Europaudvalget 2018
KOM (2018) 0113
Offentligt
1865157_0001.png
EUROPEAN
COMMISSION
Brussels, 8.3.2018
SWD(2018) 56 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT
Accompanying the document
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
on European Crowdfunding Service Providers (ECSP) for Business
and
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
amending Directive 2014/65/EU on markets in financial instruments
{COM(2018) 113 final} - {COM(2018) 99 final} - {SWD(2018) 57 final}
EN
EN
kom (2018) 0113 - Ingen titel
Table of Contents
Glossary ................................................................................................................................................... 3
List of Figures........................................................................................................................................... 4
List of Tables ............................................................................................................................................ 5
Introduction ............................................................................................................................................. 6
1
Policy Context and Problem Definition ........................................................................................... 7
1.1
Background and context.......................................................................................................... 7
Key characteristics of crowdfunding ............................................................................... 8
Size, geographic overview and trends ........................................................................... 16
1.1.1
1.1.2
1.2
Problem definition ................................................................................................................. 19
Barriers to cross-border scaling up leading to underdevelopment .............................. 21
Investors' lack of trust to engage on a cross-border basis ............................................ 25
1.2.1
1.2.2
2
Why should the EU act? ................................................................................................................ 29
2.1
2.2
The necessity of an EU action ................................................................................................ 29
The value added of an EU action ........................................................................................... 30
3
4
Objectives: What is to be achieved? ............................................................................................. 31
Policy Options and analysis of impacts ......................................................................................... 32
4.1
Scoping the policy action ....................................................................................................... 32
Crowdfunding models ................................................................................................... 32
Fundraising threshold .................................................................................................... 33
Services .......................................................................................................................... 34
Instruments ................................................................................................................... 35
4.1.1
4.1.2
4.1.3
4.1.4
4.2
4.3
Baseline scenario – no EU framework (option 1) .................................................................. 35
Building on reputational capital: minimum standards with best practices (option 2) ......... 37
Rationale and key characteristics .................................................................................. 37
Impacts .......................................................................................................................... 38
4.3.1
4.3.2
4.4
A product-based approach: bringing crowdfunding within the existing EU single rulebook
(option 3) ........................................................................................................................................... 41
4.4.1
4.4.2
Rationale and key characteristics .................................................................................. 41
Impacts .......................................................................................................................... 44
4.5
A complementary service-based solution: a regime for 'European Crowdfunding Services
Providers' (ECSPs; option 4) .............................................................................................................. 47
4.5.1
4.5.2
5
Rationale and key characteristics .................................................................................. 47
Impacts .......................................................................................................................... 49
Comparing the policy options ....................................................................................................... 51
1
kom (2018) 0113 - Ingen titel
6
7
Overall impact of the preferred option ......................................................................................... 54
Monitoring and evaluation ............................................................................................................ 57
Annex 1: Procedural information .......................................................................................................... 58
Annex 2: Stakeholder consultation – Synopsis Report.......................................................................... 61
Annex 3: Who is affected and how?...................................................................................................... 68
Annex 4: Overview of Crowdfunding regulatory Frameworks in a selection of EU Member States .... 76
7.1
Overview of the legislative framework ................................................................................. 94
Authorisation ................................................................................................................. 94
Organisational requirements ........................................................................................ 95
Conduct of business rules.............................................................................................. 95
Transparency ................................................................................................................. 96
7.1.1
7.1.2
7.1.3
7.1.4
Annex 5: Interplay with other EU legislation......................................................................................... 98
Annex 6: Case Study extracts .............................................................................................................. 114
Annex 7 List of references ................................................................................................................... 120
2
kom (2018) 0113 - Ingen titel
1865157_0004.png
Glossary
AIFMD
CF
CMU
EBA
ECB
ECP
ESAs
ESMA
Alternative Investment Fund Managers Directive
CrowdFunding
Capital Markets Union
European Banking Authority
European Central Bank
European Crowdfunding Providers
European Supervisory Authorities
European Securities and Markets Authority
Full-time equivalent
Investment-Based
Investor-Compensation Schemes Directive
Key Investment Information Sheet
Lending-Based
Markets in Financial Instruments Directive
Markets in Financial Instruments Regulation
National Competent Authority
Prospectus Directive
Payment Services Directive
Placing of Securities Without a Firm Commitment
Reception and Transmission of Orders
Survey on the access to finance of enterprises
Small and medium-sized enterprises
FTE
IB
ICSD
KIIS
LB
MiFID
MiFIR
NCA
PD
PSD
PSWFC
RTO
SAFE
SMEs
3
kom (2018) 0113 - Ingen titel
List of Figures
Figure 1. Funding escalator ................................................................................................................... 15
Figure 2: European Alternative Finance Market Volumes 2013-2016 in EUR billion ............................ 16
Figure 3: European Alternative Finance Market by category Volumes and average growth rates 2013-
2016 in EUR million ............................................................................................................................... 17
Figure 4: World Online Alternative Finance Volumes 2013-2016, by regions (bn EUR) ....................... 18
Figure 6. Bank lending to businesses in the Euro area (EUR million; end of the year, outstanding
amounts) ............................................................................................................................................... 21
Figure 7. Total crowdfunding volume, average size of inflows and outflows, 2013 -2016 (EUR million)
............................................................................................................................................................... 22
Figure 8. Impact of regulatory costs on operational costs .................................................................... 23
Figure 9. Industry perceived risks to future growth of the alternative finance sector ......................... 25
Figure 10. Percentages of responses to the question: "Would you invest with the same confidence
through platforms established in another EU Member State?" ........................................................... 26
4
kom (2018) 0113 - Ingen titel
List of Tables
Table 1. Typology of crowdfunding business models ............................................................................. 9
Table 2. Start-up crowdfunding: crowdfunding model, rewards and information asymmetries ......... 13
Table 3. External effects of crowdfunding platforms ............................................................................ 14
Table 5. Key requirements – Option 2................................................................................................... 38
Table 6. Key benefits and costs, by stakeholder type – Option 2 ......................................................... 40
Table 7. Key requirements – Option 3................................................................................................... 43
Table 8. Key benefits and costs, by stakeholder type – Option 3 ......................................................... 46
Table 9. Key requirements – Option 4................................................................................................... 48
Table 10. Key benefits and costs, by stakeholder type – Option 4 (see quantification in Annex 3) ..... 50
Table 11. Key characteristics of the policy options ............................................................................... 51
Table 12. Benchmarking policy options ................................................................................................ 52
Table 4. Illustrative summary of EU legal acts ...................................................................................... 99
Table 13. Cases where MiFID/CRD/CRR provide for initial capital of less than standard €730,000 ... 107
5
kom (2018) 0113 - Ingen titel
1865157_0007.png
Introduction
This initiative is part of the Commission's priority of establishing a Capital Market Union (CMU), as
announced in the Commission Work Programme 2018. Broadening access to finance for innovative
companies, start-ups and other unlisted firms is at the heart of the CMU Action Plan
1
. Investment
finance remains difficult for these firms, particularly when they move from start-up into the
expansion phase. The plan aims at strengthening a Europe-wide 'equity culture' and at developing
alternative means of financing, including crowdfunding and peer-to-peer finance.
2
As a new form of technology-enabled financial service, crowdfunding carries the potential to help
better match investors looking to support innovative business ventures with projects in need of
funding. With appropriate safeguards, such as investor protection measures, crowdfunding can
become an important source of non-bank financing and thus further the CMU overarching goals of
supporting a more sustainable financial integration and public/private investments for the benefit of
job creation and economic growth.
Crowdfunding is increasingly establishing itself as an essential part of the funding escalator for start-
ups and young businesses. It is often the main funding tool for early stage companies financed by
family, friends & own funds up to later development rounds where venture capital or even private
equity funds start taking interest in those ventures. Crowdfunding also provides a complement (if not
an alternative) to unsecured bank lending, such as bank overdrafts or credit card loans, which are
currently the main sources of external finance for SMEs, especially during the initial period of
activity.
3
This type of bank lending is often overly expensive for start-ups and more generally less
accessible for SMEs due to structural information asymmetries (like the lack of credit and business
history). In addition, bank lending volumes to both start-ups and SMEs have been severely affected
by the 2008 financial crisis and since then have fallen below pre-crisis levels. CBInsights identified
lack of funds to be the second most of important reason as to why start-ups fail,
4
representing 29%
of the cases. Funding aside, crowdfunding is also used as a unique marketing tool and has helped
businesses build their brand to attract a wider customer base as well as to help pass through the
proof of concept phase.
The Commission Services have been monitoring crowdfunding market developments for several
years. A staff working document was published in May 2016
5
which concluded that there was no
strong case for EU level policy intervention at that juncture. Since then, the Commission Services
have gathered additional evidence on the demand for cross-border activity and on the barriers in the
1
2
COM(2015) 468 final, 30.09.2015.
This impact assessment uses the term 'crowdfunding' as also including peer-to-peer finance, if not stated
otherwise.
3
See European Commission (2016), Survey on the access to finance of enterprises (SAFE), Analytical Report,
Chapter 1. The report also highlights the lack of debt securities finance for SMEs. For a more updated survey,
but restricted to Euro area countries, please also see ECB (2017), Survey on the Access to Finance of Enterprises
in the euro area, Chapter 3.
4
https://www.cbinsights.com/research/startup-failure-reasons-top/
5
SWD(2016) 154 final, available here: https://ec.europa.eu/transparency/regdoc/rep/10102/2016/EN/10102-
2016-154-EN-F1-1.PDF
6
kom (2018) 0113 - Ingen titel
1865157_0008.png
Single Market through stakeholder consultations and external studies.
6
Moreover, the continued
concentration of the European crowdfunding sector in a few Member States has underlined the need
to make this funding method available more widely, notably for the benefit of fund seekers and
investors in smaller Member States.
This initiative is also part of the Commission's FinTech Action Plan which aims to ensure that the EU
adopts an innovation-oriented approach towards FinTech by creating a competitive environment
where innovative products and solutions can be rapidly applied in a safe and stable environment. As
observed through the recent developments related to
Initial Coin Offerings,
technology is bringing
about unprecedented changes to the financial sector, creating new opportunities and also risks. In
this context, our goal can only be achieved by bringing forth a forward-looking regulatory framework
that is fit-for-purpose in an increasingly digital age. Within the newly emerging space of digital
finance, it must be ensured that investors are aware of the activities and risks they engage in so that
they are able to make sufficiently informed decisions.
The initiative focuses principally on the activity (operation of the platform) rather than the features
of the underlying instrument being traded (risk capital, debt or other instrument). It aims to help
platforms to scale-up across the Single Market by creating a clear regulatory framework at the EU
level that enables cross-border activity and addresses risks in a proportionate manner. In order to
create the necessary trust for cross-border investment, investors need to have access to the
necessary flow of information to understand underlying risks and platforms need to have the
necessary safeguards in place to preserve investor protection and minimise financial stability risks.
1 Policy Context and Problem Definition
The basic function of crowdfunding can be described as an open call via the Internet for the provision
of funds by the public at large to support specific initiatives by typically small fundraisers. The
investors/lenders can provide the means as a pure donation (intangible reward) or in exchange for
some form of reward in order to compensate for the financial risk taken (tangible reward).
