The European crowdfunding industry is merging into a harmonized market – with major implications for how companies raise capital and investors access investment opportunities. The opportunities and challenges arising from this were also at the center of the ECN Crowdfunding Convention 2020 (ECN CrowdCon). This article gives you a detailed report of the 9th ECN CrowdCon.
ECN CrowdCon is organized annually by the European Crowdfunding Network (ECN) and is the most important conference for the European crowdfunding industry. The 9th ECN CrowdCon was all about the market trends of the European crowdfunding industry, the opportunities of the potential crypto asset regulation and the impact of the harmonized European regulation and its implementation in the individual member states.
This year, the ECN CrowdCon was held digitally due to the ongoing pandemic. Innovestment was also actively represented by our CEO Christin Friedrich, who is also Chair of the ECN Non-Executive Board and moderated the market trend panel on the first day. There were many exciting speakers and a fruitful discussion and exchange of best practices. In the following, we go into detail about the individual conference days.
Trends: The European Crowdfunding industry – Where do we stand and where are we going?
This year’s CrowdCon was opened on December 15th by ECN Chairman Oliver Gajda, who welcomed the speakers and presented the agenda for the following days. Afterward, Friedrich moderated the panel on market trends. The panel focused on the current state of the industry and possible future development. Invited panelists were:
- Armando Melone, Policy Officer at the European Commission.
- Jeff Lynn, Chairman of Seedrs
- Liza Aizupiete, Managing Director of Fintelum
- Matthias Klaes, Chief Scientific Officer at ECN
The panel began with a brief round of introductions. Jeff Lynn is the co-founder of Seedrs, a British platform specializing in equity financing. Since 2012, Seedrs, one of the pioneers in the industry, has been able to provide nearly one billion euros of capital in around 1,200 financing rounds for startups. Seedrs recently caused a stir in the industry when it announced a planned merger with competitor Crowdcube.
Liza Aizupiete then introduced herself. She is Managing Director of Fintelum, a crowdfunding platform where investors can also invest in companies using cryptocurrencies. Matthias Klaes was on board as Chief Scientific Officer of the ECN, representing academia. A professor at the University of Buckingham, he has published widely on issues of transaction costs, market governance, and innovation.
Armando Melone was present as a representative of the EU Commission. He is a policy officer in the EU Commission’s Directorate-General for Internal Markets, Industry, Entrepreneurship and SMEs and has been responsible, among other things, for developing strategies for alternative sources of financing, especially crowdfunding and venture capital, for more than five years.
The first key question was: how has the crowdfunding industry evolved in recent years? From Armando Melone’s point of view, the industry has broken free from its niche and has now become an important building block in corporate financing. Small and medium-sized enterprises (SMEs) would have better access to capital markets through crowdfunding.
“We have seen a lot in the last ten years. In the beginning, crowdfunding was seen as a small and unconsolidated market. Now it has grown into a coherent market, which became clear with the harmonization initiative. Now it has become a challenger to traditional funding. We are very happy with this development and are watching it closely,” Armando Melone.
The EU Commission is taking this development very seriously, he said. This is particularly evident in the recently adopted regulation, he said. The legislative package called “European Crowdfunding Service Provider” (ECSP) gives the industry uniform standards across Europe and will thus provide new impetus for growth, as platforms are now allowed to finance companies and address investors across Europe.
Jeff Lynn also saw the development of the industry as very positive overall. However, he went even one step further in his description of the current situation. Crowdfunding had not only developed into an alternative form of financing for companies but was even already “mainstream”.
Klaes underpinned the positive development of the industry with scientific facts. He showed that the growth of the European crowdfunding industry is now no longer driven by the UK alone, but that other countries are catching up. While three years ago the market share of British platforms was still 78 percent, today it is only 60 percent, as the share of continental Europe has almost doubled, he said. The Scandinavian countries, France, Germany and the Benelux countries were particularly decisive for this.
This immediately led those present to the next question: how can the industry develop in the future? All participants agreed that there was still a lot of work ahead for the industry. It is true that crowdfunding has succeeded in opening up an asset class that was previously only accessible to professional investors to a wider audience. But there is still a lot of untapped potential in the number of private investors in corporate financing.
9th ECN CrowdCon, Day 1, Trends – where do we stand and where are we going?
Close cooperation between legislators and industry representatives is essential to fully exploit this potential, the panel stressed. It is often difficult for young companies to innovate within the existing legislative framework, he said. Many legislators are too inflexible to quickly adapt the framework to changing circumstances. The ECN’s good cooperation with the European institutions in recent years has shown a new way forward here.
