Current rules for the supervision of crowdfunding platforms in the EU

In recent years, crowdfunding has gained widespread traction globally, including within the European Union. Consequently, the European Commission (hereinafter “the Commission”) has formulated a regulatory framework aimed at governing crowdfunding activities within the EU.

In many instances, establishing a crowdfunding platform within the EU does not necessitate the development of a Prospectus. This exemption particularly applies to crowdfunding models involving donations or pre-sale of goods or services, such as crowdsourcing or crowdlending.

However, should the platform offer investors the opportunity to acquire shares in a company or other securities, adherence to EU securities and crowdfunding regulations may mandate the development of a Prospectus. Under such circumstances, regulatory oversight of crowdfunding service providers across EU member states will be more stringent to ensure investor protection and compliance with financial standards.

Subsequently, we shall examine the prevailing legislative framework applicable to individuals contemplating the launch of a crowdfunding platform in Europe.

Understanding crowdfunding: definition and operational characteristics

Crowdfunding represents an innovative approach to raising financial resources to bolster projects and business ventures through online platforms. It affords both startups and burgeoning enterprises access to additional funding streams in the form of contributions from a broad spectrum of investors.

Through online crowdfunding platforms, entities secure financial backing and cultivate a network of stakeholders predisposed to endorsing the project concept and making contributions. This facilitates fundraising and fosters an engaged community poised to sustain long-term support for the project.

The primary objective behind establishing crowdfunding platforms within the EU and other jurisdictions is to foster secure and efficient engagement among participants. Typically, platforms levy a commission on successful fundraisers, constituting their revenue stream for service provision. Various types of crowdfunding exist, each tailored to specific project types and target demographics.

Types of crowdfunding and their descriptions

Peer-to-Peer Lending

Peer-to-peer lending entails a mechanism wherein a collective of individuals extends financial backing to a company or project under the agreement that the funds will be repaid with a stipulated additional amount in the form of interest.

This model bears resemblance to traditional bank lending, albeit differing in that the borrower secures funds not from a singular bank entity but from multiple investors. Such an approach serves to distribute risk among participants, thereby enhancing the sustainability and efficiency of financing.

Equity Crowdfunding

Equity crowdfunding constitutes a form of investment solicitation wherein a company offers partial ownership of its business to a broad spectrum of investors in exchange for financial support. Grounded on the principles of collective financing, this method enables numerous individuals to invest their capital in a shared project.

Reward-Based Crowdfunding

Reward-based crowdfunding operates on the premise wherein individuals contribute to a project or business and, in return, receive non-financial incentives. These incentives may manifest as goods, services, or other benefits provided to patrons at subsequent stages of the project.

This approach facilitates fundraising and engenders an engaged community invested in the success of the project or business. Furthermore, it fosters closer ties between creators and investors, effectively transforming the latter into partners in the project's realization.

Donation-Based Crowdfunding

Donation-based crowdfunding involves the pooling of small sums of money to support a collective goal, typically funding a specific charity or community project. Unlike conventional investments, participants in crowdfunding ventures do not anticipate financial or material returns. Instead, they are motivated by a desire to contribute to meaningful initiatives with the potential to positively impact society.

In Europe, registering a company for crowdfunding utilizing a donation-based model is becoming increasingly popular for financing a spectrum of socially oriented projects, ranging from aiding the less fortunate to backing innovation and research endeavours.

Debt Securities Crowdfunding

In debt securities crowdfunding, investors extend borrowed funds to a company in exchange for a commitment to receive a predetermined return in the form of interest or repayment of the loan upon maturity. This approach facilitates both investors and companies in accessing financing without resorting to bank loans.

Hybrid Models

Hybrid models afford the flexibility to amalgamate elements from multiple crowdfunding types, offering a bespoke approach to fundraising.

Selecting a specific strategy necessitates meticulous deliberation and planning. In this vein, engaging a proficient specialist possessing a profound understanding of the legal intricacies surrounding the operation and regulation of crowdfunding platforms within the EU is imperative.

Such an expert is equipped to furnish adept legal guidance throughout the process of venturing into crowdfunding platforms, ensuring adherence to all pertinent regulations, both at the pan-European level and within individual members.

Legislative framework

The establishment of a crowdfunding platform in Europe can significantly bolster the advancement of SMBs. Crowdfunding serves as a remedy for SMEs grappling with limited access to finance, a prevalent issue even in member states where overall access to bank finance has remained stable amidst financial crises.

