Business crowdfunding in the EU is now bound by bloc-wide regulations

All business crowdfunding platforms that wish to operate within the European Union (EU) must comply new EU-wide regulatory framework which brings a uniform set of rules to the bloc.

Crowdfunding platforms that were previously greenlit to operate have yet to receive approval under the new rules. Before these updated regulations, a fragmented regulatory landscape meant that companies had to go through each constituent EU country to gain approval, preventing any crowdfunding effort that looks to operate across borders.

The many forms of crowdfunding

For context, crowdfunding comes in many forms, including “reward-based” platforms like Kickstarter that can be used to get funding for new products; “donation-based,” which can be used for charitable causes; “equity-based” used by companies seeking to raise funds; and “base lending,” which businesses (or individuals) can use to borrow money.

Crowdfunding is basically an alternative to more traditional fundraising methods offered by banks or institutional investors, allowing anyone to raise small amounts of money from multiple sources. However, different countries have different rules, while different types of crowdfunding (eg equity, based on lending) are often treated differently in terms of which regulations apply – and this leads to all kinds of complexity of an industry dependent on an international. medium (the internet) to operate.

This is most obvious in the EU, which has historically regulated crowdfunding platforms at a local national level, making it more difficult for cross-border crowdfunding campaigns due to the fact that each platform will require regulatory approval for each country they wish to operate in. .

And that, effectively, is European Crowdfunding Service Provider Regulation (ECSPR) for business seeks to resolve – it combines disparate and siled rules together under a framework that all Business-oriented crowdfunding platforms should be followed. One authorization to rule them all, is the general idea, with minimal barriers to operate in all 27 EU states. And for investors, this means they have to worry about a protection framework.

“For many years, one of the biggest obstacles faced by crowdfunding platforms seeking to offer their services across borders has been the diversity of licensing requirements and the lack of common rules of throughout the European Union,” the European Commission. notes. “This results in high compliance and operational costs, which prevent crowdfunding platforms from effectively scaling the provision of their services. As a result, small businesses have fewer opportunities to finance available to them and investors have fewer options and face greater uncertainty when investing cross-border.

While crowdfunding platforms still need to register through a national body that remains responsible for regulatory oversight, once they receive approval they can effectively operate throughout the EU.

There are some limitations in place, however. Private EU businesses can raise up to €5 million from retail investors (ie non-professionals such as consumers) under the new regulations in a single offering, although this figure can be topped up up to €13 million for crowdfunding platforms licensed in both the UK and the EU (€8 million from UK investors and €5 million from EU investors).

Professional “sophisticated” investors are exempt from these limitations.

Consultation

The initial consultation that sought to address the fragmented crowdfunding market in the EU is back on track in 2013and through various iterations at the end adopted in 2020 before “applying” the following year. However, a notable part of the regulations that were eventually passed was the removal of consumer-oriented crowdfunding. Peer-to-peer (P2P) lending, donations, or Kickstarter-style reward-based projects are not covered by these new regulations – they are entirely focused on equity- and lending-based crowdfunding for in businesses.

Companies that previously received permission to operate on a country-by-country basis had to reapply under the new EU-wide regulatory framework on 10 November last year, but this time is launched in one year to give companies more time to transition without affecting their existing business. And that deadline ends today.

San Francisco-based Wefunder expanded into the EU in February after gaining approval through new regulations. And the UK’s Crowdcube was one of the first equity-based crowdfunding platforms in the received ECSPR approval last yearhelping the company grow beyond its UK and Spain markets, launching a French office in anticipation of its approval in April.

Crowdcube co-CEO Matt Cooper says the company has so far been reluctant to expand into Europe because of the heavy and fragmented regulations in place, noting that the rule changes also herald good news. news for businesses seeking capital in a climate that has seen VC investments stall.

“In today’s market, the opportunity for founders to put a large amount of money on their balance sheet under the new rules is very attractive,” Cooper told TechCrunch. “The changes open up huge potential for companies across the EU to raise capital from their community of users and retail investors. The rules have created a significant first-mover advantage for Crowdcube, which allows us to scale our operations faster and more efficiently in many European markets.

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