Crowdfunding platforms play a key role: as technology-enabled platforms/systems they enable
interaction between fundraisers and the "crowd" (wide investor community).
The core functionality performed by these platforms is that of matching supply and demand for
capital in the form of ownership claims on project/company proceeds or debt claims on borrowers.
Platform operations can be small, with less than 10 employees, or reach levels of more than 200 staff
and operating with subsidiaries in several European countries.
Although the overall concept of crowdfunding is straightforward (request for money via an open
call), various categories have developed depending on the type of rewards offered to
investors/lenders. Section 1.1.1.1 provides an overview of the main categories.
1.1 Background and context
Crowdfunding has increasingly developed since the early 2000s, fuelled by the widespread use of the
Internet. The crowdfunding industry is thus a relatively young industry. The total online alternative
6
See Annex 2: Stakeholder consultation
7
kom (2018) 0113 - Ingen titel
1865157_0009.png
finance market in Europe, which comprises predominantly crowdfunding, grew by 92% over previous
year to reach a value of EUR 5.4 billion in 2015.
7
Without the United Kingdom, by far the largest
market in Europe, the market size reached around EUR 1 billion. Overall, the European market is still
relatively modest compared to the online alternative finance markets in the US and Asia.
8
1.1.1 Key characteristics of crowdfunding
There is no single comprehensive definition of crowdfunding. Definitions are often limiting in view of
the innovative forms that crowdfunding service providers develop (Mollick, 2013). Crowdfunding is
an open call for the collecting of resources (funds, money, tangible goods, time) from the wider
public through an Internet-based platform for a specific project.
9
Crowdfunding platforms can thus
be viewed as 'two-sided' markets, i.e. a matching service that subsidises the (full or partial) cost of
offering access to one side (investors) with the fees charged on the other (project owners).
Crowdfunding platforms link fund seekers to investors/lenders.
The key characteristics of the crowdfunding platforms change according to the model under
consideration. The remuneration model of crowdfunding platforms typically charge the fundraising
project with a fee, as a percentage of the total amount raised, while investors are not usually paying
to invest on the platform or only if additional services are provided. The platform usually selects the
project that can be listed on the platform and either allows investors to pick the projects on their
own or it applies some discretion (after having established some key preferences for the investor) on
which project the money would be invested. In the case of crowdfunding platforms dealing with
financial products, platforms are also not trading with their own balance sheet in most of the cases.
Some lending-based crowdfunding platforms also rate the risk of different borrowers and place them
into portfolio of loans with similar risks. Investors then set the level of risk they want to undertake,
while money is automatically invested in the different portfolios. Therefore, the degree of agency
relationship that the platform has with investors might change according to the business model,
including the degree of discretion that the platform has in determining the investment decision.
Some equity crowdfunding platforms also exercise voting rights on behalf of client that are willing to
use a proxy. Similarly, some lending-based platforms also enforce the terms of the loan agreement
on behalf of the investor, directly or through debt collection agencies.
1.1.1.1
Business models
The type of fundraising activities varies greatly across the different crowdfunding models. The
motivation and type of participants, as well as the resulting relationship between investors/lenders
and fund seekers/borrowers, vary as well (Belleflamme, et al., 2012). There are different models of
crowdfunding platforms and any categorisation is provisional, as the market develops and integrates
new technologies in the service provision. The four main categories of crowdfunding platforms are:
1) Donation;
2) Investment;
"Sustaining momentum, the 2
nd
European Alternative Finance Industry Report", University of Cambridge
Judge Business School, September 2016.
8
In 2015, the volume for the Asia-Pacific region (mostly China) equalled EUR 94.6 billion and EUR 33.6 billion
for the Americas (mostly the US).
9
See also European Commission, Communication on Crowdfunding, 27 March 2014.
7
8
kom (2018) 0113 - Ingen titel
1865157_0010.png
3) Lending; and
4) Reward.
There are then a number of platforms that combine different models or run a model that cannot be
immediately classified under these four categories, but they are usually of a much smaller scale
compared to main ones. Nevertheless, we can identify a number of common features that are
helpful in explaining why economies of scale and market integration matter (see Table 1).
10
Notably,
the type of reward that investor are potentially getting is a key distinguishing feature across the
different models. It goes from no-tangible reward, like the recognition that donors get in donation-
based crowdfunding, to a very tangible reward, like the product or service that company produce in
exchange of a price usually lower than the future market value, when the product will be publicly
marketed.
Table 1. Typology of crowdfunding business models
Sub-type
Pure Donation
Donation Crowdfunding
Reward Donation
Other
Reward type
No reward
Recognition, tokens or other
non-tangible rewards
Low value tangible rewards
Equity, bond-like shares,
securities, revenue or profit
sharing; Projects accessible
to all investors
Securities, revenue or profit
sharing; Projects accessible
to accredited investors only
Interest only if project /
firms has revenue or profit
Fixed-term interest
Discounted invoices
Reward in form of a finished
product or a service
Tangible Reward
No tangible Reward
Entrepreneur-led
Investment-based
Crowdfunding
Investor-led
Forgivable Loan
Lending Crowdfunding
(peer-to-peer finance)
Traditional Loan
Pre- financing of account
receivables
Reward-based
Crowdfunding
Product/service reward
Source: Commission services.
Donation-based Crowdfunding
Donation-based crowdfunding typically involves investor providing a monetary contribution in
exchange of a non-tangible asset (like recognition or a token) or of a tangible asset of far lower value
10
Agrawal, A., Catalini, C., & Goldfarb, A. (2014); Belleflamme, P., Omrani, N., & Peitz, M. (2015); Belleflamme,
P., Lambert, T., & Schwienbacher, A. (2010).
9
kom (2018) 0113 - Ingen titel
1865157_0011.png
than the contribution (like a t-shirt or a pen). This crowdfunding model relies on philanthropy,
whereby people give money towards a 'good cause'. Backers may receive tokens that increase in
prestige as the size of the donation increases, but these tokens do not hold any economic value. In
2015 donation-based crowdfunding has the smallest average fundraising size (EUR 2 771). The
contribution is typically either directly channelled to the donee or collected by the platform (often a
Non-Governmental Organisation), which will then pass them onto the recipient(s).
Investment-based Crowdfunding
ESMA defines 'investment-based' crowdfunding as:
'[..] a call for funds for a specific project, usually through the internet. The people providing funds may
do so [..] in return for a right to participate in a share of the revenues or profits of the project, or
through the purchase of a debt, equity or other security.' (ESMA, Opinion on Investment-Based
Crowdfunding, ESMA/2014/1378, 18 December 2014, p. 6).
The model involves a project owner (fundraiser), an intermediary (the platform) and an investor (the
crowd). The number and size of the projects being financed may suggest that the crowd may also
include project owners, so the platform stands between a large number of fundraisers and investors.
The instrument being marketed can be an equity stake in the undertaking or any other type of
financial instruments in the form of a transferable security (e.g. debt securities). The reward relies on
a future stream of cash flows. In the case of an equity stake, as would be the case for listed
companies, the investing shareholders hold partial ownership of the company or project and stand to
profit, if it performs well, or lose everything if it fails. Generally, these instruments have limited
marketability on secondary markets, which increases the probability to lose the full investment.
However, as the market expands, there are greater chances that demand for trading on secondary
market will increase. In 2015 equity-based crowdfunding had the highest average deal size by model
at almost EUR 460 000, whereas the average deal size for debt-based securities is just over EUR 190
000. It is expected to see continued growth in average funding size for equity-based crowdfunding (in
the UK the average deal size is well over EUR 600 000).
Lending-based Crowdfunding
EBA defines lending-based crowdfunding as:
'Open calls to the wider public by fund seekers through a third party, typically an on-line platform, to
raise funds for a project or for personal purposes, in the form of a loan agreement, with a promise to
repay with (or in certain cases without) interest. The fund raisers may include individuals, start-up
companies or existing SMEs that are seeking an alternative means of funding, rather than the
traditional credit market.’
(EBA, Opinion on lending-based crowdfunding, EBA/Op/2015/03, 26
February 2015).
Unlike the traditional banking model, lending in crowdfunding platforms is dispersed while
borrowing is concentrated among selected project owners. These investments can yield a higher
return than savings accounts offered by banks, but can be subject to higher risk. No regulatory
safeguards, such as bank deposit guarantee schemes or investor protection schemes, protect these
investments, besides the different pecking order compared to financial instruments (investment-
based instruments) in case of bankruptcy. If the borrower defaults or the platform becomes insolvent
(in case it pools assets on own balance sheet), the lenders risk losing part or almost all of their
10
kom (2018) 0113 - Ingen titel
1865157_0012.png
investment. The fundraising entity commits to pay interest on the sum lent by each respective
investor at regular intervals, as it would be the case for a regular bank loan.
There is a variety of business models that could be defined as lending-based crowdfunding. This
depends mostly on the constellation of relationships between the parties involved, for example
business-to-business lending, peer-to-business, business-to-peer and peer-to-peer. Although many
hybrid models are emerging (as well as increasing participation by institutional investors), two main
models according to the recipient of the funds are observed:
1) Consumer lending; and
2) Business lending.
Consumer lending involves lending to natural persons for consumption purposes (e.g. travel, cars,
mortgage), while business lending involves providing funds to legal and natural persons for business
purposes. Business lending can also take the form of individuals or institutional investors purchasing
invoices or receivable notes from a business at a discount, holding it for the duration and receiving a
financial return.
11
Average deal size approaches EUR 100 000 for peer-to-peer business lending and peer-to-peer
consumer loans are on average EUR 10 000 per loan. Automation (automatic selection and automatic
bidding of small & large funding amounts) plays a key role in the development of this market
segment. Cambridge Centre for Alternative Finance reported that in 2015, 82% of consumer-lending
and of 38% business peer-to-peer lending
12
were funded through automation.
Reward-based Crowdfunding
Reward-based crowdfunding was the earliest form of modern day crowdfunding to develop. This
model is based on providing the investor (usually called 'backer') with a non-monetary reward, in the
form of the product or service that the fundraiser offers or is going to offer in the future. Backers
usually get a discount on the future market price, which increases with the distance in time between
contribution and finalisation and public marketing of the product. Contributors are not accredited
investors to participate in any financial returns. The only commitment of the fundraiser is to deliver
the service or the good at a future date. Average fundraising size is EUR 4 266.
Mixed models
In recent years, new operators have entered the market, which may offer mixed elements of the
different business models. For example, equity investors may, in addition to their equity stake,
receive additional non-monetary rewards. A further new crowdfunding approach is to sell a portion
of future sales (royalty) in return for an investment. This can be attractive for investors as they
receive regular income from gross revenues, while benefitting the entrepreneur(s) who keeps full
ownership of the company. The downside is that royalties are deducted from revenues and therefore
add to the expenses of running the business, thereby making this model potentially attractive only
for high profit margin businesses.
11
Due to rapid growth in popularity, invoice trading is sometimes highlighted as a separate business model.
Invoice trading has been the fastest growing alternative finance model in continental Europe, growing from
EUR 7 million in 2014, up to EUR 81 million in 2015.
