The European Commission has published an Inception Impact Assessment that pitches a legislative proposal for an EU framework for crowdfunding including peer to peer lending. The initiative is accepting feedback from interested parties until November 27, 2017. The expectation is the Commission will create a framework that is supportive of the policy for a Capital Market Union the heart of the mission of the EC. Thjs new framework is expected by Q1 of 2018.
The problem, for Europe, is the fact that bespoke regulatory regimes have cropped up across member states. This fragmented approach has created unecessary hurdles for firms seeking either debt or equity capital.
Referencing heavily the research completed by the Cambridge Centre for Alternative Finance, the Commission notes that crowdfunding has grown rapidly across Europe but in recent years this growth has slowed.
“Since 2014 it grew by 92% to reach a value of €5.4 billion in 2015.4 From a global perspective, this compares with a total online alternative finance volume for the Asia-Pacific region (mostly China) of €94.6 billion and for the Americas (mostly the US) of €33.6 billion.”
Debt based crowdfunding or peer to peer lending (marketplace lending) is by far the dominant vertical in this form of digital finance. Equity based crowdfunding is important for startups and can fill the gap between friends and family and a potential Angel/VC round. Market fragmentation has hobbled growth as it is difficult for issuers to scale across Europe.
According to the iniative, a recent survey indicates that for almost half of the platforms none of the funds came from foreign investors. Additionally, over 3/4s of the platforms indicated that they had raised less than 10% from foreign investors. This fact highlights a shortcoming within the European Union. Disparate regulations and added transaction costs undermine the potential.
Another challenge, according to the proposal, is the “perceived lack of reliability” of crowdfunding and peer to peer lending platforms. Disclosure requirements, that vary dramatically or are simply missing, may be needed.
Overall, the main policy objectives are as follows:
- Enable platforms to scale cross-border: creating the required conditions such as licensing regimes that can be used across the EU without requiring further authorization in each EU country. This would facilitate the attraction of a critical mass of investors and fundraisers across the EU, and reduce the transaction costs;
- Provide platforms with a proportionate and effective risk management framework: cross-border activity requires a high level of trust. The aim is to ensure that the rules for crowdfunding platforms – notably conduct of business, fit and proper, risk management, due diligence and information disclosures – are geared towards the proper management of platforms and the protection of fund providers, including through appropriate disclosure and explanation of the related risks. Trust will also be strengthened by safeguarding the integrity of the sector by developing approaches to address key risks such as data protection, illicit use and cybersecurity.
The document provides for four different options but in the end, the 3rd and the 4th options are the ones that will have any meaningful impact. One option seeks to create a comprehensive EU approach treating crowdfunding platforms like regulated trading firms. The other option creates a stand alone EU framework for platforms to opt into a cross border framework while adhering to their national rules. In the end, the devil will be in the details but a single regime, regardless of location that empowers platforms to operate cross border would be the best.
The Commission seeks to enable crowdfunding activity to grow making it easier for start-ups, scale-ups and other SMEs to access finance across Europe.