To initiate a crowdfunding platform in Europe, adherence to the ECSP and MiFID II directives is imperative. Below, we present the highlighted essentials of both regulatory frameworks.

As we outline, the ECSP regulation establishes consistent standards across the EU for rendering crowdfunding services pertaining to investment and lending in the realm of business finance. This regulation facilitates the submission of EU passport applications by platforms, streamlining service provision across the EU under a singular approval authority.

The Regulation on crowdfunding activities aims to establish a cohesive framework that mitigates disparities inherent in national regulations governing crowdfunding service providers. The Regulation, under Article 1, introduces unified requirements and criteria applicable to potential crowdfunding projects.

Scope of application

The Regulation applies solely to crowdfunding projects, with price offers capped at five million euros over a twelve-month period per project owner. Projects exceeding this threshold fall under the purview of MiFID II/MiFIR and the Prospectus Regulations. This delineates the Regulation's scope, aligning with the proliferation of crowdfunding among SMBs.

Establishment of a single authorization process, with ESMA facilitating coordination among national competent authorities.

ESMA is endowed with supervisory powers, procedural rule development, fine imposition, and administrative sanction enforcement, ensuring compliance and investor protection across the EU.

Licensing of crowdfunding platforms

The establishment of a crowdfunding platform necessitates obtaining a permit in accordance with the Regulations of the European Parliament and of the Council. This regulation, like all other European laws, rigorously governs all facets of activities within this financial sphere. Nonetheless, it presents substantial advantages for European entrepreneurs. By levying a certain percentage on each entrepreneurial initiative, consistent income is assured, mitigating financial risk. Moreover, as of 2024, all platforms are mandated to:

• Obtain appropriate permission to legally offer services in the EU.
• Demonstrate compliance with criteria such as stability, risk management, and anti-fraud measures.
• Contribute to the standardization of the collective investment market in the EU.

Licensing of crowdfunding platforms is pivotal in regulating the sector in the EU, ensuring a high level of protection for all participants while fostering trust and stability in the crowdfunding domain.

Assistance in documentation preparing

Assistance in acquiring the necessary permitting documentation is readily available to those seeking to establish their own crowdfunding platform. Engaging professionals in this field is advisable to mitigate the risk of errors during documentation preparation and legal entity establishment in the European Union. Every mistake carries significant financial implications, underscoring the urgency of proactive action to launch a fundraising business.

Process of obtaining a crowdfunding licence

Navigating the process of obtaining permissions for community financing involves a structured sequence of steps. It begins with familiarizing oneself with the complex array of regulations at both local and national levels, given the wide variation among jurisdictions. Potential obligations may include entity registration with regulatory authorities or compliance with specific financial disclosure requirements. Understanding the obligations associated with fundraising is imperative, including the mandated use of funds for their intended purpose and transparent provision of information to investors.

Leading crowdfunding platform

Kickstarter emerges as the primary European hub for collective funding, boasting a broad user base and facilitating financial support for innovative endeavours across various domains.

Conclusion

1. The legal regulation structure of crowdfunding in the EU lacks uniform interpretation, primarily regulated by the Regulations alongside other acts. Consequently, characterizing the Regulations as universally regulating remains untenable.
2. Recognizing the cross-border nature of crowdfunding activities, the Regulation introduces fundamental rules to mitigate discrepancies among national crowdfunding regimes of member countries.
3. Crowdfunding service providers are not prohibited from engaging in other regulated activities, such as investment companies, provided the applicable rules are permissive, and the provider holds appropriate permits.
4. The Regulations do not annul directives concerning crowdfunding activities but acknowledge their extension to relations within crowdfunding activities.
5. A systematic analysis of the Regulation's provisions reveals several regulatory regimes at the EU level, including national norms, directives, and Regulations.
6. The Regulation's structure delineates general operating principles applicable to all crowdfunding platforms, alongside specific rules for investment-based and lending-based crowdfunding. However, not all crowdfunding types fall under Regulation's purview, such as donations, rewards, and consumer loans.
7. Owners of crowdfunding platforms, established before or after Regulation adoption, must ensure compliance with Regulation requirements.
8. The Regulations aim not to establish universal standards for crowdfunding activities but propose mandatory standards for crowdfunding platforms and owners. However, these provisions apply solely to investment and lending-based crowdfunding platforms.