12
"Sustaining Momentum, the 2
nd
European Alternative Finance Industry Report" op.cit. p.44
11
kom (2018) 0113 - Ingen titel
1865157_0013.png
1.1.1.2
Economics of crowdfunding and key stakeholders
Crowdfunding can help (innovative) start-ups to provide financing in the early stages of business
development. Besides the monetary benefit, crowdfunding can also offer a number of non-monetary
benefits,
13
such as:
i.
ii.
iii.
Validation of the business idea;
Product validation (elicitation of customer preferences regarding product features by means
of feedback and endorsements);
Market validation (testing the waters before a possible official market launch); and
iv.
Market penetration/expansion.
For investors/lenders, the type of financial reward depends on the crowdfunding model. In the
lending crowdfunding model, loans plus interest are repaid based on pre-launch conditions in case of
traditional lending, contributions are only repaid if and when a project generates revenue or profit in
case of forgivable loan type lending. Equity crowdfunding attempts to raise money from the crowd in
exchange for a stake in the firm.
Peer-to-peer business lending is used particularly by young SMEs and micro-companies that have
established early cash flows but are in need of additional funding to expand or bridge short-term
funding gaps. The high growth rate suggests that there is a strong demand for this type of funding
and that these companies are either unable to attain a standard business loan from a bank or achieve
preferable financing conditions on P2P business lending platforms. While peer-to-peer consumer
lending has started to enable people to balance their time spending directly without a bank or other
intermediary acting as an indirect facilitator, this type of crowdfunding does not contribute to the
alternative funding of firms. The same applies for donation-based crowdfunding, which is mainly
aimed at charities and other philanthropy or artistic enterprises. In view of financing young
innovative firms peer-to-peer business lending and investment-based crowdfunding are the most
relevant types.
Investment-based crowdfunding is usually less attractive for very young companies as low revenues
and total profit-levels tend to limit the ability to raise sizeable funds. Super-fast growing companies
can mark an exception in this regard. Investment-based crowdfunding is generally more aimed at
firmly established companies that are too small to access public capital markets but wish to finance
substantially larger projects compared their current operations in order to drive further expansion.
Selling equity stakes not only acts as a funding source but it also distributes business risk across a
larger number of stakeholders and can bring experienced partners into the business.
13
Paschen (2017) and references herein (p.181)
12
kom (2018) 0113 - Ingen titel
1865157_0014.png
Table 2. Start-up crowdfunding: crowdfunding model, rewards and information asymmetries
Source: Paschen (2017)
Network effects
A platform with a high number of active investors will be more attractive for an entity seeking to
raise funds, as the additional investors will increase the likelihood to raise sufficient funds for the
project. Likewise, a platform with a lot of accessible fundraising projects will be more attractive for
investors. It provides them with a wider choice and allows for greater diversification of investments
where the investor engages in multiple projects.
Demand on both sides of the market give rise to network external effects, both across
investors/lenders and fund seekers/borrowers (cross-group
external effects)
as within the
investors/lenders' or fund seekers/borrowers' group (within-group
external effects).
Overall,
platforms will exhibit positive cross-group externalities from investors/lenders to fund
seekers/borrowers and positive within group externalities for investors/lenders (Belleflamme, P.,
Omrani, N., & Peitz, M., 2015).
This interaction creates demand side-economies of scale, also referred to as network effects. Each
new investor/lender or fund seeker/borrower creates additional value across the user group on the
other side of the platform respectively i.e. a positive externality from the consumption of the service.
Similarly, there are network effects that act within a single user group. A larger number of informed
investors on a platform may, for example, act as a form of guidance for other investors and thus
improve their returns (positive externality). Likewise, a larger number of fund seekers/borrowers
competing for potential investors may reduce the chances of attracting funds (negative externality).
This externality acts simultaneously with the cross-group positive externality for investors so that the
overall effect in terms of social welfare remains positive in most scenarios.
The above described network effects become significant once a certain number of subscriptions are
achieved often referred to as 'critical mass'. Given that the size of the user base on a platform is
positively correlated to the value of the service, more users imply a higher value and thus increase
demand. However, in order for this interaction to work, a platform needs a certain number of users
to create sufficiently strong network effects.
13
kom (2018) 0113 - Ingen titel
1865157_0015.png
Table 3. External effects of crowdfunding platforms
Increase number of campaigns
(fund seekers/borrowers)
more choice
harder to reach sufficient
funding
more competing projects
Increase number of
investors/lenders
Investor/lender
easier to
funding
easier to
funding
reach
sufficient
Fund seeker/borrower
reach
sufficient
Source: Commission services.
The network effects stimulate concentration in the crowdfunding market. Big platforms become
even bigger, while small platform will not reach the critical size and will be forced out of the market.
Finance is in general considered a distance-sensitive business, especially when it comes to small
fundraising projects. However, crowdfunding can overcome this proximity bias given its reliance on
the Internet to match investor/lender with fund seeker/borrower. Current research indicates that
crowdfunding has partially overcome this proximity bias (Agrawal, Catalini and Goldfarb 2011;
Mollick 2014), while geographic clusters exist and proximity may still impact the type and success
rate of projects.
14
Nevertheless, the crowdfunding market differs along crowdfunding model and
sector allowing for specialisation, so opposing forces may counterbalance this concentration trend
(Belleflamme, Lambert, and Schwienbacher 2010).
Information asymmetries
Information asymmetries are another key feature of crowdfunding markets, besides network effects,
due to its highly dispersed investor structure. Ex-ante, adverse selection problems could arise given
that investors/lenders lack the necessary information to assess the likelihood of success of projects.
Hence, platforms risk attracting only low-quality projects, given that high-quality projects may not
find the required funding at adequate conditions, due to investors' inability to assess their quality.
15
Ex-post, a moral hazard problem might face difficulties to ensure that fund seekers/borrowers deliver
what they have promised.
From the investor/lender perspective, an investment could be riskier than expected due to
risk/return profile not being properly disclosed and/or more costly than expected due to costs (direct
and indirect) not properly disclosed. For the fund seeker/borrower, the funding could be more
expensive than expected when costs (direct and indirect) and risk/return profile are not properly
disclosed, which could also lead to reputational risk for the platform (lack of transparency /
misleading information). Moreover, invested capital (partly or completely) may be lost or not
reclaimable due or the fund seeker/borrower may be faced with the inability to repay dues due to
platform failure (counterparty risk). The project may not get funded or the investment lost due to
fraud (risk of fraud) or a delay or mistake in the information flow, processing, safekeeping or
administration (e.g. computer breakdown, mistake) (operational risk). All these risk can also lead to
reputational risk for the platform.
14
'The average distance between artists and investors is about 3,000 miles, suggesting a reduced role for
spatial proximity.' (Agarwal, Catalini, Goldfarb 2011).
15
This is known as the 'lemon problem' (Akerlof, 1970).
14
kom (2018) 0113 - Ingen titel
1865157_0016.png
Belleflamme and Thomas (2016) suggest five governance strategies for crowdfunding platforms to
deal with these asymmetric information problems: (i) information dissemination; (ii) fraud
prevention; (iii) provision point mechanism, whereby fundraisers only receive money if a minimum
threshold is reached; (iv) facilitate information exchange among investors/lenders; (v) establish trust
in the platform. Essentially these strategies attempt to increase the amount and quality of available
information; built reputation signalling high-quality platforms and projects; and reduce monitoring
costs due to moral hazard.
Although crowdfunding is still relatively small compared to the complete alternative finance market,
it is considered to be an essential chain to allow innovative SMEs to develop and to bridge the ‘death
valley’ between own resources, friends and family and attracting financing from sophisticated
investors like business angels and venture capital providers. Crowdfunding provides an alternative to
traditional sources of finance which aren't available due to information asymmetries (lack of credit
and business history) or often overly expensive for start-ups to access (Tunguz, 2013).
The alternative financing methods of crowdfunding has shown a significant potential for financing
firms, in particular for SMEs and micro-enterprises, and bridge existing funding gaps. SMEs will
attract different types of financing depending on their stage of development as mirrored by the
funding escalator (see Figure 1). Crowdfunding is particularly interesting for start-ups that are trying
to develop and maintain a viable business from an initial business idea (Stemler, 2013).
Crowdfunding has also been identified as being important for the development of innovative firms
(Stanko and Henard, 2017).
Figure 1. Funding escalator
Source: Commission services.
Each crowdfunding model brings specific monetary and non-monetary benefits that can be matched
with start-up needs as they grow over the start-up life stage. Paschen (2017) shows that lending
15
kom (2018) 0113 - Ingen titel
1865157_0017.png
based and investment based crowdfunding are associated with SMEs that are in the start-up and
growth phase respectively.
1.1.2 Size, geographic overview and trends
The European alternative finance market as a whole raised a total of funds of EUR 5.43 billion in
2015. This represents an annual growth rate of 92%. The market remains heavily dominated by the
UK which constituted a market share of 81% with EUR 4.41 billion in 2015. The rest of the European
market raised a total of EUR 1.2 billion and grew at a lower rate of 72% in that year. In 2015, a total
of EUR 4.2 billion were raised through crowdfunding in the EU. This makes crowdfunding the most
important sub-market of the alternative finance sector. Excluding the UK, the countries with the
largest total market volumes in 2015 were France, Germany, the Netherlands, Finland and Spain.
Examining the market share in more detail, peer-to-peer consumer lending has the largest market
share, followed by peer-to-peer business lending and equity-based crowdfunding. In 2015 peer-to-
peer consumer lending had a market share of 35.9% worth EUR 366 million, excluding the UK. It is
the most established market segment, with growth between 2014 and 2015 declining to 33% from
75% between 2013 and 2014.
Figure
2:
European Alternative Finance Market Volumes 2013-2016 in EUR billion
9
8
7
6
EUR billion
5
4
3
2
1
0
7.67
5.43
5,608
2.83
4,411
2,236
2,063
0,594
2014
EU27
UK
1,019
2015
2016
1.13
0,804
0,326
2013
Source: University of Cambridge (2017)
Peer-to-peer business lending had a market share of 20.8% in 2015 worth EUR 293 million and
experienced the highest annual average growth rate of 223% between 2013 and 2015. While EU
investment-based crowdfunding did not grow quite as strongly as P2P business lending, it
nonetheless achieved a 3-year growth rate of 128%. Reaching a market share of 15.6% worth EUR
222 million, the European equity-crowdfunding market is significantly larger in relative terms than
the American and Asian market. As for P2P business lending, the high growth rate indicates that
16
kom (2018) 0113 - Ingen titel
1865157_0018.png
smaller firms in the EU are in need of additional funding and manage to realise good conditions via
crowdfunding platforms.
Figure 3: European Alternative Finance Market by category Volumes and average growth rates 2013-
2016 in EUR million
Donation-based
Reward-based
2016
P2P Consumer
2015
2014
P2P Business
2013
Investment -based
0
500
1000
1500
2000
2500
3000
3500
4000
Source: University of Cambridge (2017).Note: P2P Business includes 'p2p property lending', which is
used to finance property development projects.
Despite the relatively fast development of the European market for crowdfunding, the continent has
not kept pace with other major regions around the world. As seen from the figures below, even
when including the UK, the EU market has not been developing as fast as in other areas. Given that
the growth rate in Europe has already started to slow, it is possible that the gap in contrast to other
regions will continue to grow over the coming years.
