History In the Making: ESCP In Force As Of Today – Harmonised European Regulation for Crowdfunding
Today, on 10 November 2021, European regulation on European Crowdfunding Service Providers for Business (“ECSPR”) (EU) 2020/1503 and the accompanying Directive (EU) 2020/1504 amending MIFID II has entered into force across 27 European Member states. We believe this is a historic moment. This pan-European framework creates a largely harmonised regulatory rulebook for crowdfunding service providers (“CSPs”) established in one of the 27 member states of the European Union.
When we started in 2012 our first discussions with policymakers in Brussels, suggesting that crowdfunding could provide a significant benefit to how we finance small and medium-sized business, innovation and job creation, the response was one of interest and support. Over the following years, the European Commission has reviewed the market closely. Given the relatively slow growth of the sector and the lack of large platforms a sound level of skepticism against crowdfunding remained. When in 2014 the European Commission declared that it was not the time to harmonised crowdfunding, we noted a significant shift of interest of platform operators to national opportunities.
When the Prospectus Directive was under Review shortly after, we engaged - jointly with our members - with European lawmakers in detailed exchanges and found a lot of support for our arguments. Crowdfunding was inserted into the pursuing Prospectus Regulation (EU) 2017/1129 with an exemption to the prospectus law that basically enabled grow of the sector in individual member states. For the first time, we saw sizeable transactions, platforms grow a noticeable presence and a clear indication that our vision of crowdfunding to become an innovative way of funding our economy with the direct involvement of citizens was working.
With the growing success of a few platforms, the European Commission also reignited its interest in the sector as part of the political drive to create a European innovative financial service market. As a result, the initiative became part of the European Commission’s fintech action plan and the mid-term review of the capital markets union action plan.
Our ongoing discussions with the European Commission had led to a study that we prepared on their behalf on the EC on market and regulatory obstacles in cross-border transactions in 2017. Our members shared deep insights openly and we engaged both the market, national conduct authorities and consumer protection agencies in our work. The European Commission took our input and wrapped up their in-depth observations of the market developments - and drafted a proposal for a European law harmonising crowdfunding for business across 28 Member States.
The proposal passed all internal checks and was issued in 2018 after which an intense two years of political negotiations between the European Commission, the European Parliament and the Member States as represented in the Council of the European Union ensured. Thanks to many of our members, we were able to support the political decision-making process with detailed, open, and factual input.
We were able to clarify many points that have turned out positive for the sector in the final text signed off by the European Parliament in 2020. Today, on 10 November 2021, the law will finally apply across the European Union following a one-year transition period allowing Member States to adapt national laws.
We are extremely excited about the opportunities this will offer to crowdfunding service platforms in the years to come and we are very glad that the rules are flexible enough for platforms to switch from their incumbent national licenses to a European without too much hassle. At the same time, we believe that the new rules set a clear focus on professional conduct and consumer protection. By creating this new law as a stand-alone regulation, the sector has been protected from regulatory arbitrage of other market actors and will be able to develop a professional financial services sector.
The implementation within the now 27 Member States might still offer some uncertainty, but we are convinced that this will be overcome with quickly. In the next two years, the sector can establish best practices and provide input to policymakers to make adequate adjustments to the rule book. We are very grateful to our members for their support in this seemingly long - and yet in political terms extremely fast - journey from nowhere to a European law.
The new law brings change. As of now, crowdfunding service providers offering financial services will operate under the same license for lending and securities - as well as some national instruments that will be subject to the new rules. The rules are also distinctively different from existing frameworks, so that crowdfunding has been established as a separate professional financial services sector. While there were still outstanding issues until today that the European Market and Securities Authorities (ESMA) was working on, the legal text of the regulation already provides a clear action plan for platform operators. ESMA has published their technical standards on crowdfunding in time and as promised also on the 10th November.
The sector is now waiting for the implementation advise from the National Conduct Authorities. While in some Member States an open communication exists between the sector and the regulatory authorities, in others information has not yet been made available sufficiently.
With a bit of patience, the market will be able to exploit the new regime and hopefully fulfill its ambitions by becoming a scalable, innovative form of direct investments into the European economy while mobilising capital from retail and institutional investors alike.