The European Crowdfunding Network (ECN) has just published an Open Letter directed towards EU member states and the ongoing debate regarding pan-European crowdfunding rules. Proposed rules would impact, and perhaps improve, the marketplace for both debt and equity crowdfunding. The ECN believes the European Crowdfunding Service Provider proposal is a significant step in the right direction in creating a thriving sector of finance.
Pascal Ouvrard, International Development Director of online lender October (formerly Lendix), commented on the open letter:
“To sustain their development and finance the millions of small to medium size enterprises throughout Europe, the investment-based and loan-based platforms require a uniform set of rules over the 28 Member States. The best and quickest way to achieve this goal before EU Parliament election and enable a smooth transition for existing platforms, is an optional 29th regime. Aiming for minimum harmonisation will render the existing regulatory landscape even more complex.”
As CI has reported in the past, both the European Parliament and European Commission (EC) are engaged in a discussion about creating a single regulatory approach for online capital formation for securities.
Today, each EU member state enables investment crowdfunding based on national rules. This bespoke approach has created a fragmented regulatory ecosystem for Europe that stymies sector growth, access to capital, and innovation.
For platforms, the cost to operate in multiple member states rises due to associated compliance costs. These challenges thus impact issuers who could benefit from a streamlined regulatory approach and access to capital from all EU citizens without navigating local regulatory nuances and idiosyncrasies.
In August, the Econ Committee of the European Parliament published a well-received draft of legislation to improve access to capital for smaller firms. The draft was viewed by many as superior to what the Commission was then proposing. Parliament also included an increase to €8 million as the cap on crowdfunding – an amount that has already been adopted by several European countries.
Today, there is an expectation that Europe will create harmonized rules that will be enacted at some point in 2019. Beyond benefiting issuers, investors and platform, successful rules will directly align with the goal of the EU Capital Markets Union (CMU). An inability to accomplish a bright line task that is core to the EU would be a significant policy defeat for the Commission. Yet it is not a foregone conclusion that effective, pan European crowdfunding rules will win the day.
As ECN wrote this past October, they are aware of some discussion that would “change the structure of the regime created by the Regulation from that of a 29th regime to a minimum standards approach.”
If pursued, this would allow Member States to impose further rules or licence requirements on CSPs (or, indeed, project owners or investors) beyond what is contemplated by the Regulation. We would strongly oppose such a move. In order for the Regulation to be effective in its aims, it is essential that CSPs—many of whom are relatively small businesses—not be faced with the burdens of identifying and complying with different regulations in 28 separate Member States. It is essential, in our view, that the rules established by the Regulation represent a 29th regime (or else complete harmonisation), and not merely a set of minimum standards to which Member States can make additions. We, therefore, oppose these Amendments and any move away from a fully harmonised/29th regime.
The missive from ECN says the group fully supports the Commission’s goal of creating a pan-EU regime for crowdfunding platforms which can “significantly improve the financing situation of small and medium-sized enterprises (SMEs).” Access to capital for SMEs is vital for economic growth and more traditional sources of funding have fallen short of the goal.
The open letter states:
We strongly believe that a properly framed EU wide regulation would help to:
- Create a level playing field and allow European crowdfunding platforms to expand their support for SMEs across the Single Market;
- Make the EU market more accessible for innovative entrepreneurs, start-ups and small- and medium-sized companies;
- Give investors across the EU a wider range of choices in how they allocate their capital; and
serve the aim of the EU’s Capital Markets Union to promote non-bank financing as an alternative source of funding.
As it stands today, the “vast potential for cross-border capital flows has not been tapped.” In brief, Europe has missed a significant opportunity to boost innovation and entrepreneurship while the policy wheels grind slowly forward.
The ECN adds:
“The Commission and the Parliament’s ECON Committee have made significant steps forward in proposing rules tailored to the European crowdfunding market.”
It is now time to close the policy loop and enact harmonized rules.
Any shift to a minimum harmonisation approach would completely undermine any potential for a pan-European ecosystem that remains the dream for believers in the European single market.
Oliver Gajda, Executive Director of ECN, told CI that over the past years, they have worked closely with the Commission to provide a deep and relevant understanding of the specifics of the European crowdfunding sector. The EC has undertaken relevant research and outreach to have a good understanding of this young market and it has tried to propose a pan-European regime that will enable both, small and large players to grow their services organically in their target markets while ensuring a high level and customer protection.
Gajda explained that the European Parliament understands the difficulties deriving from the fragmented legal situation well – which has continuously been analyzed by the ECN Legal Working Group, led by Osborne Clarke, over the past five years. This has provided good and productive input to the EC proposal.
“The European Council is now threatening to sidestep this progress based on national concerns, which make sense for each of these markets, but will be counter-productive to the idea of a single European market as outlined in the Capital Market Union,” said Gajda. “We believe that with the EC proposal, to strike a balance between national regimes and a European alternative, is currently the only workable solution that will allow small and niche platforms to continue to seek growth without additional compliance burdens, while enabling others to expand their services cross-border. At all times, regulatory oversight and stringent customer protection rules would ensure that European small- and medium-sized businesses will be able to access another source of finance, while retail investors can engage in a meaningful and sustainable manner in their local or European economies.”
We hope Brussels is listening.
ECN open letter on legal framework ECSP_17Dec2018