17
kom (2018) 0113 - Ingen titel
1865157_0019.png
Figure 4: World Online Alternative Finance Volumes 2013-2016, by regions (bn EUR)
250
205
200
150
European Union
Americas (inc. US)
86
100
China
35,2
7,67
2016
50
1,13 3,2 4,7
0
2013
2014
2,83
9,7
20,5
24,2
5,43
2015
Source: University of Cambridge (2017).
The European market has grown asymmetrically and remains heavily concentrated in a few large
countries, specifically the UK, France and Germany in terms of the number of platforms and volumes
of capital raised. Excluding the UK, the countries with the largest total market volumes in 2015 were
France (EUR 319 million), Germany (EUR 249 million), the Netherlands (EUR 111 million), Finland
(EUR 64 million) and Spain (EUR 50 million).
The expansion of crowdfunding remains heavily domestically oriented in the EU with little cross-
border activity. Between 2013 and 2014, there was EUR 180 million of cross-border funding for
successful projects which amounted to 8% of the total EUR 2.3 billion raised for successful projects.
However, this was predominantly raised through non-EU platforms. Cross-border activity within the
EU amounted to EUR 16.9 million, a mere 0.73% of the total raised in this period.
A recent survey
16
indicates that for almost half of the platforms none of the funds raised came from
foreign investors; moreover, more than three-quarters of the platforms indicated that they had
raised less than 10% from foreign investors. With regard to foreign outflows, only a quarter of
platforms raised funds for projects outside the national borders.
While crowdfunding was only a marginal trend being embraced by early adaptors a few years ago,
the sector has grown at an extremely rapid pace over the last years and is seeing increasing interest
in all levels of society. The European crowdfunding market has experienced more institutional
involvement recently in terms of funding and platform ownership suggesting that the market is
beginning to mature. Participation rates of institutional investors in crowdfunding grew by 83%
between 2013 and 2015, with institutional investors providing around one quarter of funds in peer-
to-peer lending and 8% in equity-based crowdfunding. The increasing rate of institutional investors
demonstrates a rise in trust levels vis-à-vis crowdfunding investments. Given the large sums of
16
"Sustaining momentum, the 2
nd
European Alternative Finance Industry Report", University of Cambridge
Judge Business School, September 2016 (University of Cambridge (2016))
18
kom (2018) 0113 - Ingen titel
institutional money potentially available for the further development of the market, it will be crucial
to maintain trust by establishing standards that act to uphold high levels of integrity. Inability to
curtail risks of fraud or other illicit activity could be a major setback for the development of the
European market. The European crowdfunding market is also showing early signs of consolidation
with the first platforms merging or attempting to take over platforms and unsuccessful platforms
exiting the market. Moreover, enabling regulation in Member States has been shown to correlate
with high market volumes in the industry. At the same time, existing laws de facto impede certain
types of crowdfunding to develop in some Member States. While the market continues to grow
quickly, regulatory barriers are limiting the potential of the European crowdfunding market. More
cross-border activity would spur the further development of the industry and access-to-finance for
early-stage firms, especially in small Member States and those Member States with less developed
national markets.
1.2 Problem definition
The following section explores two main problems in the European market for crowdfunding: one,
the inability of the crowdfunding market to scale up at a level that would provide a meaningful boost
to early stage funding for businesses across Europe; two, the lack of trust by investors to engage in
cross-border activity.
While some domestic crowdfunding markets are developing rather fast, the size to finance these
platforms can raise is too small compared to the overall early-stage financing needed by non-
financial corporations. Cross-border activity is almost absent and platforms struggle to scale up
enough to be able to undertake cross-border activities. Most notably, while project owners are
willing to fund themselves cross-border, the cross-border accessibility and demand on crowdfunding
platforms is fairly limited, beyond what the local origins and the limited international exposure of the
project may naturally determine. A major consequence, among others discussed in the following
sections, is the inability to create a solid pool of early-stage financing across Europe, which would
serve very young businesses irrespective of their place of establishment.
Concerns about the reliability of crowdfunding platforms are considered as key risks for the future
growth of the industry. The biggest risks perceived are loan defaults or business failures, fraudulent
activities or the collapse of platforms due to malpractice. This reflects concerns about weak
governance practices, notably in areas such as risk management or the prevention of conflict or
misalignment of interests. Moreover, investors appear not to have sufficient information or to be
misinformed about the potential risks of projects or about the operation of platforms. Requirements
to ensure an adequate disclosure of offers intermediated through crowdfunding platforms do not
exist or vary considerably which complicates comparability. Moreover, from a financial integrity
perspective, platforms remain vulnerable to issues concerning the security of client data and the use
of crowdfunding for illicit activities.
The problem tree below provides an overview of those two major problems, with its underlying
drivers and consequences.
19
kom (2018) 0113 - Ingen titel
1865157_0021.png
Drivers
Problems
Consequences
D.1 Conflicting frameworks for crowdfunding activities
Different licensing regimes
o
scope (business models; instruments)
o
safeguards (disclosure; due diligence)
o
business requirements (organisational;
conduct)
Fragmented application of different thresholds and
exemptions under existing EU legislation
Different definitions of business models
Fragmented investor protection frameworks (e.g.
conduct and information disclosure) across the EU
while the nature of the risk is similar
P.1 Barriers to cross-border scaling-up,
leading to underdevelopment
High market entry costs
Legal uncertainty (e.g. compliance
risks, like regulatory arbitrage)
Enhanced operational and
sustainability risks for different
business models (incl. profitability)
Regulatory arbitrage risk
C.1 Less efficient and stable EU capital
market
Risks of cross-border spillover effects
(generalised lack of confidence)
Less developed capital markets and so
risk sharing mechanisms to stabilise
Europe's financial system
P.2 Investors' lack of trust to engage on a
cross-border basis
High search costs due to enhanced
information asymmetries and
divergent disclosure frameworks
Uncertainty about legal protections,
individual rights, etc.
C.2 Lack of early stage financing in the EU
Gap in early stage funding escalator for
innovative businesses
Difficulty to finance larger funding
rounds in MS with small internal markets
Lack of competitive tools to lower
funding costs for SMEs
D.2 Features of crowdfunding
Enhanced asymmetric information due to the
dispersed investor structure
Enhanced asymmetric information when dealing
with products embedding a financial return
Out of scope Drivers
Different legal systems (company law, etc)
Taxation
Other factors (e.g., language and financial education)
20
kom (2018) 0113 - Ingen titel
1865157_0022.png
1.2.1 Barriers to cross-border scaling up leading to underdevelopment
SMEs are heavily reliant on short-term unsecured bank funding. Currently, the weight of crowdfunding over the total
SME funding is still fairly small, with bank funding to SMEs in the order of hundreds of billion euros, compared to the
EUR 7.671 billion of the whole European crowdfunding market in 2016. Nonetheless, as banks restructure and
consolidate, there is a structural downward trend in the availability of the most used bank financing tool for SMEs, as
well as bank loans below EUR 1 million (see Figure 5). The development of crowdfunding markets as a stable funding
tool for businesses is increasingly becoming a key element for Europe's financial system and partially replacing short-
term unsecured bank funding.
Figure 5. Bank lending to businesses in the Euro area (EUR million; end of the year, outstanding amounts)
€ 750.000
€ 700.000
€ 650.000
€ 600.000
EUR mn
€ 550.000
€ 500.000
€ 450.000
€ 400.000
€ 350.000
2010Dec 2011Dec 2012Dec 2013Dec 2014Dec 2015Dec 2016Dec 2017Sep
Revolving loans and overdrafts
Loans up to EUR 1 mn (rhs)
€ 75.000
€ 70.000
€ 65.000
€ 60.000
€ 55.000
€ 50.000
€ 45.000
€ 40.000
€ 35.000
EUR mn
Source: ECB Data Warehouse.
While the European crowdfunding market has skyrocketed over the recent years, with annual growth rates
exceeding 100% in some sub-sectors, there are increasing indications that the rapid expansion phase may
significantly slowdown in coming years. Establishment of new platforms seems to have peaked and is foreseen to
decrease further, as 2016 started to show a phase of consolidation within MS. The growth rate in the most
established market segment of peer-to-peer lending, dropped by more than half to 33% in 2014-15 (75% in the
previous year). Furthermore, the European crowdfunding sector remains strongly fragmented along national
borders, despite crowdfunding is less sensitive to distance than traditional finance (Agarwal, Catalini and Goldfarb
2011). More than two thirds of European platforms collected 5% or less of their total funds from cross-border
investors. 76% of platforms reported that no project listed on their platform comes from outside the national
border. 16% of platforms indicated that less than 10% of funds raised left the country of origination. Only 10
Member States
17
have active investment-based crowdfunding platforms operating in multiple jurisdictions.
18
While
the survey reported the existence of 33 platforms with some form of MiFID license, only 5 tied agents related to
those firms were reported to have been operational in another Member State. As all of them were reported in the
UK, this indicates that – given the high regulatory costs involved with entering a new market – platforms focus their
efforts on large domestic markets, thus depriving less-developed and smaller Member States from the benefits of
alternative finance.
17
18
France, Germany, Italy, Netherlands, Spain, United Kingdom, Finland, Norway and Sweden, Czech Republic.
Please,
see
ESMA
Response
to
the
CMU
Mid-Term
Review
consultation
https://www.esma.europa.eu/sites/default/files/library/esma31-68-147_esma_response_to_cmu_mid-term_review.pdf
21
kom (2018) 0113 - Ingen titel
1865157_0023.png
Figure 6. Total crowdfunding volume, average size of inflows and outflows, 2013 -2016 (EUR million)
€ 9.000
€ 8.000
€ 7.000
€ 6.000
€ 5.000
€ 4.000
€ 3.000
€ 2.000
€ 1.000
€0
EU
2013
inflow
2014
2015
outflow
2016
€ 650
€ 515
€ 7.671
Source: Commission services' estimates from University of Cambridge (2017) . Note: the estimates are based on the
assumption that outflows and inflows are similarly distributed across all categories of platforms.
While some platforms are receiving cross-border investments, they are often not actively marketing in those
countries, mostly because of the regulatory implications, as reported in case studies reviewed in Annex 7. The
regulatory environment confronting the crowdfunding industry is very diverse, presenting considerable complexity
for those platforms keen to extend operations on a cross-border basis without a passport and high compliance costs
due to different requirements in national jurisdictions.
19
Licensing requirements in many Member States create
additional cost barriers not just through licensing and local advisory fees, but also due to the rising legal uncertainty.
Platforms are often not allowed to operate under the same business model and have to adjust their models
according to separate jurisdictions. One platform indicated that often even the local law offices from the target
Member State cannot assure them that they could operate within the market without the possibility of legal
sanctions as the.
A number of platforms have noted that bespoke national regimes are one of the major hurdles to cross-border
activity. As Member States do not coordinate their actions whilst implementing tailored regulatory frameworks for
crowdfunding activity, these tend divergence in a number of aspects such as permitted activity, instruments,
thresholds and other requirements – making it increasingly difficult for businesses to simultaneously comply with a
number of different requirements. These platforms also highlighted that EU action should not be delayed because an
increasing number of Member States are coming forward with their own locally tailored regimes and are also
reviewing them to add further detail to the requirements. This continues to create even greater obstacles for cross-
border activity and may in the end create a great number of entrenched local frameworks and heavy resistance
towards convergence by local market incumbents that want to preserve their existing business models.
