Spanish regulation set to stifle crowdfunding?

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The Spanish Minister for Economic Affairs and Competition, Luis de Guindos, announced recently the first aim of the Draft Bill to Foster Business Financing (from page 43 on), presented to the Council of Ministers on Friday 28 February. This bill is meant positively, “facilitate alternative non-banking sources of financing for SMEs” is its aim. This is an important step in the public discourse on crowdfunding in Spain. Studies have already shown the positive impact that crowdfunding has on the Spanish economy, with 7000 to 8000 jobs being directly created in relation with crowdfunding campaigns in 2012.

However, the proposal has been drawn up without any input from the Spanish crowdfunding sector and fails to reflect on some important crowdfunding specific aspects. The European Crowdfunding Network believes that a more open approach will deliver a better result in the mobilizing economic resources to value creating activities, job creation and cultural diversity through crowdfunding.

Among the new features contained in the proposed legislation, the minister remarked those meant to regulate “the system based on electronic platforms that puts investors and entrepreneurs directly in contact with each other”, also known as crowdfunding. The piece of upcoming legislation does not introduce any changes with regard to donation and/or reward-based systems. The focus remains specifically on platforms offering equity and loans as investments to “non-professional” funders.

Overall, the biggest shortcoming of the proposed legislation is the limited differentiation between lending and equity-based crowdfunding business models. The European Crowdfunding Network would like to encourage the Spanish Minister for Economic Affairs and the market authority (CNMV – Comisión Nacional del Mercado de Valores) to revisit their proposal with support from the crowdfunding sector. More focus might be put on solvency and technical aspects of the lending-based crowdfunding, while avoiding excessive restrictions for investors in lending. This could be matched with a less demanding regulation for equity-based crowdfunding adjusted with a relevant level of customer protection to account for risk and illiquidity.

As it stands, in an attempt to protect investors and force asset allocation diversification, the proposal includes strict limits with regard to the maximum individual contribution per crowdfunding project, fixed at €3.000; together with €6.000 in various projects in a 12 month period on any single platform. While the European Crowdfunding Network understand and support the need of customer protection, we believe that applying seemingly random hurdles will fail to achieve this. Furthermore, a cap of €1.000.000 has been proposed that any project may ask via a crowdfunding campaign, which for vast majority of projects might be sufficient for now.

The main conditions and limitations to be applied to service providers include some positive aspects:

  • Platforms dedicated to crowdinvesting or lending will have to register, respectively, with the market authority (CNMV) or the Spanish Central Bank (BANCO DE ESPAÑA) and this prior to providing any crowdfunding service. This will be accompanied by a number of accounting, auditing and similar prerequisites
  • Platforms will have to inform users about investment risks in order to adequately protect customers

However, we believe that a number of points, as they stand to date, will act counterintuitive in facilitating an alternative of non-banking sources to finance SMEs, in the words of the current proposal, as they introduce potentially inadequate hurdles that will stifle competition and creating an economically viable industry:

  • Any new platform entering the market will be required to have a minimum share capital of €50.000 and liability insurance of €150.000
  • Platforms will not be allowed to advertise crowdfunding projects outside of their platform
  • Larger investments to be automatically allocated to projects will not be allowed
  • Success fee and commission-based business models will be prohibited
  • Not compliance with legislation may result in monetary sanctions ranging from €25.000 to €200.000, as well as a prohibition to operate in this market for a period of 5 years.

The draft legislation is currently undergoing a short period of public consultation before being presented to the Spanish Parliament for final discussion and approval with a deadline for providing comments on 28 March 2014. The European Crowdfunding Network is supporting an open discourse between the Spanish authorities and the thriving Spanish crowdfunding industry.

We understand that the consensus among the industry is that modifications are needed and that this is also supported by actors from the Spanish investment industry, such as Business Angels. While customer protection and professional oversight are important, current actions could limit future startup investment and eventually damage also business angel and venture capital activity in the long run.

In general, the European Crowdfunding Network would have liked to see stronger collaboration between national regulators, something we have been asking since 2012 and we have already intervened with a large number of regulators in national discussions but also through special work groups within the European Securities and Markets Authority (ESMA) and Financial Industry Regulatory Authority (FIRNA) in the USA.

We remain concerned that regulation by national regulators will increase fragmentation of the European market if these are not aligned. The announcement of the Spanish Minister for Economic Affairs and Competition is especially ill-timed, as the European Commission, after more than one year intensive research and open discourse is about to announce its standpoint on crowdfunding on 19th of March. We believe that this announcement would have helped to create a more balanced approach on Spanish crowdfunding regulation.

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