youth of the industry, a great deal of innovation is matching these projects, as the fintech sector continues to attract increased regulatory attention. The Capital Markets Union Green Paper was followed by calls from many member nations for some form of intervention at an EU level, to introduce a harmonised regime for the industry within member states.
“By providing an online marketplace to match investors and investees or lenders and borrowers, investment-based and lending-based crowdfunding can bring more competition into retail and capital markets”
– The EUC Report on Crowdfunding in the EU Capital Markets Union.
What has the EU done to foster access to crowdfunding platforms?
On 19 January 2016, the European Parliament passed a resolution, to promote equity crowdfunding platforms, “giving priority to their cross-border dimension and ensuring the reduction of market entry barriers”. It endorses the Commission’s ability to recognise crowdfunding as one of the latest technological innovations with the ability to transform the financial markets. Such resolutions are geared towards educating governments, and the Commission itself, on the broad capabilities of the fintech sector.
In addition, the Commission has established the European Crowdfunding Stakeholder Forum, an expert group of representatives of stakeholder groups and national authorities. The group is aimed at raising awareness of best practice crowdfunding, and the key methods of allowing the industry to flourish. The Forum held that there were three key tenets to allowing crowdfunding to succeed within the EU: clarify the applicability of existing EU law, encourage self-regulation at a national and EU level, and create a voluntary transparency label.
The Commission has also launched a study by Ernst and Young to map the crowdfunding market over a two-year period, analysing market trends before and after national legislative interventions. This, and similar studies funded by the Commission, are indicative of the goodwill and faith its behalf to establish guiding principles and best practice for the industry that will ensure its proliferation and success. It has also published a guide on Crowdfunding for SMEs, in 23 different languages.
What are the barriers to equity crowdfunding platforms in the EU?
Despite the amount of goodwill and promotion of crowdfunding on behalf of a collaborative EU Parliament, domestic governments nonetheless continue to pass bespoke legislation that stymies the proliferation and improvement of market access in their respective countries.
In some instances, this regulation is positive, and aimed at reducing the risks involved with equity crowdfunding platforms by issuing licences or Markets in Financial Instruments Directives (MiFIDs) to platforms wishing to practice. These platforms are then able to operate in a cross-border context under a good faith basis.
Nonetheless, certain countries do not allow this, irrespective of whether the platform has an MiFID or not, and such divergences in the approaches of Member States is unhelpful to the function of crowdfunding platforms.
Looking forward, however, the Plan notes that increased institutionalisation of the industry will occur, together with a more stringent regulatory framework, the combination of which will eliminate present concerns around the industry and boost its stature.
Ultimately, the EU Commission’s focus on crowdfunding is heartening, as it supports its growing, but nonetheless complication, position within its financial markets. Described as “one of the many technological innovations that have the potential to transform the financial system”, continued research by the EU Commission, combined with broad-base, cohesive regulation, will assist in the continued growth and success of the industry.