Market observations indicate that there are currently no platforms that actively operate at a pan-European level.
Platforms that do operate cross-border generally choose to do so only within a limited number of (often
neighbouring) countries. A platform notes
20
that "…operating
in seven different countries requires compliance with
seven different crowdfunding regulations or, in the absence of those, with other local rules."
Platforms that accept
cross-border fundraising projects and investments state that they are facing significant legal uncertainties in terms of
19
"The
use of a MiFID license doesn’t seem to make the cross-border experience easier. The different national regulatory regimes
don’t allow for the full passporting of the license in the MS and they imply high compliance costs too."
European Crowdfunding
Network & Osborne Clarke, "Barriers to the cross-border development of crowdfunding in the EU", June 2017, p18.
20
Idem, p19
22
kom (2018) 0113 - Ingen titel
1865157_0024.png
whether this could stand in conflict with national legislation applying in their home MS. For a third of the platforms
in the survey
21
, compliance costs can make up more than 20% of total operational cost in cross border business and
for 50% they make more than 10% of operational costs (see Figure 7).
Figure 7. Impact of regulatory costs on operational costs
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
<5% of total
5-10% of total
10-20% of total
>20% of total
operational cost operational cost operational cost operational cost
10%
20%
30%
40%
Source: European Crowdfunding Network and Osborne Clarke
These costs can have negative consequences for the level of competition, leading to market concentration, higher
costs and less choice for clients with a lower drive for innovation. As platforms continue innovating their business
models, expansion into other markets would also support profitability and ensure platforms can develop on a
sounder footing and, as the market matures, can consolidate at European level. As they mostly rely on a
remuneration-based model, i.e. charging project owners as a percentage of the capital raised (according to the 'two-
sided' characteristic of the market discussed in section 1.1.1). Cross-border is also a necessary step for platforms
developed in smaller member states, where the size of the domestic market (in terms of number of domestic project
owners as well investors with a suitable risk profile) may not be sufficient enough to ensure long-term sustainability
or even emergence of such a market. Statistics collected by ESMA show that investment-based crowdfunding
platforms are pre-dominantly concentrated within the largest and more developed European markets that have the
capacity to raise significant funding amounts. On the other hand it is well-recognised that there is a very significant
gap for early stage investments in small European States.
Market fragmentation also reduces the benefits of network effects on funding costs and pushes the market into a
vitious circle that could constraint crowdfunding markets for a long time. Furthermore, in targeted consultations, the
industry has highlighted that profitability remains an issue for the sustainability of their business models due to
insufficient scale, even for established platforms in large markets. ESMA highlights that the fees charged by
investment-based platforms have been increasing – as indicated by the 2016 survey, reaching on average 5-8% of
the total fundraising amount, which puts the total revenues for the whole European crowdfunding industry between
EUR 272 and 434 million. One of the largest investment-based platforms in the UK has helped businesses raise GBP
358 million since 2011. Given that they charge 7% of the total amount, revenues to cover 6 years of operations and
around 80 staff thus equals GBP 25.06 million (a bit more than EUR 4 million per year).
Respondents to the FinTech Consultation
22
generally argued that the existing national regimes for crowdfunding
have a significant impact on sector development. The vast majority of national competent authorities stated that the
21
Idem, p32
23
kom (2018) 0113 - Ingen titel
1865157_0025.png
existence of multiple regimes and the lack of a common EU regulatory regime create barriers for cross-border
expansion of crowdfunding platforms. None of them mentioned proximity between investor and fundraiser as a
reason for platforms not to develop cross-border. Almost half of the other respondents equally noted that national
regulatory regimes hinder cross-border activities for crowdfunding and peer-to-peer finance. They noted that
harmonisation at the EU level could reduce fragmentation of the EU market, mainly attributable to divergences in
the regimes adopted by different Member States. It was also highlighted that the MiFID passporting regime, despite
its high cost, is often ineffective in facilitating activities across the EU, as some Member States require separate
authorisation under the respective bespoke national regimes, regardless of whether firms hold a MiFID license in
another MS. Respondents likewise stressed (in line with EBA) that the EU passport under the Payment Service
Directive could never cover the full range of activities, also in the case of lending-based crowdfunding platforms.
According to most respondents, the lack of an EU framework and the lack of passporting rights make it complex and
costly for crowd and peer-to peer platforms to scale up across the EU.
23
Moreover, there is additional uncertainty weighing on platforms' decision to go cross-border. EBA highlighted that
'[..]the lending-related aspects are not covered by EU law, leaving several risks and risk drivers that the EBA had
identified unlikely to be addressed. [..]the EBA concludes that the business models of lending-based crowdfunding
platforms do not fall inside the perimeter of credit institutions and their typical business model as defined in the EU
legislation. The funds provided by lenders with crowdfunding platforms would therefore not qualify as deposits
eligible for protection under a deposit guarantee scheme, taking into account the definition of ‘deposit’ in Article 2(1),
point 3, of Directive 2014/49/EU (the Deposit Guarantee Schemes Directive).'
24
It suggests that the risk of regulatory
circumvention or uncertainty, due to a patchy framework of national regulations, may discourage further cross-
border activity, both for platforms and investors.
Other barriers to cross border expansion were identified during a workshop with platform representatives. One
platform found the lack of reliable data such as access the creditworthiness of foreign SMEs to considerably limit the
countries towards which a cross border expansion is possible. Another platform recalled that, besides the substantial
national rules they have to comply with within each jurisdiction and the licencing process itself often proves to be a
long, tedious and disheartening process.
Moreover, as it was pointed out by a respondent,
the general absence of a clear regulatory framework may inhibit
new market entrants. They would be concerned with the consequences of sunk costs and future potential regulatory
costs when acting without a basic guiding regulatory pathway for making jurisdictional and legal choices.
The study by ECN and Osborne (2017) produced a number of case studies on major European platforms operating
cross-border.
Annex 7: Case Study extracts
provides examples of the different issues that these platforms faced
when attempting to operate in other EU Member States. The main report of the study also highlighted six different
methods
25
that platforms currently have to resort to for cross-border transactions, highlighting the disadvantages of
each and concluding that no suitable framework currently exits. It is worth noting that two of these methods are not
comprehensive as they do not permit active cross-border marketing of services and provide only a partial solution
22
23
See Annex on Stakeholder Consultations.
A more detailed analysis of the consultation responses in provided in the Annex.
24
EBA,
Opinion
on
lending-based
crowdfunding,
2015,
available
at
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
03+%28EBA+Opinion+on+lending+based+Crowdfunding%29.pdf
25
Identified methods for cross-border operations: i) Operation via distinct business in each Member State under local
legislation; ii) Operation via a partner platform to collect investment from investors outside the home Member State; iii)
Operation via EU (MiFID) license for the platform as a financial service provider; iv) Operation via a special purpose vehicle (SPV);
v) Accepting cross-border investments (for predominantly local deal-flow); vi) Brokering cross-border investments to local (and
other) investors
24
kom (2018) 0113 - Ingen titel
1865157_0026.png
for some business models in certain Member States. As for the other four options, the study underlines that the
most significant obstacles are separate, lengthy and thus costly national regulatory approval procedures (up to one
year), time-consuming processes for identifying suitable partnerships in other Member States, costly compliance
with MiFID as well as the cost of setting up special purpose vehicles and their recognition within different local
regulation.
To conclude, besides the uncertainty for platforms and investors, the high costs for the crowdfunding industry to
scale up and overcome low profitability may increase pressure towards domestic concentration, leading to rent-
seeking behaviours and higher costs for fund raisers that may actually reduce the appetite for this funding tool for
small businesses.
1.2.2 Investors' lack of trust to engage on a cross-border basis
Even though crowdfunding has been rapidly expanding, the vast majority of investors remain cautious about its risks.
As suggested in Figure 6, the level of cross-border inflows (cross-border investments) is only a small fraction of total
volumes, even lower than the outflows, i.e. how much fundraising goes to non-domestic projects. Its size relative to
the total has not changed since inception in 2013.. The share of cross-border activity has remained stable at very low
level (roughly 4% for inflows and 7% for outflows) between 2013 and 2015. A full understanding of the project risk
associated with crowdfunding is often constrained by the lack of metrics, due to the modern nature of this financing
tool.
26
Nonetheless, a survey conducted by the Cambridge Centre for Alternative Finance shows that the chief
concern for the platforms is the reliability of crowdfunding platforms themselves. The graph below shows that three
most perceived threats for investors are the collapse of a platform due to malpractice, project fraud and an increase
in project failure-default rates. Only the latter can be directly assessed through metrics. In case of frauds or
malpractice, the platform could be victim itself of the fraudulent behaviour of the project promoter, especially
without obligations and liability for the latter.
Figure 8. Industry perceived risks to future growth of the alternative finance sector
The collapse of one or more well-known platforms
due to malpractice
Notable increase in default rates/business failure
rates
Fraud involving one or more high-profile
campaigns/deals/loans
Changes to regulation at a national level
Cyber security breach
Changes to regulation at a European level
Potential 'crowding out' of retail investors as
institutionalisation accelerates
0%
High or very high Risk
20%
40%
60%
80%
100%
Medium Risk
Low or very low risk
Source: University of Cambridge ( 2017).
26
There is, nonetheless, some preliminary evidence that the returns from investment-based platforms may resemble those of
venture capital investment.
25
kom (2018) 0113 - Ingen titel
1865157_0027.png
Research indicates that there is limited confidence for cross-border investment in particular. As reflected in a
targeted survey designed by the Financial Services Users Group and the European Crowdfunding Stakeholders
Forum, there is a clear lack of trust towards platforms established in neighbouring Member States. Figure 9
illustrates that 71% of lending-based platform users and 42% of equity platform users would not invest with the
same confidence, if the platform was not established within their home jurisdiction.
Figure 9. Percentages of responses to the question: "Would you invest with the same confidence through platforms
established in another EU Member State?"
Equity
40%
35%
30%
25%
20%
15%
10%
5%
0%
YES, I already do
YES, I would invest I would invest some NO, I would not invest
invest through
with the same
money through
through foreign
platform(s)
confidence.
foreign platforms, but
platforms
established in a
not as much as
country different from
through domestic
my country of
ones.
residence.
No response
1%
1%
13%
20%
15%
11%
36%
31%
Lending
34%
36%
Source: European Crowdfunding Network and Osborne Clarke (2017), "Identifying market and regulatory obstacles to
cross-border development of crowdfunding in the EU"
The mistrust towards foreign platforms may reflect concerns about weak governance practices, notably in areas,
such as risk management or the prevention of conflict or misalignment of interests. Continuous monitoring of the
sector and the independent initiatives adopted by the Member States have shown
27
that authorisation, organisation
and conduct of business requirements for crowdfunding platforms within the Member States vary considerably
(please Annex 1 for an overview of selected Member States). Targeted consultations with lending-based platforms
also pointed out differences in the treatment of professional investors, who may be required to check compliance
with know-your-customer rules in multiple (EU) legislations that are implemented nationally (such as anti-money
laundering legislation or the E-Commerce Directive). As the investor would be facing high cost, vis-à-vis the size of
the investment, platforms shall be allowed to discharge these obligations, but this is not always the case. In some
Member States, there is currently no or unclear application of Anti-money laundering rules to lending-based or
investment-based (in non-transferable securities) crowdfunding platforms, which are in some cases shifted onto
professional investors investing on these platforms (from their home authority). This complexity fosters uncertainty
that increases investors' distrust to engage cross-border via these platforms.