“We saw a change at the political level, a generational change that made it much easier to work with policy makers. Now there is a level of understanding of our online-based business models. Where it gets tricky is when the policymakers turn it over to oversight. I’m not so sure those departments have modernized in the same way. Sometimes they still fall back on their old ways,” Jeff Lynn
An important trend in the coming years could be secondary crowdfunding markets. There, the idea is, investors could trade their acquired company shares among themselves. For a long time, this was not possible and regulatory conditions were too restrictive. In the meantime, there have been attempts to replace secondary markets with simple forums, so-called “bulletin boards,” on crowdfunding sites. Many platforms themselves were initially skeptical about whether there would be enough interest on the buyer side for the shares. But there is now renewed optimism that a secondary market could also provide liquidity in crowdfunding:
It is generally accepted that secondary markets are important to provide liquidity to an illiquid market. But existing laws are there for a reason. To better link buyers and sellers in crowdfunding through a secondary market, there will be some sort of creative regulatory solution. But before that, the market will have to prove under ECSP that it can also generate corresponding transaction volumes.”
Aizupiete saw a possible way out of this impasse in crypto-based crowdfunding models. Tokenizing shares, she said, makes it easier to establish tradability. The Fintelum CEO sees no way around it, as the technology is available and investor demand is high:
“We live in a time when private investors are gaining more and more power. The banking system with a centralized stock exchange system is becoming less relevant and a decentralized peer-to-peer system is becoming more important. We see our role as giving investors the technical tools for this self-empowerment.”
All panelists are very hopeful about the future of the industry and are already looking forward to the growth that will be triggered by the new EU regulation and to crowdfunding becoming an important part of SME financing. Armando Melone was also “very optimistic about the future of the industry.” And Liza Aizupiete immediately gave the next big target: “Our future is bright. We want to be on par with venture capital at some point.”
MiCA: An new horizon for crypto assets – what does it offer to the crowdfunding industry?
The second panel of CrowdCon on December 16th was all about cryptocurrencies and the new EU regulation MiCA, which gave the industry the long-awaited legal framework. The panel was moderated by Ivona Skultetyova from ECN. Invited as panelists were:
- Weiß, Policy Officer at the German Federal Ministry of Finance.
- Nathan Kaiser, General Counsel at SIX Digital Exchange
- Michael Huertas, Co-Head of Financial Institutions Regulations at Dentons
- Greta Gaumert, Chief Compliance Officer of Exporo
The panel began by briefly introducing themselves. Hagen Weiß was there to represent the legislators. He works for the German Federal Ministry of Finance. He works there in the area of digital financing, payment services and cybersecurity and is, among other things, co-responsible for the development of a crypto regulation. Previously, he worked at the Federal Financial Supervisory Authority (BaFin) and gained experience as a lawyer.
Kaiser was present as a representative of the crypto industry. He works for SIX Digital Exchange, which wants to become the first fully regulated crypto provider. Gaumert works for the German crowdfunding platform Exporo and is responsible for compliance there. And finally, Huertas, a partner at the largest global business law firm Dentons, was also on board.
First, it was about the current state of the industry. Exporo, the largest crowdfunding platform in Germany focused on real estate, is now using the Ethereum blockchain to issue digital bonds. Greta Gaumert highlighted the advantages of this technology. She said that the settlement and trading of shares is faster and easier, there are fewer intermediaries, lower custody costs, and all in all, more efficiency for financial services. Michael Huertas also saw efficiency as the main driver of blockchain innovations in recent years.
“Faster, cheaper, better is simply not possible with the current structure. It’s an infrastructure problem. The private sector will pick up on this problem, I’m convinced of that. But the regulatory framework is also part of that infrastructure problem.”
Weiß picked up the ball representing the regulatory side. Crypto assets have presented lawmakers with a problem insofar as they have rendered existing regulation useless, he said. This has increased the pressure on authorities and ministries to adapt laws to the current market situation.
Huertas added that the crypto sector should not only be about “faster, better and cheaper”, but also about “safer”. In the past, there have been many cases of fraud in the sector. For this reason, regulation must also protect customers and provide a secure framework. The EU regulation “Markets in Crypto-Assets” (MiCA) must also be understood in this light. Essentially, the regulation stipulates that most crypto-assets are to be classified as securities and thus fall under the existing securities laws.
9th ECN CrowdCon, Day 2, MiCA: An new horizon for crypto assets
It is expected that MiCA will come into force around 2024, after further negotiations in Brussels. Although this would finally give the industry Europe-wide legal certainty, it also sets the regulatory hurdles very high. The German legislators were in charge of the drafting. However, Hagen Weiß assured the industry that the legislators were taking the issue seriously and were sympathetic to the industry. The fine line in regulation, he said, lies in enabling innovation and efficiency while ensuring consumer protection.
“We will protect the industry and consumers. We want to create a safe environment for the issuance of stable coins. Rest assured that both the German government and the EU government have the best intentions in this matter and do not intend to crush any market participants,” Hagen Weiß
There was much optimism for the future of the crypto industry. The crypto industry, he said, has given individuals access to new asset classes and made the market more efficient and cost-effective. The next step, he said, is to professionalize the industry, and EU regulation is an important building block for that. In a few years, it is hoped, cryptocurrencies and related investments will no longer be seen as a small and obscure part of the financial industry, but will increasingly enter the “mainstream.”
