Crowdfunding rules to cut financial risks for investors are under consideration by the European Union.
Crowdfunding is a fast and easy way for firms to raise money by pitching online for donations.
Some firms offer equity shares covered by tax breaks like the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS), while others just post a thank you online or offer a discount or T-shirt for a donation.
Recent big name crowdfunding appeals included a £1 million shout for financial help from TV design guru and architect Kevin McCloud, presenter of Channel 4’s Grand Designs.
His pitch was oversubscribed by 90% – raising £1.9 million for his company Hab Homes.
Software group Ubuntu recently opened a £20 million appeal for funding to develop new smartphone software, but although raising a record £12 million, fell short of the target.
Many crowdfunding pitches are for much more modest sums to fund creative and media projects, like movies, books or stage shows.
Crowdfunding has raised millions of pounds in the US, UK and the rest of Europe as private investors plug a funding void left by banks pulling out of start-up finance.
Michel Barnier, the European Commission’s financial services commissioner, wants to look at standardising crowdfunding rules across the European Union as the companies running the online funding platforms are not regulated.
Eurocrats fear many investors do not understand the risks of giving money they cannot afford to lose to start-up companies.
In 2012, crowdfunding across Europe soared by 65% compared to 112 months earlier to £620 million, while traditional venture capital investments dropped to £2.5 million, according to a consultation document on whether crowdfunding rules are needed published by the EU.
EU crowdfunding consultation
The consultation looks at whether ‘soft rules’ are needed to promote crowdfunding across the EU.
The European Commission is keen to promote crowdfunding as an alternative financing option for start-ups in a bid to kick start weakening economies and to provide jobs.
“Crowdfunding can offer promising advantages that are a good fit with the aims of the European Commission,” said the commissioner. “Part of our remit is to foster start-up businesses via entrepreneurship legislation and action plans.
“Other topics under discussion also include whether member states should change laws to make alternative funding, including crowdfunding, easier for entrepreneurs. Crowdfunding is at the early stage of development and involves different models, while the advantages and risks are yet to be seen.”
The consultation is open until December 20, 2013.
Download the EU crowdfunding consultation document