An analysis of the different disclosures & safeguards applied by the Member States was carried out in a recent report
commissioned by the European Commission.
28
The study showed that, although most countries have a certain
system for safeguarding against these risks in place, the approaches can be very different and thus the systems
27
28
Commission Staff Working Document, "Crowdfunding in the EU Capital Markets Union" May 2016.
European Crowdfunding Network and Osborne Clarke, "Identifying market and regulatory obstacles to cross-border
development of crowdfunding in the EU", 2017.
26
kom (2018) 0113 - Ingen titel
1865157_0028.png
diverge. The divergence of the national approaches towards authorising and monitoring platforms creates
uncertainty regarding the level of scrutiny they are subject to within a neighbouring jurisdiction. Given that a
different system is applied within each regime of the EU28, the average retail investor may not be able to devote
sufficient resources to finding and validating information on the applicable safeguards. As a result, he may choose to
remain and invest within his home jurisdiction. Furthermore, there are reputational risks which may result in
scandals within one jurisdiction creating mistrust towards the whole crowdfunding sector. The Trustbuddy Scandal
of 2015
29
is said to have had a reputational effect on other Scandinavian platforms as a whole.
Concerns regarding transparency and project fraud are well-grounded, as investors may not have sufficient
information (and often capability) to make proper risk assessments. Although widely spread, fears of direct fraud
have not manifested, it remains uncertain as to whether investors receive sufficient information on the projects
prior to investing and whether platforms perform sufficient pre-screening. A solid approach would be to rely on
other measures such as risk warnings, funders' categorisation and funders' tests, due diligence as well as softer
disclosure requirements.
Although with the same objective, Member States have taken different approaches towards reaching this goal. For
example, as regards fundraisers' disclosure to funders - platforms are expected to follow certain procedures
regarding this information flow. Common basic information is that fundraisers are obliged to disclose information to
funders concerning their ID and business in a fair and not misleading way. However, differences exist in the way this
disclosure is filed and the information disclosed. Two Member States have designed a template which must be filed
by fundraisers. In another Member State, fundraisers are obliged to file a three-page fact sheet, if no prospectus is
required, where they disclose information about their business. In some other countries, the regulators authorize
platforms to check for the complete and accurate information provided by fundraisers. Similar principals apply to
prescribed due diligence procedures by the Member State. As highlighted in the recent report on barriers to cross-
border crowdfunding, these can vary considerably.
30
This creates an issue of scalability as due diligence and other
procedures are often an essential part of a platforms' business model. It has also been observed that some platforms
carry out high-level due diligence on their listed projects, however do not disclose the information due to fears of
legal suit.
Diverging measures of investor protection create unnecessary confusion for retail investors that have to familiarise
with different systems. Prospective and current investors demonstrate a lack of trust, as they may not receive
sufficient information about the returns and risks of the projects. This uncertainty is further increased as the
conducted due diligence and presented information are often carried out in different ways. This results in high
search costs that defer investors who would otherwise be willing to invest in other Member States. The issue of trust
is also highly applicable in defining the selection criteria used in cases where automatic decisions on investors'
money are taken by the platform. The issue of liability of the platform, when provide discretionary services, goes
down to delineate the responsibility of fair representation between the project owner and the platform. Uncertainty
29
In 2014 Trustbuddy, a Scandinavian peer-to-peer lending platform filed for bankruptcy. The company had been a novel
success story in the lending space and had become the first publicly traded crowdfunding platform as they listed on the NASDAQ
OMX Nordic exchange. With the appointment of a new CEO and an overhaul of the management team just months later, a
review of the books uncovered a 44 million SEK (EUR 4,6 mil) discrepancy that had likely been there since the companies early
days. Not soon after the funds that the company held were frozen (including the nearly EUR 2 mil that were funded by lenders,
but not yet assigned to any borrowers), the National Authorities forced the company to shut down operations and just days later
the company had filed for bankruptcy.
30
In one Member State, platforms do not have to follow a specific due diligence procedure but they must disclose information
to potential funders on which due diligence procedure is undertaken. In another Member State, platforms are obliged to
predefine the due diligence criteria they follow. In a third & fourth Member State, platforms must inform potential funders
about the due diligence process they follow. In a fifth Member State, platforms are restricted from performing and sharing due
diligence under the crowdfunding exemption, but need to publish relevant information to investors to enable their informed
decision making
27
kom (2018) 0113 - Ingen titel
regarding investor rights, the responsible governing authorities and tax treatment in a cross-border setting will also
further deter potential investors. Some platforms in targeted consultations also voiced investors' concerns about the
need to ensure a minimum regulatory framework to create sufficient trust in a platform, especially for professional
investors. Risk of regulatory arbitrage can have a direct impact on investors' trust, leading to underinvestment.
This conclusion was shared by some of the respondents to the Inception Impact Assessment, one of which,
representing a consumer protection organisation, observed
that divergent or even absent national approaches
create regulatory loopholes and spur regulatory arbitrage, bounding consumers to invest in projects they shouldn’t,
whereas a clearer regulatory environment would provide more choice, grant higher standards of consumer
protection and thus encourage investments.
28
kom (2018) 0113 - Ingen titel
2 Why should the EU act?
The legislative action to be examined would lay down uniform rules on crowdfunding platforms for certain
crowdfunding activity when operating cross-border. It aims at ensuring that such platforms are subject to consistent
rules across the EU and that they are identifiable as such by investors throughout the EU. At the same time it also
aims at ensuring a level playing field between different crowdfunding providers, irrespective of market size or legal
framework applicable in their home market. It aims therefore at establishing uniform conditions for platforms
operating with an EU label. This proposal thus harmonises the operating conditions for relevant players in the
crowdfunding market, for the benefit of fundraisers and investors. Legislative action to establish an EU framework
for crowdfunding services examined in this report is based on Article 114 of the TFEU.
2.1 The necessity of an EU action
While many Member States leave the activity unregulated, others have put in place stringent bespoke national
frameworks to cater specifically for crowdfunding activities. Large differences in regulatory standards adopted by
Member States continue to increase market fragmentation resulting in a lack of economies of scale and inconsistent
approaches to transparency and financial risks, as explained in section 1.2. Different regulatory approaches in this
area create an un-level playing field, erecting additional barriers to a Single Market in financial services and products.
Member States have already taken divergent and uncoordinated action to develop national crowdfunding
regulation, and it is likely that this development will continue. Divergences in such rules increase costs and
uncertainties for platforms, fund raisers, and investors, and represent an impediment to the further cross-border
development of the market. These divergences represent an obstacle to the establishment and smooth functioning
of the Single Market. Transparency and prudential rules may be necessary to ensure investor protection and
financial stability across the EU, while ensuring a level playing field among the different platforms established in the
different Member States.
While there is no coordination effort undertaken so far among Member States on rules for lending services by non-
deposit-taking institutions, the application of MiFID rules to investment-based crowdfunding platforms is
insufficiently uniform, as MiFID was not constructed to ensure proportionality to crowdfunding services and the use
of discretions to ensure that proportionality by Member States (such as article 3 exemption) has resulted in further
divergences and impediments to cross-border activity via a MiFID passport. In effect, many countries have decided
to adopt an ad hoc regime, to use the article 3 MiFID exemption for two specific investment services, or not to
regulate at all this area. In one Member State, platforms do not have to follow a specific due diligence procedure but
they must disclose information to potential funders on which due diligence procedure is undertaken. In another
Member State, platforms are obliged to predefine the due diligence criteria they follow. In other ones, platforms
must inform potential funders about the due diligence process they follow. In one more, platforms are restricted
from performing and sharing due diligence under the crowdfunding exemption, but need to publish relevant
information to investors to enable their informed decision making
This situation restricts access to early stage capital markets financing only to bigger EU countries and investors have
limited accessibility and ability to diversify risk in the same way irrespective of where they are geographically
located. In effect, there are important and innovative sectors, like technology, whereby the geographical proximity is
not a key factor to invest, hence the reliance on an international investor base. This cross-border investor struggles
to emerge on European crowdfunding platforms due to cross-border barriers highlighted above, despite the fast
growth of domestic markets. As a result, the inability of investors to engage cross-border is capable to generate
extra costs for businesses. In effect, anecdotal evidence and desk research show that many micro firms decide to
incorporate the legal entity in the country where the crowdfunding market is more developed (like the United
Kingdom). While this could be influenced also by other factors, such as the local financial ecosystem, this also means
that small businesses in sectors that do not allow mobility of production factors would not be able to access these
29
kom (2018) 0113 - Ingen titel
funding opportunities, unless an efficient domestic crowdfunding market already exists. Hence, the inability of
platforms and investors to move cross-border may inhibit access for companies in a large set of sectors, especially in
capital intensive ones (e.g. manufacturing), cutting them out of this market.
These variations also create an un-level playing field for platform providers depending on their location, and by
fragmenting fund models along national lines erect additional barriers to a Single Market in financial services and
products. Key drivers include different interpretations and treatment of crowdfunding service providers as well as
additional mistrust that this creates for investors in a cross-border setting. Investor preference for platforms within a
familiar environment is thus preferred.
2.2 The value added of an EU action
EU action would reduce significantly the complexity, financial and administrative burdens for all key stakeholders,
i.e. crowdfunding platforms, project owners and investors at the same time ensuring a level playing field among all
the service providers using the same EU label. Furthermore, harmonising prudential rules, operational conditions
and rules on transparency for all the relevant players would bring clear benefits to investor protection and financial
stability. By harmonizing the essential features that constitute a crowdfunding platform, the proposal aims at
establishing a uniform framework in relation to the definition of such crowdfunding activity, clearly setting common
rules in specific areas.
Newly emerging evidence in stakeholders' consultations and recent developments, such as the departure of the
United Kingdom from the European Union (leading roughly 80% of the European market to move into a third country
regime), further justifies action at this point in time. The purpose of the action at EU level is to protect the public
interest against these problems by contributing to the effective and efficient development of the crowdfunding
services in the EU, protection of investors, stability and effectiveness of the financial system, for the Union economy,
its citizens and businesses. This impact assessment accompanying the Commission's proposal contributes to greater
understanding of why these objectives are better achieved at Union level.
Therefore, the establishment of an EU framework for crowdfunding services would fall under the competence of the
EU according to Article 114 of the Treaty of Functioning of the European Union (TFEU).
30
kom (2018) 0113 - Ingen titel
3 Objectives: What is to be achieved?
The general objective is to increase the efficiency and diversification of the EU's capital market by eliminating
problems to the development of a cross-border pool of financing for businesses. A single market for crowdfunding
services would also provide access to alternative financing tools to expensive short-term unsecured bank lending for
SMEs, especially for startups and other fast-growing companies, while ensuring a high level of investor protection.
Thus, the initiative will support the CMU objectives of establishing a single EU capital market and strengthening
market-based finance. In view of the key role of innovative firms for job creation and growth, the initiative also
envisions to contribute to the wider EU objective of creating jobs and boosting growth.
