EU Moves To Regulate Crowdfunding

Financial regulators are getting ready to crack down on crowdfunding platforms across Europe.

New guidance has been published aimed at aligning crowdfunding rules throughout the European Union.

The documents also highlight what regulators in each country need to do to make sure cowboy crowdfunding platforms play to the same rules as the rest of the industry.

The European Securities and Markets Authority (ESMA) argues action is needed because current rules encourage crowdfunding platforms to adopt business models that fall outside regulation.

ESMA feels unregulated crowdfunding discourages investors and puts their money at risk, while these factors also stop businesses and investors from looking to crowdfunders to finance their businesses.

New rules needed

Steven Maijoor, who chairs ESMA, said: “The intention is not to restrict or throttle crowdfunding as a financial resource for businesses, but to make sure the sector runs smoothly because investors across the EU will understand and expect a uniform set of rules to apply to working with crowdfunders.

“The best way to do this is to urge crowdfunding platforms to work with regulators instead of finding ways to work around the rules.”

ESMA has told regulators that no one-size-fits-all rules apply to crowdfunding due to the different business models and the businesses should be reviewed to identify how they work and then the appropriate EU directives should be applied.

Crowdfunding embraces several types of investment, including:

• Reward for cash – anything from a mention on a web site to T-shirts, coffee mugs and other gifts in return for money
• Equity stakes – Cash for shares, which in the UK can be twinned with generous tax incentives under the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS)
• Debt funding – Borrowing cash from peer-to-peer lenders at cheaper interest rates and fees than generally charged by banks

ESMA has also issued directions to the European Commission and other agencies about regulating crowdfunding.

Legislation gaps

Specific concerns are the development of an EU-wide crowdfunding directive to plug gaps in legislation.

ESMA also wants to see crowdfunding platforms build a cash reserve to deal with claims from investors if deals fail.

Crowdfunding is when a pool of investors come together and put up relatively small sums of cash to finance projects pitched via an online platform.

Typically, if the project fails to attract a pre-announced cash target, the project does not proceed and the cash is returned to investors.