Good things come to those who wait: European Parliament approves new rules to facilitate crowdfunding across the EU

After several years of dedicated policy work, on October 5, 2020 the European Parliament adopted the latest text for the European Crowdfunding Service Provider for Business Regulation, which will enter into force in November 2021.



Pascal Martino - [Sponsoring] Partner - Banking and Human Capital Leader - Deloitte

Francesca Messini - Director - Fintech & Sustainable Finance Leader - Deloitte

Valentina Fratino - Consultant - Strategy, Analytics and M&A - Deloitte

Published on 14 January 2021

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Entrepreneurs and entrepreneurship can change the way we live and work. Their revolutions improve our standards of living, providing employment and income to a wide range of citizens, contributing to increased innovation, productivity, and competitiveness1. However, early stages of entrepreneurial ventures have always presented several challenges for business founders in attracting the financial resources needed to survive and thrive. To name a few, limited credit histories, cash flows, under-collateralization as well as higher default risks are some of the factors that make it difficult for entrepreneurs to access credit. While before the 2007-2009 financial crisis, US traditional lenders would provide credit to business founders that exhausted their own savings, or where an equity investment would be too expensive, the number of smaller loans originated by banks fell drastically during the credit crisis2. In this vacuum left behind by the retreat of traditional lenders, crowdfunding platforms, on which individuals club together to fund projects of all kinds, became more and more prominent.

Crowdfunding is a rapidly evolving form of financing that bypasses traditional venture capital, investment banking, business angels or public financing regimes3. It allows entrepreneurs to raise money quickly and directly from their target customers, for ideas that bankers might consider too risky for their strategy and risk appetite on online platforms. The crowdfunding platform usually charges a fee, paid by the beneficiary if the funding campaign is successful. Otherwise, investors get their money back – no hard feelings and no strings attached.

In 2019, the global crowdfunding market was valued at US$13.9 billion and was forecasted to triple by 20264. However, great differences can be observed when geographically breaking down crowdfunding global volumes and activities, such as crowdfunding type. In 2017, whilst crowdfunding transactions were recorded in 161 countries, three main regions dominated the scene accounting for 97% of all global crowdfunding volumes, i.e. China, the US and Europe. However, while the transaction value in the crowdfunding segment is projected to reach US$503.8 million in the US, in Europe it is projected to account for US$329.9 million in 20215.

This shows that although Europe managed to retain its position as the third largest market in the past years, it was still considered underdeveloped when compared with other countries. The higher degree of market fragmentation was the main obstacle for

the growth of crowdfunding platforms and the industry in general, caused by differences in regulations across EU member states. This legislative void has so far resulted in worrisome legal uncertainty, discouraging investments in projects. As a result, EU-based crowdfunding service providers (SPs) were discouraged from offering cross-border services, and crowdfunding platforms tend to operate within their domestic borders. Therefore, so far Europe has failed to produce equivalent players to US globally renowned platforms, i.e. Kickstarter, Indiegogo or GoFundMe6. For many years, we believe that this lack of common rule and diverging licensing requirements across the EU has prevented Europe from competing globally on equal footing, resulting in higher costs related to transparency, compliance, and operations, preventing crowdfunding platforms from proliferating across Europe.

In 2019, against this backdrop, the EU has created a unique crowdfunding regulation for equity and lending based crowdfunding, the European Crowdfunding Service Provider (ECSP) Regime. The main goal of the ECSP has been to improve access to credit for SMEs across Europe, paving the way towards fewer limitations on cross-border investment activity within continental Europe. The ECSP constitutes the very first attempt of regulation harmonization within the EU.

On 20 November, 2020, the ECSP Regulation entered into force and ad-hoc changes were made to the Markets in Financial Instruments Directive (MIFID). After a transition period of 12 months, the ECSP rules will enter into force in November 2021, and will apply directly across the EU, making it easier for crowdfunding players to offer their services across EU member states.

Crowdfunding SPs will be subject to various organizational and transparency requirements, e.g. conflicts of interest, due diligence and complaints handling. In addition, the Regulation introduces two new categories of investors: sophisticated and non-sophisticated investors. In anticipation of November 2021, let’s take a look at the main points to remember:

  • Scope – the rules will apply to all SPs operating a digital platform in connection to crowdfunding campaigns (open to the public) of up to of €5 million, calculated over a period of 12 months per project owner, after which they will fall under other EU regimes (MIFID, Prospectus).
  • A universal definition – a "crowdfunding service" is defined as the match of business funding interests of investors (i.e. any natural or legal person granting loans or acquiring transferable securities or admitted instruments for crowdfunding purposes through a crowdfunding platform) and project

owners (i.e. the natural or legal person seeking funding through a crowdfunding platform) through the use of a crowdfunding platform, consisting of either the facilitation of granting of loans (i.e. crowd-lending) or the placing of transferable securities and admitted instruments for crowdfunding purposes7. Therefore, the scope of the Regulation includes both investment-based and lending-based crowdfunding.

  • Authorization and licensing requirements – to obtain an authorization, a prospective crowdfunding SP will have to file an application with the relevant NCA8, e.g. the CSSF in Luxembourg. This application will have to include, among others, a description of: o The envisaged types of crowdfunding services o The details on the crowdfunding platform it intends to operate o The governance arrangements and internal control mechanisms o Its systems, resources and procedures for the control and safeguarding of the data processing systems o The operational risks, prudential safeguards and business continuity plan as well as any outsourcing arrangements

Any successful applicant will be registered in a register of all crowdfunding SPs established by the ESMA.

According to the European Crowdfunding Network (ECN), a non-profit professional network that aims to innovate, promote and protect the EU crowdfunding industry, after eight years of dedicated policy work, the new Regulation has the right potential to make pan-European crowdfunding a reality, and that doing so will be of huge benefit to European start-ups and SMEs and investors9.

Additionally, projects aiming at reducing the impact on the environment, such as renewable energy or pollution reduction projects, can be boosted by crowdfunding as an additional financing tool. Due to its nature, crowdfunding can bring crucial added-value for an increased participation of citizens as investors and consumers. Hence, the newly-adopted ECSP may position Europe as an industry leader in crowdfunding for sustainability causes.


1 OECD 2017; Wennekers and Thurik 1999. 2 Can Equity Crowdfunding Crowd-Out Other Alternative Sources of Finance?, David Timothy Schneider. 3 The term “crowdfunding” was coined for the first time by Jeff Howe in 2006. Crowdsourcing, Jeff Howe. 4 Statista, Market size of crowdfunding worldwide in 2019 and 2026, 2020. 5 Statista, Crowdfunding, Digital Market Outlook, 2020. 6 Crowdfunding in Europe: Between Fragmentation and Harmonization, Karsten Wenzlaff, Ana Odorović,Tania Ziegler and Rotem Shneor. 7 REGULATION (EU) 2020/1503 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, Official Journal of the European Union, 2020. 8 National Competent Authority 9


For the financial system as a whole, success ultimately depends on trust and confidence, both of which are highly contagious. That’s why, if crowdfunding is to reach full potential in Europe, both Regulators and SPs need to get the rules right.

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