In order to achieve the overarching goals above, the following specific objectives need to be achieved:
1. Enabling platforms to scale up (objective 1); and
2. Enhancing investors' trust, by strengthening platforms' integrity (objective 2a) and transparency for
investors (objective 2b).
Enabling platforms to scale throughout the EU by creating a more proportionate regime. For instance, proportionate
licensing requirements would enable cross-border business without requiring further authorisation in each EU
country, thereby facilitating the attraction of a critical mass of investors and fundraisers matching the right investors
with the right fundraisers across the EU.
Enhancing trust may require to strengthen platforms' integrity and to increase transparency for investors, for what
concerns the project, the instruments being intermediated and the processes performed by the platform. The sector
adherence to a common set of standards may promote its reputation and help establish itself as a stable and reliable
source of alternative finance. Proper levels of governance requirements, to ensure that management is fit and
proper, and adequate internal controls are important step to achieve the second specific objective. Appropriate
levels of information disclosures to ensure that prospective and current investors receive sufficient information
about the returns and risks of the projects, together with fitting safeguards to prevent fraudulent activities by the
platforms as well as by the project owners (fundraisers), are paramount.
31
kom (2018) 0113 - Ingen titel
1865157_0033.png
4 Policy Options and analysis of impacts
The following section covers the assessment of the scope of the initiative and of the policy options to meet the
objectives, with their impacts.
4.1 Scoping the policy action
The policy action would exclude donation, reward and lending to consumers for consumption
purposes from the scope. Projects below EUR 1 million would qualify for crowdfunding services under
the EU regime, which include reception and transmission of orders and placing of securities without
firm commitment. The list of products to be covered includes transferable securities, loan agreements
and other credit intermediation products.
The following sections discuss three aspects that help to define the scope of the policy intervention. This initiative
falls within the remit of the Capital Markets Union (CMU) Action Plan, which has been recently reassessed with its
Mid-Term Review. The target of this initiative is thus to further the European Union's goal to develop a more
integrated market for capital to counter-balance overreliance on bank finance and produce more private risk
sharing, which can help to stabilise Europe's financial system, as well as more risk capital for European businesses (in
particular, SMEs). One of the means of achieving this goal is the development of a viable market for alternative
finance, such as crowdfunding. More specifically, the policy action wants to enable crowdfunding to increasingly
become a stable source of early-stage financing for businesses, which could complement bank-based short-term
funding (e.g. bank overdrafts or loans).
4.1.1 Crowdfunding models
Crowdfunding models can be clustered in four groups: donation, reward, lending and investment-based.
The investment and lending-based crowdfunding models offer a product with a financial return, which by nature
relies on a future cash flow stream. This characteristic structurally produces additional information gaps that
typically require a different regulatory intervention than consumer protection regimes. In this case, the combination
of the crowdfunding model with a dispersed investment structure (and small ticket size that offers limited incentives
to engage in monitoring) and a financial product calls for a targeted intervention to address risks for cross-border
market stability and investor protection, which may not be sufficiently (or too aggressively) addressed under current
national regimes.
Crowdfunding via lending platforms (also called peer-to-peer lending platforms) can provide funds to businesses, as
well as individuals. A further distinction is needed in the case of lending to individuals, as this can entail both lending
to natural persons for business purposes (e.g. for purchasing equipment needed to carry out a business, such as an
ice-cream van) or for personal consumption (e.g. travel, goods, etc), also called 'consumer lending'. The involvement
of a consumer, receiving a loan for personal consumption and operating outside of professional capacity, places this
activity within the remit of the Consumer Credit Directive. In case of a consumer receiving a loan to purchase an
immovable property, this activity falls within the remit of the Mortgage Credit Directive. Given that these are already
regulated activities (even though only from the lender's perspective) with a clearly local dimension in terms of
operations and risk assessment, as well as lower ticket sizes for consumer credit compared to other crowdlending
activities (on average – EUR 9 585
31
), inclusion of this business model would not be warranted. Inefficiencies in
providing consumer credit (including through the use of crowdfunding platforms) are already being assessed as part
31
Cambridge Centre For Alternative Finance report.
32
kom (2018) 0113 - Ingen titel
1865157_0034.png
of the Retail Financial Services Action Plan
32
and will feed into the forthcoming evaluation of the Consumer Credit
Directive.
In assessing whether or not to include donation-based crowdfunding, the Commission has pointed out in its Report
on the assessment of risks of money laundering and terrorist financing affecting the internal market and relating to
cross-border activities, that all forms of crowdfunding are significantly vulnerable to money laundering and terrorist
financing –COM(2017)340 and SWD(2017)241. Part of the vulnerability was identified with the lack of a horizontal
framework on crowdfunding platforms. For this reason, the Commission has proposed in the same document that
Member States should consider applying anti-money laundering rules to crowdfunding platforms.
Nevertheless, donation crowdfunding falls outside the scope of a European action, as it does not entail any 'tangible'
return over the investment, whether financial or non-financial. Reward crowdfunding does not entail a financial
return, even though it is an attractive funding tool for businesses. To preserve consistency among the European
legislative frameworks, the existing consumer protection regime would still apply to those models. Less clear the
application of legislation on money laundering and terrorism financing to donation crowdfunding under existing
national legislations and supervisory arrangements. Insufficient basic transparency can undermine investors' trust
and generate spillover effects on the stability of the Single Market. However, the donation crowdfunding industry is
marginal and the average size of these firms is typically below 5 employees. In that respect, while extending the
policy intervention applicable to crowdfunding platforms providing investment services over products with a
financial return, to ensure application of Anti Money Laundering (AML) and Counter-Financing Terrorism (CFT) rules,
would have represented merits in term of level playing with other financial services, it has been considered as too
premature at this stage. This position does not prevent the Commission to envisage future policy actions on that
matter. While application of AML and CFT is paramount, a targeted regulatory response would be more appropriate.
Inclusion of donation services within the current initiative would result in a disproportionate action that would
hinder and probably impede completely the provision of the service at domestic and cross-border level.
4.1.2 Fundraising threshold
Crowdfunding is a financial service, so policy intervention does not only need to define the nature of a crowdfunding
activity (see previous section), whose core feature is intermediating funding between a dispersed issuer and investor
structure, but also the conditions to avoid regulatory circumvention of well-established legislative frameworks for
financial services, like investment services legislation (Markets in Financial Instruments Directive, MiFID). On the one
hand, a defined 'issuance' or 'fundraising' size limit would narrow the scope to relevant crowd business activity and
minimise the risk of circumvention. On the other hand, a limit on issuance size may potentially curtail crowdfunding
issuance in specific capital intensive sectors, where the funding size is structurally higher.
This upfront scoping relies on the recent impact assessment of the new Prospectus Regulation
33
(PR), which has
introduced a crowdfunding exemption from prospectus requirements for securities offers with a total consideration
below EUR 1 million (during a 12 month period).
34
This threshold was developed using data from a public
consultation where respondents indicated that offerings fluctuates between EUR 50 000 and EUR 1 500 000 as well
as market surveys that indicated average offering sizes to be between EUR 220 000 and EUR 250 000. The final
number was decided during negotiations. According to the latest available market data, the average issuance of the
32
33
Action 7 of the Retail Financial Services Action Plan.
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2015:0255:FIN
34
Article 1(3) of the (EU) 2017/1129 New Prospectus Regulation does not apply to an offer of securities to the public with a total
consideration in the Union of less than EUR 1 000 000, which shall be calculated over a period of 12 months. If specific
conditions are met, Member States can raise this threshold for prospectus up to EUR 8 million.
33
kom (2018) 0113 - Ingen titel
1865157_0035.png
business models with the largest ticket sizes is below the EUR 1 million threshold (investment-based crowdfunding
averaged EUR 459 003 and peer-to-peer business lending averaged EUR 99 985 per fundraiser in 2015).
35
In order to provide a passporting capability for platforms, as well as to ensure coherence with other financial
legislation, the proposal should thus cover security and other products (as defined in the following section) issuances
with a total consideration of below EUR 1 million over 12 months. Above EUR 1 million, there is national discretion
whether or not to require a prospectus for public issuances (under conditions set by the Prospectus regulation). Also,
cross-border offerings for issuances in that range would be under the EU Prospectus Regulation. The Prospectus
provides appropriate space for sufficiently large funding rounds to be raised without mandating production of costly
legal material and application of burdensome legal obligations, which would be disproportionate to the level of risk,
size and activity of crowdfunding platforms.
As this policy option builds upon regulating the provision of the service, the threshold would apply also to non-
security-based financial products (e.g. loans), i.e. irrespective of the product actually negotiated on the
crowdfunding venue. Any issuance above this threshold, for the provision of services discussed in the following
section, does thus warrant the application of more mature and complex regulatory regimes, like MiFID or a more
mature credit intermediation regime, because of the spillover effects that this greater amount would generate on
risks for investor protection and financial market stability.
4.1.3 Services
Crowdfunding involves several different processes and transactions and an effective regulatory framework needs to
be clear about what crowdfunding is and what is not. While preventing regulatory arbitrage risks within the financial
sector, a limited number of activities can be identified as distinguishing features of crowdfunding platforms,
leveraging on the existing framework for investment services under MiFID,
36
which defines services that can qualify
as European crowdfunding services. Upon consideration of different business models, as well as Member State
experience in creating their own bespoke regimes, two types of investment services can be used to provide a
principle-based definition of crowdfunding, and therefore be potentially subject to a lighter-touch and enabling
framework: 1) Reception and transmission of orders (RTO); and 2) Placing of securities without a firm commitment
basis (PSWFC).
In several occasions, ESMA has confirmed that almost all investment-based crowdfunding platforms mainly offer
reception and transmission of orders as core service.
37
In addition, placing of securities without a firm commitment
basis is also included, because, as ESMA pointed out,
38
in the case of crowdfunding the reception and transmission of
orders and placing of securities without a firm commitment can appear as the same activity, since the distribution
element of the offer is embedded in the platform. Other services/activities, such as portfolio management,
investment advice and execution of orders on behalf of clients, are usually added on top of the core service and
35
University of Cambridge Judge Business School, "Sustaining momentum, the 2nd European Alternative Finance Industry
Report", September 2016.
36
Please, see Directive 2014/65/EU, Annex I, section A for the list of investment services and activities.
37
Please, see ESMA responses to the CMU Green Paper (2015) and CMU Mid-term Review (2017), available at respectively
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-
856_ann_1_esma_response_to_ec_green_paper_on_cmu_-_crowdfunding_survey.pdf
and
https://www.esma.europa.eu/sites/default/files/library/esma31-68-147_esma_response_to_cmu_mid-term_review.pdf.
Please, see also ESMA, Opinion on Investment-based crowdfunding, ESMA/2014/1378, 18 December 2014, p. 4 '[..]the
fundamental MiFID service/activity in the ‘typical’ investment-based crowdfunding platform is reception and transmission of
orders[..]'.
38
'In the case of crowdfunding, it appears that the same activity could potentially be considered as reception and transmission
of orders or as placing without a firm commitment basis.' See ESMA, Advice on Investment-Based Crowdfunding,
ESMA/2014/1560, 18 December 2014.