“There is one incontrovertible truth: crypto is too big to ignore.” Michael Huertas
From Brussels to national implementation – can the industry help ‘harmonisation’ to thrive?
The third day of CrowdCon on December 17th focused on the impact of the EU regulation “European Crowdfunding Service Provider” (ECSP). The regulation, which has now been adopted, will be implemented in member states from November 2021, with an optional one-year grace period for member states with existing crowdfunding regulations. The panel discussed the legislative text and discussed possible effects on the crowdfunding market. Pascal Ouvrard, International Development & HR Director from the French crowdfunding platform October and member of the ECSP working group in the ECN moderated the panel. Present as panelists were:
- Delphine Dirat, Head of Issuer Policy at the French financial regulator AMF.
- Diego Valiante, Senior Officer at the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA)
- Jeff Lynn, Chairman of Seedrs
- Umberto Piattelli, partner and head of financial services sector at Osborne Clarke
Valiente delivered the keynote address. He is Head of Financial Markets and Institutions at the Centre for European Policy Studies (CEPS) and the European Capital Markets Institute (ECMI). He is also a member of the Group of Economic Advisors (GEA) of the European Securities and Markets Authority (ESMA).
Valiente introduced ECSP and also explained how the long process to develop it took place. ECSP focuses explicitly on crowdinvesting and crowdlending, i.e. digital financing that uses fixed-rate loans or tradable securities. Payment processing and asset management, on the other hand, are not covered.
At the core of ECSP regulation is the harmonization of the EU market. In the future, European crowdfunding platforms will only need an ECSP license from their home country in order to be able to operate in the other EU countries. They will then be able to finance companies from other EU countries as well as address investors from these countries. In addition, a uniform level of financing is to apply from now on. In the future, platforms will be able to raise up to 5 million euros per year and project without a prospectus (by comparison, the current limit in Germany is 6 million euros).
9th ECN CrowdCon, Day 3, From Brussels to national implementation
ECSP also provides regulations for a limited secondary market. Accordingly, potential buyers and sellers may contact each other via the platforms, but the platforms may not offer a matching mechanism that brings the two sides together and results in the conclusion of a contract. In addition, ECSP contains various requirements on marketing communication, investor protection and reporting obligations of the companies. One important piece of information for existing platforms concerned registration under the new regulation. Since they are already registered with their respective regulatory authority, they will only have to submit some information once ECSP has been adopted in their country. A complete re-registration, on the other hand, is not necessary, Diego Valiente emphasized.
ECSP was not adopted by the EU Commission on its own, but in close exchange with representatives of the industry, supervisory authorities of the various countries and independent experts. These included Umberto Piattelli, an expert in financial market regulation and a partner at the commercial law firm Osborne Clarke in Italy. He advised the EU Commission on the drafting of the regulation that has now been adopted. Delphine Dirat from the French financial regulator AMF was also closely involved in the process.
It remains to be seen how the individual member states will implement ECSP in national law. Already, some conflicts with existing laws are emerging that require creative solutions. This puts a bit of a damper on the otherwise prevailing anticipation among platform operators. Jeff Lynn worries that implementation could mean the law doesn’t have the desired effect.
“On a theoretical level, we know that ECSP as a regulation trumps national regulation. But there are potential conflicts with existing national laws. So is ECSP exclusively applicable in such cases?”
Dirat tried to dispel these doubts. As she understands it, ECSP will supersede national legislation. While she also sees potential conflicts between national and European regulations, she believes that the details of accountability will become clearer in the coming months. A change in national laws is therefore inevitable, she said.
ECN CrowdCon offered all crowdfunding enthusiasts an exciting look behind the scenes. The panels featured top-class participants from both the industry and the most important regulatory authorities. Even if the content was partly very technical in nature – for example when it went into great detail about the current legal situation – the panels still offered exciting discussions and a well-founded outlook on future trends in the crowdfunding and crypto sector.
ECN CrowdCon once again underlined the importance of a constructive dialogue between legislators and market participants. The relationship between the industry and policymakers has grown a lot in the last years of activity at European and national level. Politicians have recognized the need for continuous exchange, as they do not have the market expertise.
It also sees the important role crowdfunding can play in providing capital for small and medium-sized enterprises (SMEs). In 2018, European crowdfunding platforms provided approximately €2.2 billion in capital to SMEs. As a result, policymakers have responded with great openness and support for the industry. It plays an important role in the EU Commission’s plans to further open SME access to financial markets.
The crowdfunding and crypto industries, in turn, are hoping for new growth impetus from the adopted EU regulations. The common denominator among all panelists was this: digital financial instruments – whether crowdfunding or cryptocurrencies – are leaving their niche as alternative forms of financing and are an increasingly important part of the financing landscape for small and medium-sized enterprises.
André Jasch is Head of Content at Innovestment, an ECN member and lending-based crowdfunding platform for sustainable and innovative companies based in Berlin/Germany. In 2016, he discovered his passion for crowdfunding and has been closely following the developments in the industry ever since.