All business crowdfunding platforms wishing to operate within the European Union (EU) must now comply with a new EU-wide regulatory framework that brings a uniform set of rules to the bloc.
Crowdfunding platforms that had previously been greenlighted to operate had until today to receive authorization under the new rules. Prior to these updated regulations, a fragmented regulatory landscape meant that companies had to go through each constituent EU country to gain approval, hamstringing any crowdfunding endeavor that was looking to operate across borders.
The many forms of crowdfunding
For context, crowdfunding comes in many forms, including “reward-based” platforms like Kickstarter which can be used to garner funding for new products; “donation-based,” which might be used for charitable causes; “equity-based” which is used by companies seeking to raise funds; and “lending-based,” which businesses (or individuals) might 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 cash from myriad sources. However, different countries have different rules, while different kinds of crowdfunding (e.g. equity-, lending-based) are often treated differently in terms of which regulations apply — and this brings all manner of complexity to an industry that pretty much relies on an international medium (the internet) to function.
This has been most-evident in the EU, which historically has regulated crowdfunding platforms on a local country level, making it trickier for cross-border crowdfunding campaigns owing to the fact that each platform would require regulatory approval for each country they wish to operate in.
And that, effectively, is what the European Crowdfunding Service Provider Regulation (ECSPR) for business seeks to address — it combines disparate and siloed rules together under a single framework which all business-focused crowdfunding platforms must adhere to. One authoriziation to rule them all, is the general idea, with fewer hurdles to operate across all 27 EU states. And for investors, it means they that they only have to worry about a single protection framework.
“For many years, one of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders has been diverging licensing requirements and the lack of common rules across the European Union,” the European Commission notes. “This has resulted in high compliance and operational costs, which prevented crowdfunding platforms from efficiently scaling the provision of their services. As a result, small businesses had fewer financing opportunities available to them and investors had less choice and faced more uncertainty when investing cross-border.”
While crowdfunding platforms still must register through a national body which will remains responsible for regulatory oversight, once they receive approval they can now effectively operate across the entire EU.
There are some limits in place, though. Private businesses in the EU can raise up to €5 million from retail investors (i.e. non-professionalsnsuch as consumers) under the new regulations in a single offering, though this figure can be bumped up to €13 million for crowdfunding platforms that are licensed in both the U.K. and the EU (€8 million from U.K. investors and €5 million from EU investors).
Professional “sophisticated” investors are exempt from these limits.
The initial consultation that sought to address the fragmented EU crowdfunding market kicked off back in 2013, and through various iterations was finally adopted in 2020 before being “applied” the following year. However, a notable facet of the regulations that finally passed was the omission of consumer-focused crowdfunding. Peer-to-peer (P2P) lending, donations, or Kickstarter-style reward-based projects isn’t covered by these new regulations — it’s entirely focused on equity- and lending-based crowdfunding for businesses.
Companies that had previously received authorization to operate on a country-by-country basis had to reapply under the new EU-wide regulatory framework by 10 November last year, however this period was extended by a year to give companies more time to transition without impacting their existing business. And that deadline expires today.
San Francisco-based Wefunder expanded to the EU back in February after gaining authorization via the new regulations. And the U.K.’s Crowdcube was one of the first equity-based crowdfunding platforms to receive ECSPR authorization last year, helping the company grow beyond its existing markets in the U.K. and Spain, having launched a French office in anticipation of its authorization last April.
Crowdcube co-CEO Matt Cooper said that the company’s hitherto lack of European expansion was down to the onerous and fragmented regulations that were in place, noting that the rule-changes also spell good 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 sizeable amount of cash on their balance sheet under these new rules is incredibly attractive,” Cooper told ProWellTech. “The changes have unlocked 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, allowing us to scale up our operations more quickly and efficiently in multiple European markets.”