All business crowdfunding platforms wishing to operate within the European Union (EU) must now comply with a new regulatory framework at EU level which brings a single set of rules to the block.
Crowdfunding platforms that had previously been given the green light to operate had until now been authorized under the new rules. Before these updated regulations, a fragmented regulatory landscape meant that companies had to go through each EU component country to get approval, hindering any crowdfunding effort that wanted to operate across borders.
The many forms of crowdfunding
For context, crowdfunding comes in many forms, including “rewards-based” platforms like Kickstarter, which can be used to raise funding for new products. “donation-based,” which can be used for charitable purposes; “equity-based,” which is used by companies seeking to raise capital; and “borrowing-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 a myriad of sources. However, different countries have different rules, and different kinds of crowdfunding (e.g. equity-based, loan-based) are often treated differently in terms of the regulations that apply — and that brings all kinds of complexity to an industry based on largely in an international medium (the internet) to operate.
This was most evident in the EU, which historically regulates crowdfunding platforms at the local country level, making cross-border crowdfunding campaigns more difficult due to the fact that each platform would require regulatory approval for each country in which they wish to operate. .
And this, essentially, is what the European Regulation of Crowdfunding Service Providers (ECSPR) for businesses seeking to address — combines disparate and distorted rules together into a single framework which all business-centric crowdfunding platforms must adhere to. One mandate to rule them all is the general idea, with fewer barriers to operating in all 27 EU states. And for investors, it means they only have to worry about a single framework of protection.
“For many years, one of the biggest obstacles facing crowdfunding platforms seeking to offer their services cross-border has been the divergent licensing requirements and the lack of common rules across the European Union,” the European Commission notes. “This resulted in high compliance and operational costs, which prevented crowdfunding platforms from effectively scaling their service delivery. As a result, small businesses had fewer financing opportunities available to them and investors had fewer options and faced more uncertainty when making cross-border investments.”
While crowdfunding platforms still need to be registered through a national body that will remain responsible for regulatory oversight, once approved they can now operate effectively across the EU.
However, there are some limits. Private businesses in the EU can raise up to €5 million from private investors (i.e. non-professionals such as consumers) under the new regulations in a single offering, although this amount can be increased up to €13 million for crowdfunding platforms that licensed in both UK and EU (€8m from UK investors and €5m from EU investors).
Professional “sophisticated” investors are exempt from these limits.
Consultation
The initial consultation seeking to tackle the EU’s fragmented crowdfunding market has launched in 2013and through several iterations it was finally done approved in 2020 before it is “implemented” the following year. However, a notable aspect 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 and debt-based business crowdfunding.
Companies previously granted a country-by-country license had to reapply under the new EU-wide regulatory framework by November 10 last year, but that period was expanded by one year to give companies more time to transition without affecting their existing operations. And that deadline ends today.
San Francisco-based Wefunder expanded into the EU in February after being licensed under the new regulations. And the UK’s Crowdcube was one of the first equity-based crowdfunding platforms to received ECSPR license last yearhelping the company grow beyond its existing markets in the UK and Spain, having opened a French office pending authorization last April.
Crowdcube co-CEO Matt Cooper said the company’s lack of European expansion so far was due to the burdensome and fragmented regulations in place, noting that the rule changes also mean good news for businesses seeking capital in a climate that has see VC investment defer.
“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 possibilities for companies across the EU to raise capital from their community of users and private investors. The rules have created a significant first-mover advantage for Crowdcube, allowing us to scale our business more quickly and efficiently across many European markets.”
