Trialogue Stage Position Paper of the European Crowdfunding Network on the Proposed Regulation on European Crowdfunding Service Providers (ESCP) for Business
Brussels, 2 October 2019. As the proposed European Crowdfunding Service Providers (ECSP) for Business Regulation (the “Regulation”) enters trialogue stage, the European Crowdfunding Network welcomes this opportunity to provide our views on the key provisions of the three versions of the Regulation and our recommendations on the approach that should be taken by the final version (the “Common Approach”).
In this paper, we refer to the version of the Regulation initially proposed by the European Commission on 8 March 2018 as the “Commission Version”; the version adopted by the Economic and Monetary Affairs Committee of the European Parliament on 5 November 2018, and subsequently adopted by the European Parliament in plenary on 27 March 2019, as the “Parliament Version”; and the version adopted at COREPER on 26 June 2019 as the “Council Version”.
The European Crowdfunding Network wholeheartedly welcomes the Regulation. We believe it has the potential to make pan-European crowdfunding a reality, and that doing so will be of huge benefit to European startups and SMEs and to European investors. However, the efficacy and success of the Regulation will depend heavily on certain choices made in trialogue, in particular:
- Threshold should be set at €8 million in line with the Parliament Version; limitations on amounts raised from investors in particular Member States under the Council Version would be workable, but a prohibition on marketing offerings over €5 million in those member states would not.
- Definition of crowdfunding services, and the resulting distinction between the project-based KIIS and the platform-based KIIS, should follow the Parliament Version.
- Provisions on exercise of discretion should follow the Commission and Parliament Versions.
- Rules on conflicts of interest with respect to CSPs should follow the Parliament Version.
- Rules on conflicts of interest with respect to CSP-connected persons should follow the Council Version.
- Investor classification rules should follow the Council Version, subject to a modification establishing that sophisticated investors only need to meet one, not two, of the applicable criteria.
- Approach to withdrawal period should follow the Commission or Parliament Version.
- KIIS language requirement should follow the Commission or Parliament Version.
- KIIS notification requirement should follow the Commission or Parliament Version.
- Bulletin board provisions should follow the Parliament Version.
- Restrictions on marketing communications should follow the Council Version.
- Marketing communications language requirement should follow the Commission or Parliament Version.
This position paper explains each of these points in detail, as well as providing our views on a number of other provisions. Download the full Version here.
The European Crowdfunding Network represents over 40 crowdfunding platforms (“CSPs”) based across the European Union. Together we have led the development of the crowdfunding market in Europe over the past decade, and through that process we have learned first-hand a substantial amount about how crowdfunding works and should work, where the key risks lie and how to mitigate them, how to provide robust investor protection and maintain effective compliance processes, and what regulatory approaches help or hinder the attainment of crowdfunding’s objectives.
We believe ECSP has the potential to make pan-European crowdfunding a reality. To date, the divergence in laws between Member States has made crowdfunding a largely national affair. This means that the vast potential for cross-border capital flows has not been tapped, leading to substantially less funding and fewer investment opportunities across the EU than would be available under a unified regime.
At the same time, certain provisions in each of the three versions of the Regulation would significantly undermine— and, in some cases, entirely defeat — its stated purposes. In this position paper, we describe and explain our main concerns and recommendations. In doing so, we are guided primarily by our experiences around three areas of practice:
- Project Owners: the practices and structures that have encouraged and helped start-ups and SMEs to (1) view crowdfunding as an effective and desirable source of financing; (2) succeed in raising the funds they are seeking; and (3) thrive and grow as businesses after their funding is completed. It is not trivial for a business to raise funding from the crowd, and then to benefit from the support of their investors, without being overly burdened by the challenges of administering a wide and disparate financing base. We have learned a tremendous amount about what it takes to get a business onto a platform and funded, and how to optimise for its success.
- Investors: the approaches that have proven effective in achieving the key balance between investor protection and investor autonomy. It is essential that investors receive the information, and are subject to the screening, necessary to ensure that (1) they understand the characteristics and risks of what they are investing in; (2) their investments are structured properly; and (3) they do not invest more capital than they can afford to lose. But it is also essential, and a key part of the attraction of crowdfunding for many, that investors be treated as responsible adults who, having received the information and been subject to the screening provided by the CSP, are capable of making their own investment decisions. As an industry we have worked hard to strike this balance, and we believe we have been highly effective in doing so.
- CSPs: the importance of scalability to the sustainable operation of a crowdfunding platform. In order to build and maintain the legal, financial and technological infrastructure required to operate a crowdfunding platform in a highly professional and compliant manner — including, among other things, maintaining the highest standards of transparency and risk management, implementing comprehensive business continuity plans and back-up service arrangements, and operating appropriate senior manager qualification regimes — CSPs must incur a meaningful level of capital expenditure and ongoing costs. Most platforms can only be profitable, and therefore operate sustainably in the long term, if they are able to achieve a sufficient level of scale. Measures that limit their ability to do so undermine the health and viability of the crowdfunding market.