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Summary of Private Investments Network response to the European Commission public consultation on the review of the Prospectus Directive

The response was articulated around The European Equity Crowdfunding Association to which Private Investments Networks is a member. The main comments were about:

The specificities of equity crowdfunding

The initial aim of equity crowdfunding is to support companies at each stage, and more specifically at early stages. The current average of the offers published on a website by European crowdfunding platforms is €250,000. The size of the offers is mainly between €50,000 and €1,500,000.

Therefore, we think that the 5,000,000 € threshold is appropriate to support the crowdfunding development in respect of SMEs at early stages or small entities out of the scope of the Prospectus requirements.

Crowdfunding isn’t really a securities offering to the public. The issuers raising capital through a platform shall be granted an exemption to the public offering rules. Nevertheless, the need to protect the investors has to remain; hence it should be made mandatory for the issuer to maintain a flow of corporate information to its investors and to find the best solution to facilitate liquidity opportunities for the investors coming from this type of funding.

Needs of harmonization

The diversity of domestic regulations is a barrier to the crowdfunding development equity within Europe. Each EU Member State has a different domestic policy regarding Prospectus requirements. As an example, the exemption threshold varies: it is €1M in Germany, France, Romania, and €5M in Spain, Italy & the UK etc.

This creates barriers within the EU for crowdfunding both for platforms and issuers. The key point to harmonize and unleash the potential of crowdfunding is that all countries adopt similar requirements. Among them:
– the same prospectus threshold of €5M,
– the same information requirements (key Issuer information document – KIID)
– the same platforms and the Issuers responsibilities regarding this documentation.

Currently, there are regulatory competitive advantages disrupting the market and some platforms are willing to transfer their principal office to other countries to address their own domestic market.

At least, the issuer using Crowdfunding should have harmonized obligations throughout Europe.

Description of the KIID

The Directive shall harmonize a Key Issuer Information Document. This documentation should have clear definitions. It should be required for companies raising capital below the threshold, but not subject to the previous authorization of a National competent authority. The issuer should provide this information under his/her own responsibility and allowed to personalize the information given in order to adapt it to its project and situation. The template provided by the directive should aim at providing a harmonized way to present each information category.

Thus, we think that there should always be an information document (referred to as “KIID”) stating the information that the SME can provide at its sole discretion (mainly based on existing documentation):
– The annual accounts summary (balance sheet and Income statement) for the past 3 years, stating if they are audited and by whom. (Indicative length: max 12 pages)
– A documentation stating the strengths (patents, technology, know-hows, etc.) and main threat the issuer sees (competition, obsolescence, etc.) (max 1 page)
– A short bio of the founders, the board members (if any), the advisory committee members (if any) (max 2 paragraph per bio)
– Current capital structure & dilution due to the fund raising (one table)
– In an appendix, the issuer should add any existing commercial information that he views relevant for the investor. It could be about the product/service and about the market.
When some information does not exist, the issuer should just state that he doesn’t have this information and why.

Given the level of experience/expertise of the retail investors, the complexity of such a document should aim to provide conceptually simple examples, as is now expected in medical publications for consumers.

The KIID should both remain simple as entrepreneurs lack of experience and investors sophistication, and be very explicit.

Need for a single, integrated EU filing system for all prospectuses

It can be set up at a low cost and provide a simple solution to investor’s access to information. It should be set up in a flexible way enabling investors to access to the information of the prospectuses they are interested in and be easily integrated into data feeds to enable diffusion through the intermediaries and media information systems.

François-Eric Perquel.

Is there a Paradigm change in finance?

The financial sector is changing. Up until now, fast growth in this sector was possible only through external growth. The advance of technology and innovation are changing the scene, enabling the pioneers who easily adapt to change, to quickly acquire relevant positions, as shown by the example of Transferwise in the field of international P2P Transfer.

This underlying trend is reflected in an article by Dave Michaels published in Bloomberg. It refers to the US Securities and Exchange Commission (SEC) revision of the possibility to allow stock exchanges to launch less regulated markets in order to enable small businesses to obtain liquidity. When authorities of this kind start considering such changes, it shows that the trend is coming to the turning point for the whole financial sector.

“The US Securities and Exchange Commission revision of the possibility to allow stock exchanges to launch less regulated markets in order to enable small businesses to obtain liquidity.”

Analyzing this trend in more detail, we come across the first detailed study about the Crowdfunding situation in Europe. The University of Cambridge (Cambridge Judge Business School), has managed to gather the information needed to show, in this report, some extremely revealing (recent) statistical and historic data.

This publication explains that since the global financial crisis (in September, it will have been seven years since it happened), alternative funding has considerably increased in the US and Europe. In particular, it refers to: equity crowd funding platforms, peer-to-peer lending, reward based crowd funding, donation based crowd funding, etc., all of which offer investors several ways to invest, encourage innovation, create jobs and/or finance social causes.

“since the global financial crisis, alternative funding has considerably increased in the US and Europe.”

Some of the data reflected in this study, about Crowdfunding in Europe is:

  • A 144% growth in Europe in 2014 (in comparison to 2013).
  • A total amount of transactions in 2014 of € 2,957M.
  • A specific weight of the United Kingdom with a total of transactions of € 2,337M, and a yearly growth of 159%.
  • The top down ranking of countries with the highest number of online platforms is: the United Kingdom, Spain, France, Germany and the Netherlands.
  • 9,743 SMEs have been financed in continental Europe between 2012 and 2014.

This transaction volume is still to be put into perspective as it only represents 0,4 per 1,000 so of traditional funding according to EBAN figures (European Business Angels Network). That is what traditional banks and supervisory authorities still think. However, given the crowd funding exponential growth, one can hope that SMEs, the greatest engine of our global economy, will get from it the financing needed to keep growing, to innovate and to create jobs.

“given the crowd funding exponential growth, one can hope that SMEs, the greatest engine of our global economy, will get from it the financing needed to keep growing, to innovate and to create jobs.”

This hope is very important for Europe given the drastic reduction in traditional financing for this type of businesses, which is due to the current trend to overregulate banks, in order to try to eliminate the risk from their activity.

For this reason, this way of creating closer and less restrictive collaborations is attracting companies and investors. Will crowd funding consolidate and, in such a case, how will traditional banks adapt to this new emerging paradigm?

Guillem Comi and Carmen Zamudio.

Welcome to Private Investments Network’s Blog

Welcome to Private Investments Network’s Blog. This corporate blog tries to show different aspects (more or less complex) of investors’ relations of private companies. Our intention is to bring us closer to equity investors, to CEOs, to CFOs, to advisors, to lawyers, to family offices, and, in short, to all the professionals related to the legal and financial management of private companies.

“This blog will highlight different aspects (more or less complex) about the investors’ relationship in private companies.”

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