All corporate crowdfunding platforms wishing to operate within the European Union (EU) must now comply with a new regulatory framework at EU level which brings a uniform set of rules to the block.
Crowdfunding platforms that had previously received the green light to operate had until today to receive authorization under the new rules. Prior to these updated regulations, a fragmented regulatory landscape meant companies had to go through each EU constituent country to gain approval, crippling any crowdfunding initiatives seeking to operate across borders.
The many forms of crowdfunding
For context, crowdfunding comes in many forms, including “reward-based” platforms like Kickstarter, which can be used to raise funding for new products; “donation-based,” which could be used for charitable causes; “equity-based,” used by companies seeking to raise funds; and “loan-based,” which businesses (or individuals) could use to borrow money.
Crowdfunding is basically an alternative to more traditional fundraising methods offered by banks or institutional investors, allowing anyone to raise small amounts of cash from countless sources. However, different countries have different rules, while different types of crowdfunding (e.g. equity-based or loan-based) are often treated differently in terms of which regulations apply, and this brings all sorts of problems. complexity to an industry that depends largely on an international agreement. medium (Internet) to function.
This has been most evident in the EU, which has historically regulated crowdfunding platforms at the local country level, making it more complicated for cross-border crowdfunding campaigns due to the fact that each platform would require regulatory approval for each country in the one they want to operate. .
And that, indeed, is what European Regulation on Crowdfunding Service Providers (ECSPR) that companies seek to address: it combines disparate and isolated rules into a single framework that all business-focused crowdfunding platforms must comply. The general idea is a license to rule them all, with fewer obstacles to operating in the 27 EU states. And for investors, it means they only have to worry about a single protection framework.
“For many years, one of the biggest obstacles faced by crowdfunding platforms trying to offer their services across borders has been the divergence in licensing requirements and the lack of common standards across the European Union. “said the European Commission. grades. “This has resulted in high operational and compliance costs, preventing crowdfunding platforms from efficiently scaling the provision of their services. “As a result, small businesses had fewer financing opportunities available and investors had fewer options and faced more uncertainty when investing abroad.”
While crowdfunding platforms still need to register through a national body that will remain responsible for regulatory oversight, once they receive approval they can now operate effectively across the EU.
However, there are some limits. Private EU companies can raise up to €5 million from retail investors (i.e. non-professionals, such as consumers) under the new regulations in a single offering, although this figure can rise to up to €13 million for funding platforms. collective licensed in both the UK and EU (€8 million from UK investors and €5 million from EU investors).
“Sophisticated” professional investors are exempt from these limits.
Consultation
Initial consultation aimed at addressing the EU’s fragmented crowdfunding market has begun in 2013and through several iterations it was finally adopted in 2020 before being “applied” to the following year. However, one notable facet of the regulations that were ultimately passed was the omission of consumer-focused crowdfunding. Peer-to-peer (P2P) lending, donations, or Kickstarter-style reward-based projects are not covered by these new regulations; They focus entirely on equity-based crowdfunding and business loans.
Companies that had previously received authorization to operate on a country-by-country basis had to re-apply under the new regulatory framework at EU level by November 10 last year, however this period was extended for one year to give companies more time to transition without affecting their existing business. And that deadline expires today.
San Francisco-based Wefunder expanded into the EU in February after gaining authorization through new regulations. And UK’s Crowdcube was one of the first equity-based crowdfunding platforms in receive ECSPR authorization last yearhelping the company grow beyond its existing markets in the UK and Spain, having launched an office in France in anticipation of its licensing last April.
Crowdcube co-CEO Matt Cooper said the company’s lack of European expansion so far was due to the onerous and fragmented regulations that existed, and noted that the rule changes also mean good news for companies seeking capital. in a climate that has seen venture capital investments. stall.
“In today’s market, the opportunity for founders to put a significant amount of cash on their balance sheet under these new rules is incredibly attractive,” Cooper told TechCrunch. “The changes have unlocked huge potential for companies across the EU to raise capital from their community of users and retail investors. The rules have created a significant advantage for Crowdcube, allowing us to scale our operations more quickly and efficiently across multiple European markets.”
