Eurocrowd, the leading advocacy group for the securities crowdfunding market in Europe, has distributed an email describing the market as “under pressure.”
Several years ago, Eurocrowd helped craft the pan-European rules that eliminated national barriers for firms and investors to participate in the sector of online capital formation. ECSPR, or European Crowdfunding Service Providers regulation, was positioned as a game changer for the consolidated EU market and as the catalyst for the sector’s boom. Issuers could raise up to €5 million from investors in any EU member state.
Today, according to Eurocrowd, the market is moribund as harmonization has not delivered the boost anticipated.
“While the regulation has delivered on its goal of creating a harmonized single market for crowdfunding across EU member states, the transition has also exposed structural weaknesses in the sector, and new challenges are emerging,” explains the group.
Under ECSPR, a platform must apply to the relevant authority in its member state to be approved to issue securities online. This unearthed disparities between member states, as each regulator handled the requirement differently.
Eurocrowd explains that instead of streamlining cross-border funding and improving retail participation, the “harmonization effort has proved more complex.”
Germany, the largest economy in the EU, is a prime example of applying regulatory scrutiny to the degree that some platforms simply decided not to participate in the ECSPR regime.
However, Germany is not alone, according to Eurocrowd, as regulatory compliance under ECSPR has been difficult for previously compliant firms.
“The requirements—from fit-and-proper assessments to detailed investor protection rules—have added layers of operational and legal complexity that many market actors underestimated. Several platforms, big and small, have quietly withdrawn from certain national markets, frozen cross-border activity, or exited the business altogether.”
New rules can lead to additional costs that, when applied to a nascent sector of industry, can undermine development.
These new barriers, along with “missing tax incentives” and “co-financing from institutions,” have harmed the European investment crowdfunding business. Platforms are facing “sustainability issues.” Otherwise, they continue to lose money.
New regulations, such as the new EU Anti-money Laundering rules, could increase the burden on platforms that are struggling to survive.
Eurocrowd shares:
“Behind the scenes, ecosystem confidence is also affected. Partnerships between platforms, fund managers, and institutional capital sources are not yet as common or robust as hoped. Questions about the long-term viability remain quietly but persistently raised across the sector. The German case clearly highlights the reluctance to fully embrace ECSPR’s strict compliance when cheaper, unregulated “alternatives” are available.”
Eurocrowd mentions France, a market that has seen the most platforms approved under ECSPR. As has been recently reported, investment crowdfunding has declined in recent years, an event that could foreshadow problems for the broader market.
“As France is the largest EU market for ECSPR, the lack of growth and stability in its ecosystem, alongside the lack of cross-border activity, could signal broader trends.”
Still, the French securities crowdfunding market is fairly large, and the last several years of economic challenges, which saw venture funding retreat across the board, should not be ignored.
Eurocrowd does not believe all is lost, describing investment crowdfunding as a “highly viable option for startups” that, given the correct environment, will be able to scale and provide needed risk capital for the private securities market.
CI has always maintained that for the sector to survive and thrive, issuers must be able to raise the capital they need, platforms must be profitable, and investors must see a good return on their investments (on a portfolio basis). If one of these foundations fails, the premise collapses.
Mario Draghi, previously the head of the European Central Bank (ECB), issued a report last year warning that Europe was “falling behind” to the degree it was giving him “nightmares.” He called for “radical change” and a strong role for the private sector in supporting innovation and entrepreneurship.
“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions,” states the report.
Given the right policies, online capital formation can be a powerful variable in supporting a more innovation-driven European economy. But this would require new policies that support risk-taking by the public and acknowledge that regulations must be suitable for young, smaller firms unable to shoulder the cost that a larger institution can.
Eurcrowdf believes ECSPR is a powerful tool, but the “ecosystem around it is under pressure.” The growing burden and cost of compliance are undermining the sector.
Eurocrowd states:
“The regulatory foundation is in place, but the business case for crowdfunding under ECSPR still needs to be proven. The path forward will require resilience, creativity, and collaboration across the European ecosystem, along with strong deal flow, retail investor interest, and, of course, returns.”