Before focusing more deeply on the subject that concerns us, it’s worthwhile to distinguish the differences in kind between financial and non-financial crowdfunding activity. The activities corresponding to the latter (which include donation and reward Crowdfunding) fall mainly under consumer protection. There is also a more ambiguous form of reward based crowdfunding, which is one based on royalties’ attribution. In the countries where it has appeared, it is usually not regarded as a financial product.
The regulatory complexity considerably increases for the financial forms of crowdfunding (equity or debt). In this field, Crowdfunding’s fundamental logic resides in the involvement of the mass – which means anyone interested in the proposal – which clashes with the financial laws developed in the past 80 years: the willingness to protect private investors, being less qualified than professional ones to understand the risks of financial products.
The result of this conceptual clash between traditional financial laws and crowdfunding needs is causing sudden changes in the Law throughout the world and it is not yet fully stabilized. For these reasons, we will focus on the laws applied to crowdfunding within the financial activity.
“Crowdfunding’s fundamental logic resides in the involvement of the mass – which means anyone interested in the proposal – which clashes with the financial laws developed in the past 80 years: the willingness to protect private investors, being less qualified than professional ones to understand the risks of financial products.“
Due to the USA’s leadership in crowdfunding, we will start by quickly reviewing its evolution in this field. The Jumpstart Our Business Startups (JOBS) act of April 5th 2012, one of Obama’s first administration flagship legislation, provided, inter alia, the possibility of creating exemptions applicable to crowdfunding to facilitate access to financing for small and medium enterprises.
The SEC (Security and Exchange Commission), has been mandated to write the implementing provisions of the law. Being by definition the defender of the traditional view of investor protection law, it is understandable that it considerably delayed the finding of a formula for the implementation of the Crowdfunding section, called title III (The Jobs Act has 7 parts called titles) due to its intrinsic antagonism with the Crowdfunding logic. The result has been the development, as in the case of blue sky laws of the early 20th century about market regulation, of some intrastate exemption in most US states. In late May 2015, the web crowdfundinglegalhub.com had counted 24 states with approved exemptions, 13 awaiting approval, 12 without such process and California that denied its exemption law without creating an alternative. The delay not only put the US in a competitive disadvantage compared with the most developed countries of Europe (especially the UK), but it also worsened by the operational complexity with multiple local laws.
The big surprise came from the same SEC, on June 19th, 2015, when it implemented the title IV of the JOBS act on capital formation for small businesses. Under this section, it opened the door for American start-ups to raise up to $ 50 million of accredited and non-accredited investors. This means a Copernican revolution from the financial Law of the last 80 years. Although it opens the door to many doubts and risks, it creates, for those companies that will know how to use it, a formidable opportunity of extremely competitive direct financing (in comparison to the laws elsewhere in the world).
“The big surprise came from the same SEC, on June 19th, 2015, when it implemented the title IV of the JOBS act on capital formation for small businesses. Under this section, it opened the door for American start-ups to raise up to $ 50 million of accredited and non-accredited investors.“
The situation of the laws applicable to crowdfunding activities in Europe is following a slightly different evolution than the one in the USA, although with similarities. Unlike the US government will (which has set a precursor path with the JOBS act probably anticipating the need perceived by the majority of the market more or less a year), the desire to promote this new type of company financing set by the European Union and its representatives did not even reach the European regulatory field.
In the slowness of its operation, several enquires were launched to try to channel the process. One of the latest ones was the public consultation on the revision made by the directive of the prospectus that was carried out in May and reaped a large number of responses.
Some national governments did not wait for the emergence of a community framework and were much more proactive in promoting Crowdfunding. The UK is the paragon of this attitude, followed by France in a less efficient manner. Both have structured this new market in recent years. In the first half of 2015, several countries have chosen to try to enter into this group. It is clearly the case of Austria, to a lesser extent of Germany and, much less, of Spain.
Others are still debating between the vision of opening to a controlled risk-taking with crowdfunding, and the traditional perspective of bureaucratic regulations intended to protect investors. Several countries seem even entrenched in this attitude, such as Denmark and other northern European countries as well as several countries in Central and Eastern Europe.
We could talk about an oil spill effect, which started in the United Kingdom and is progressively spreading across the continent, often losing strength with the distance from the spill epicenter.
The result for all the parties involved in this type of transaction is more than confusing. There are differences in many aspects of the adopted laws on crowdfunding. The main ones are:
- The statutes of Crowdfunding platforms and their activity authorizations are contradictory from one country to another. Hence, some fall under the rules of the financial services firms and plan to use the European passport (Mifid) to offer their services throughout the Union, while others have a ban on providing services abroad.
- The levels of prospectus exemptions vary from 0 to 5 million euros.
- The determining criteria for an accredited investor also vary significantly.
The result of the absence of best practices creates competitive regulation advantages for some and confuse everyone, especially in a world in which many investors try to hunt the best investment opportunities across the continent.
“The result of the absence of best practices creates competitive regulation advantages for some and confuse everyone, especially in a world in which many investors try to hunt the best investment opportunities across the continent.“
Given the pace of the crowdfunding laws and European regulatory disparity development, all the experts from the sector are invited to comment on this post with information that deepen on the subject and we commit ourselves to translating these comments into the other languages on our blog.
- Review of Crowdfunding regulation, Tax & legal workgroup of the European Crowdfunding Network (ECN)
- Information from the EECA (European Equity Crowdfunding Association)