Capital Markets Union: Council Adopts New Rules for Crowdfunding Platforms
New measures regarding crowdfunding have been recently adopted by the European Parliament. The new framework is part of the capital markets union’s project which aims at providing an easier access to new financing sources.
The European legal framework lacked specific legislative provisions unanimously applicable within all Member States. Therefore, diverging legislation across the EU crowdfunding was mainly conducted on the basis of national legislation leading to non-operational cross-border processes.
What is crowdfunding?
Crowdfunding is an emerging alternative form of financing that connects, typically via the Internet, those who can give, lend or invest money directly with those who need financing for a specific project. It offers an alternative and innovative funding source to traditional business finance opportunities, such as bank lending, which is most of the times expensive or difficult to access by different categories of young entrepreneurs.
According to the European Commission, crowdfunding is still small but growing fast in Europe. Based on available data, approximately €4.2 billion was successfully raised through crowdfunding platforms in 2015 in the EU, compared with €1.6 billion in 2014. In 2015, €4.1 billion was raised through crowdfunding models that entail a possible financial return for those contributing the funds – for example, through equity investments or loans.
Offering an easier access to funding is one of the main advantages provided by crowdfunding. Moreover, such platforms act as intermediaries between investors and businesses and facilitate the matching process of supply and demand of funds.
As a financial technology solution that provides small and medium-sized enterprises (SMEs) and, in particular, start-ups and scale-ups, with alternative access to finance, it contributes to a more diversified financial system that is less dependent on bank finance. More important, it is a chance for young enterprises to develop and thrive, in their early stages of business.
On the other side, crowdfunding platforms also allow investors to easily identify and support projects they are interested in.
Principles proposed by the new European legislation
Investing through crowdfunding carries a series of risks such as failure, fraud, doubtful returns, or making decisions based on misleading images of the project, influenced by subjective criteria. The newly adopted rules provide a high level of investor protection and demand that crowdfunding service providers give clients clear information about the potential financial risks of each project.
This new set of rules seeks to secure the commercial circuit by imposing a prerequisite for such service providers. The framework defines common authorization and supervision rules for national competent authorities.
The new rules for European crowdfunding service providers will apply one year following their publication. Supporting innovative ways of connecting savings to growth and diversifying the funding sources for European businesses is crucial to improving growth and job creation in Europe.