Several years ago, the European Union enacted harmonized securities crowdfunding rules aimed at removing existing barriers to online capital formation. While heralded at the time, the reality of the new regulations has revealed a disparity among member states in their compliance with the rules. In what should have been anticipated, each member state has taken a different approach in enabling online capital formation, thus creating a new type of fragmentation for the industry.
Under the European Crowdfunding Service Provider regulation (ECSPR), a platform must apply to the relevant authority in a member state to be approved for allowing the sale of securities online. This leads to differences in compliance between member states.
EuroCrowd, a European advocacy group that played a key role in securing pan-European rules, recently published a report on the ecosystem, reviewing over 200 platforms approved under ECSPR. According to their findings, there is “wide variation in compliance” and only “25% of platforms demonstrated strong adherence to ECSPR and transparency. Their key performance indicator (KPI) utilized in the report stated that only three platforms received an excellent rating, while 29 platforms were deemed to be “at risk.” The report does not share individual platform ratings but EuroCrowd says detailed information is being made available to regulators.
The report highlights “Six Areas of Concern,” including:
- Regulator disclosure and missing or inconsistent information about licensing and oversight
- Governance transparency challenges, as most platforms fail to disclose leadership backgrounds or governance structures
- Due diligence processes are frequently vague or undisclosed
- Financial reporting is lacking in regard to funds raised, defaults, and investor returns
- Platforms provide limited onboarding investor education and explanation of risk
- Complaint and conflict handling fall short and are difficult to access
EuroCrowd is clearly supportive of online capital formation that enables early-stage firms to raise the funding they need while allowing investors access to the investment class. Yet the group states that poor platform performance undermines investor trust and weakens Europe’s ability to raise private capital to support innovative firms. EuroCrowd also worries that a failure to adhere and enforce current ECSPR rules will lead to stricter enforcement and political withdrawal.
To quote the report:
“While some platforms lead in transparency and governance, a considerable portion continues to operate in opacity, presenting significant risks to both investors and the broader financial ecosystem.”
The industry is described as being in “transition” as highlighted in the “sobering” report. While high-scoring platforms show that it is possible to deliver a quality service, almost 40% of the platforms are failing to meet minimum transparency and operational standards.
As this publication has consistently stated, to be successful, investment crowdfunding must support the three constituent participants in the process. Issuers must be able to raise the funding they need to execute on their vision, platforms must be sustainable (ie, profitable), and investors must generate a return on their investments. Transparency, including platform performance for investors, is key for the industry to survive and thrive. The EuroCrowd report should be viewed as a call to action in Europe and a lesson for participants in other jurisdictions.
The report is available here.