10th European Crowdfunding Convention Online: Outtakes and Conclusions
In November this year, we organised our 10th edition of the Crowdfunding Convention online. As in the past years prior to COVID, the event was a closed affair for our members and invitation-only. With more than 100 registered participants, the online discussion was always busy and breakouts were used for further questions and exchanges. The event was held under adjusted Chatham House rules, so you had to be there to hear the details, but we are of course able to summarise some of the key discussion topics.
With ECSPR coming into full effect in November, and ESMA having published all technical standards – EBA has published the first set – the focus is now on the implementation by member states, as there is no indication that the European legislator might want to ask ESMA to change the technical standards, though the European Commission will monitor how member states are implementing the new rules and may indicate where rules need to be further adapted in order to remain within the intention of the law.
Individual member states deal differently with the implementation. While Malta had a full set of application documents and a clear path for online licensing on the 10th November, other member states have not indicated by when they might be ready to start communication with market participants. Nevertheless, ECSPR has arrived and the crowdfunding market for tradeable securities and business lending is going to change as of 2022.
With the new rules set to be implemented, national solutions used in the past may no longer be available under ECSPR. Our participants discussed with the audience the effect a harmonised regulation will likely have on compliance and professional standards, increasing competition. This may lead to more efficiencies but also lower margins, as experience has shown in other financial services markets that have undergone similar developments. At the same time, as a regulated financial service, crowdfunding will develop a new standing with incumbent financial services. Banks and other institutions already involved in crowdfunding, will need to adjust their own compliance.
Service providers find a new market opening up. Payment service providers will have to adapt to increasing demand across Europe, insurance companies are asked to create insurance policies for crowdfunding and audit firms have to come to grips with a new set of requirements. While this will take time, crowdfunding service providers will develop from innovative challenges of the incumbent markets to become financial services establishment itself. this will help in the relationship with investment funds, banks and others in building a professional service perception across Europe.
During CrowdCon, AFME, the Association for Financial Markets Europe, presented details of a public report, which you can download here, on the development of capital markets in Europe. EUROCROWD has been supporting AFME in this activity now for four years. It is great news that capital markets in Europe have experienced yet another eventful year marked by the recovery from the economic stress caused by the Covid-19 pandemic and the end of the Brexit transition period - among other developments.
While corporate fundraising has increased, there is no room for complacency: a structural and pandemic-induced “equity gap” remains and equity-type finance remains insufficient in Europe. It also remains to be seen to what extent recent increases in market-based financing levels can be sustained in more normal economic and market conditions, or whether they are a temporary result of the extraordinary support measures of the past year.
For instance, securitisation markets have declined with issuance reaching lower volumes than the levels shown before the introduction of the Simple, Transparent, and Standardised (STS) regime in 2018. A well-functioning securitisation market is fundamental to the capacity of the European financial system to facilitate risk transfer and provide further funding options for financial institutions. Meanwhile, the varying approaches to withholding tax across the EU and the lack of a relief-at source mechanism in some Member States continues to have a significant negative impact on cross-border investment, cost of capital and GDP.
On the plus side, most European countries have improved their local FinTech ecosystems over the last two years, which could prove instrumental in European job creation and growth. ECSPR is the first harmonised outcome on EU level and its implementation will be an indicator of the willingness of member states to innovate their financial markets.
With the harmonised crowdfunding law also applicable to project finance for real estate and renewable energy assets, markets that have grown significantly over the past years and in some markets have overtaken direct investments in business by value and volume, the foreseen use of special purpose vehicles (SPVs) in ECSPR will be key. Our participants discussed the different approaches of financing illiquid assets under current rules and the difficulty they see to move existing solutions into the new regime.
While the options for SPVs is largely welcomed, there remain clear uncertainties about the potential set up of such structures, such as the involvement of the crowdfunding service provider in the SPV as well as the use of fronting banks in the transaction, where the bank would pre-finance the investment and resell immediately to the SPV. The discussion raised a number of questions that neither market actors nor policymakers were able to solve on the day. However, promises for deepening the knowledge exchange between European policymakers and the sector have been made and the need for early clarification on outstanding issues is an agreed takeaway from the event.
The outlook of a harmonised European crowdfunding market does not only concern European platforms, but it is also an opportunity for non-EU platforms to enter the market with just one office within the Union. And while most crowdfunding service providers already operating within an EU member state framework and their home market, external platforms might be able to take a more opportunistic look. The discussion at CrowdCon showed, that apart from the accessibility of the national conduct authority and simplicity of the licensing requirements there are many issues to manage.
For many platforms, the language for the public information of the issue remains important, and as it turns out, not all EU member states will accept English. For some actors, a key aspect for the trust of the institutional investors into the regime that the platform would operate under, indicating a preference for some more established financial service markets. Others have a preference for the local business and start-up ecosystem, with some markets and cities clearly more interesting than others.
With many member states not ready to accept licensing applications – or even a phone call - participants expected the bulk of the work to fall into 2022, also given them the opportunity to further analyse how different member states will act. Other participants suggested that they may wait even longer and aim to create a partnership with an established platform in due course. While there are clearly some favourite markets by now for new market entries to set up, it is not clear if the same markets will also be an attractive alternative to platforms currently operating already within a given member state.
In the end, the regulatory conditions of any EU member state to be considered would need to welcome platform operators and their activities. And while there might be not one clear winner so far, the overall sentiment seems to be that there is a clear loser already, thanks to badly structured liability clauses and the ambition to keep a struggling local framework alive alongside ECSPR: Germany.