For some years now, crowdfunding has provided a new form of financing for SMEs, start-ups and not-for-profit projects. The European Parliament, in its resolution on the 9th of July 2015 on building a Capital Market Union underlined the importance of crowdfunding “CMU should create an appropriate regulatory environment that enhances cross-border access to information on the companies looking for credit, quasi-equity and equity structures, in order to promote growth of non-bank financing models, including crowdfunding and peer-to-peer lending”.
Crowdfunding can be defined as an open call for “the collecting of resources (funds, tangible goods, time) from the population at a large through an Internet platform. In return for their contribution, the crowd receive a number of tangibles or intangibles, which depend on the type of crowdfunding”. It generally takes place on crowdfunding platforms which link fundraisers to funders.
Massolution (Consulting agency) has developed a classification used by the EC which distinguishes 4 categories of campaigns: donation-based (no reward receives for the contribution), reward-based (people receive goods or services in exchange), lending-based (contributors receive interest payments) and equity-based (people receive share in the venture).
Crowdfunding has its pros and cons. It allows project owners to keep greater control over their projects than if they were seeking financial support from banks or venture capitalists. It also ensures that financialthat financial risk is spread among a large number of people. However, crowdfunding also involves higher costs in terms of capital since platforms collect around 10% of the capital raised and charge additional fees. Project owners might also lack skills to run a crowdfunding campaign and in the case of equity-based crowdfunding, project owners might lack expertise in banking and might fail to set an appropriate price for the shares in their venture.
The report from the European Parliament published the “State of play of crowdfunding” in January 2017 underlining the risks for investors: crowdfunding carries uncertainty since the investors’ decisions are not based on financial data and may be influenced by emotions. Investors may face fraud, incompetence and mis-calibration from the project owner. In the case of equity-based crowdfunding, the main risk is a lack of an efficient secondary market where equity-based investors could re-sell their shares.
According to a report from the Commission “Crowdfunding: Mapping EU markets and events study” published in 2015, crowdfunding projects were ongoing in every EU Member State, with a total of euro 2.3 billion euros raised for 206 908 projects, but the 5 largest markets by total amounts raised were in UK, France, Germany, Italy and the Netherlands.
The report from the Parliament shows that crowdfunding develops at national level, which could be a good thing but on the other hand may hamper the opportunity for cross border activity. Since the phenomenon is largely a national one, the report concludes that EU regulation is not needed. However, since crowdfunding could become a key source of financing, the European Commission will maintain a dialogue with European supervisory authorities, Member States’ regulators and key players in this field to follow the development of crowdfunding.
Read European Crowdfunding Network article here
Read the Report from the European Parliament “State of play of Crowdfunding” here