34
kom (2018) 0113 - Ingen titel
1865157_0036.png
would be subject to the full MiFID regime and other existing EU regimes. As the definition of
advice
is still not
sufficiently narrow across member states, its inclusion in the list of crowdfunding services would create risks of
regulatory arbitrage. If a platform wishes to provide additional services, it would then be subject to specific financial
services regulations (i.e. MiFID, AIFMD, PSD2). For lending-based platforms, the lack of any European regime (as
discussed in section 1.2.1) leaves space for the policy action to define the most suitable definition of lending
activities that would suit the spirit of the chosen option. The EBA definition, discussed in section 1.1.1.1, i.e. an 'open
call to the wider public by fund seekers through a third party, typically an on-line platform, to raise funds for a
project, in the form of a loan agreement, with a promise to repay with (or in certain cases without) interest',
39
could
be a workable broad-enough definition to capture lending-based platforms in our policy options.
An alternative option would be to use only the EUR 1 million threshold to define the scope of the policy action, so
regulating all kinds of investment services (beyond the two identified above) and lending activities under a common
EU crowdfunding regime (below the threshold). On the one hand, this would increase the possibility for
crowdfunding to develop multiple variations of business models under one set of rules. On the other hand, this
possibility would raise two important issues that leads to exclusion upfront. First, it would heighten risks of
regulatory circumvention of the established European financial services regulatory framework, as it would lead to
more fragmented issuance below EUR 1 million to be intermediated via crowdfunding structures and additional
enforcement issues with more complex services (e.g. portfolio management), for which it would be difficult to
monitor the application of the EUR 1 million threshold. Second, it would increase set off significant investor
protection issues, by allowing complex services to be marketed in the same way very simple ones, like RTO, are. The
high risk of frauds and misselling leads us to exclude this sub-option upfront.
4.1.4 Instruments
For what concerns the instruments traded on crowdfunding platforms, they can be either (transferable) securities,
loan agreements or other credit intermediation instruments. National platforms currently face scalability challenges
due to the specific instruments they use in their home market. Furthermore, in many Member States companies
(project owners) are structured as a limited company (e.g. GmbH) or a limited partnership (e.g. KG) whose shares do
not constitute 'securities' within the meaning of MiFID, but they are constructed as a loan. Hence, the relevant
European legislation (e.g. the Prospectus Regulation and the Markets in Financial Instruments Directive) may not
apply to some instruments in certain jurisdictions. It is thus important to adopt a sufficiently comprehensive
approach towards instruments in order to ensure both scalability of operations and mitigation of circumvention
risks. The definition of products that are intermediated on crowdfunding platforms (e.g. business loans, securities,
royalties, among others) is thus fairly broad in order to cover a sufficient number of business models, while ensuring
legal certainty via a strict definition of the services that the platform can perform. The exclusion of non-transferable
securities lie in the structure of the product that should not allow transferability, plus the risks that these products
may have in terms of investor protection, by locking in investors with limited exit options. The exclusion is also
coherent with the established EU legal framework and pre-empts the legal constructs that may hide risks for
investors due to their complexity.
4.2 Baseline scenario – no EU framework (option 1)
In line with the overview of legislative frameworks (see annex 5 for a summary overview), the policy baseline
scenario is enshrined in a list of national regimes (for those countries that regulate crowdfunding), which embeds
the following key features:
1. The authorisation procedure;
39
EBA, Opinion on lending-based crowdfunding, EBA/Op/2015/03, 26 February 2015.
35
kom (2018) 0113 - Ingen titel
1865157_0037.png
2. The governance and operations of a crowdfunding platform; and
3. The information disclosure to investors and business conduct.
The baseline scenario assumes that no policy action(s) are taken at the European level, which would aim to address
the problems set out in section 1.2. While the baseline would allow for flexibility to act at a later stage, when the
market is more mature and has found a stable structure, this implies that a fragmented and complex regulatory
framework for crowdfunding platforms would persist across Member States (or further fragment as a growing
number of Member States are considering bespoke regulation). Extra costs for businesses and operators may
continue to increase to even higher levels. In terms of authorisation for investment-based crowdfunding, some
Member States would continue to draw on MiFID article 3
40
to carve out crowdfunding from the Directive's scope
and preserve (or set-up) their bespoke national regimes. Other Member States would cover crowdfunding under
their respective transpositions of the MiFID. In theory, the latter approach opens the possibility to passport
crowdfunding activities across the EU. In practice, however, MS with national bespoke regimes would continue to
disallow crowdfunding platforms to avail of such passporting rights in their jurisdictions. Similar situations would
persist across other relevant regulatory regimes, such as Payment Services Directive, Prospectus Directive and
Alternative Investment Fund Managers Directive, in that member states would choose whether or not to apply
certain provisions with regard to crowdfunding. As a result of the heavily diverging regulatory approaches taken,
there would be no single market for crowdfunding in the EU and operators would be inhibited from growing and
expanding their platforms seamlessly across MS. The regulatory fragmentation would generally prevent platform
operators to expand their offerings into other MS without making substantial modifications to operating protocols,
consumer protection measures and/or other administrative aspects. These changes are not only costly but also make
it difficult or, at times, even impossible to channel investments and fundraising projects in different MS through a
common platform. For lending-based platforms, the implementation of quite different national regimes, especially
when combined with the regime for investment-based platforms, will make the system more complex and unable to
overcome (if not magnifying) the problems highlighted in section 1.2.
Operators would not only face substantial operational and compliance costs on cross-border market entries but
would also fail to reap increased network externalities if they cannot on-board projects and investors onto their
initial platform. These costs and missed network effects would continue to severely limit the incentives for operators
and investors to engage in cross-border activities. An additional hindrance is that investors would face varying
degrees of legal uncertainty, if and where investors and/or fund-seekers access platforms from another Member
State. Operators may also find that the fragmented regulatory framework supresses the cross-border demand for
their services, lowering the incentives for such offerings yet further. As authorisation, organisation and conduct of
business requirements for crowdfunding platforms within the Member States would continue to vary considerably,
investors and fund seekers will have difficulties to compare offerings and assess any associated risks. Different
standards in terms of transparency, investor protection and due diligence requirements would furthermore
contribute to already existing home and familiarity biases and lower the trust of consumers in cross-border offerings.
This is especially true on the investor side, which will generally be less proficient in assessing and evaluating
associated risks beyond the standard investment risks.
These hurdles to cross-border business operations and consumption imply that the EU crowdfunding market will
remain heavily fragmented. Neither platform operators nor fund seekers or investors would be able to benefit from
a functioning single market. Crowdfunding networks would essentially remain limited to their national markets,
which is of particular importance for the future growth of operators based in small MS. Investors and fund seekers
would be unable to benefit from increased competition, choice and innovation. Overall, the EU market would not
40
This article allows member states to exempt firms from the MiFID regime when providing only reception and transmission of
orders and/or investment advice (but not holding client funds). Some member states, like Germany, France and Italy, have used
this exemption to carve out a bespoke regime for crowdfunding.
36
kom (2018) 0113 - Ingen titel
1865157_0038.png
converge into a single integrated market. It would thereby not operate as efficiently as it could under conditions of
intensified cross-border competition. A fragmented market would furthermore hinder platform operators to scale up
and keep pace with larger platforms established in the US and Asia.
Inaction would also interfere with important market and policy developments. First, most of the market (roughly 70-
80%) is concentrated in one country, the United Kingdom. Without a functioning third country regime, the departure
of the UK from the EU poses the risk of leaving the EU with even lower scale to deal with the cross-border provision
of early stage financing for businesses across Europe. It also raises questions about the need for a more uniform
approach to provide a framework to assess the equivalence of a third country regime. Second, even though the
review of the European Supervisory Authorities (ESAs) aims at improving the capability to analyse risk for consumers
and investors and promoting more regulatory and supervisory convergence to enable more sustainable cross-border
integration, inaction would still hinder the ability of the ESAs to promote meaningful supervisory convergence due to
the severe market fragmentation. Third, inaction would hinder the activity of the FinTech sector, which increasingly
offers support to the development of crowdfunding services, through the outsourcing of separate functions (e.g.
payment services). A fragmented approach would result in multiple regimes that may or may not be supportive of
FinTech services, so diluting the 'single market network effect'.
None of the stakeholders taking part to the Inception Impact Assessment consultation found option 1 to be
preferable, all agreeing on the need for an EU action to ease the scale-up of the platforms' operations.
4.3 Building on reputational capital: minimum standards with best
practices (option 2)
This option would introduce minimum standards for crowdfunding activities, in relation to
transparency (with the Key Investor Information Sheet, KIIS) and authorisation (notification only with
ex post review by NCAs). Organisational and conduct requirements are left to either self-regulation or
national requirements (where available).
This policy option builds upon the regulatory approach applied in some Member States, whereby minimum
regulatory standards are combined with self-regulatory efforts by the industry. A 'softer' non-regulatory action can
be excluded upfront, as it won't solve the first problem driver, which lies with different national regimes without a
minimum level of harmonisation.
4.3.1 Rationale and key characteristics
The rationale for this option is that crowdfunding is still an industry in its infancy and should be allowed to develop
with the least 'regulatory touch', relying as much as possible on industry's best practices and the reputational capital
that platforms have to stay in business. The policy action would thus foresee to establish minimum disclosure
requirements in order to ensure that investors have sufficient information concerning the investment risks they are
undertaking. Given considerations of reputational capital, platform operators already have an incentive to ensure
information disclosure between fund seekers and investors. This policy action would only ensure that minimum
harmonised standards are upheld across all platforms in the EU to deal with the second key problem driver of the
dispersed investor structure. The disclosure regime could take the form of a Key Investment Information Sheet (KIIS),
which would offer a standardised template with the minimum information necessary about risk and characteristics
of the instruments sold to investors (whether a share or a loan agreement, the document will adapt its content
accordingly). This document could be issued without pre-approval, but only with ex post monitoring by the
competent authority about its key characteristics (and request to make adjustments, if necessary).
37
kom (2018) 0113 - Ingen titel
1865157_0039.png
The first problem driver, concerning with fragmented (licensing) regimes, is dealt with a notification-only procedure.
No ex ante authorisation would be necessary, except for a notification to the competent authority that business has
started. The competent authorities would only monitor the implementation of the disclosure standards and ensure
that the adopted best practices do not clash with other existing regulatory regimes.
Table 4. Key requirements – Option 2
Authorisation procedure
Ex post review of best
practices
&
ongoing
supervision of disclosure
requirements
Governance & operations
Information
conduct
disclosure
&
Harmonisation tool
Best practices
Key Investment Information
Sheet (KIIS)
Directive
Other aspects, such as organisational and business conduct requirements of platforms, would be based on industry
best practices agreed on by industry (via, for instance, a code of conduct) and providing a lighter intervention to
address further areas under the problem drivers identified in section 1.2.
41
It could be envisaged that there would be
some light initial screening in this regard carried out by NCAs, after the platform notifies the commencement of the
business activities.
The establishment of minimum disclosure obligations would require the adoption of a Directive. The threshold in the
Prospectus Regulation for the exemption from prospectus requirements will still apply, with member states deciding
how to implement it and whether to carve out an additional exemption for crowdfunding offerings between EUR 1
million and EUR 8 million.
42
4.3.2 Impacts
This policy option holds the benefit that the crowdfunding industry would be given space and time to further
develop its business models without meeting stringent regulatory requirements or authorisation procedures. It
would keep compliance costs at a minimum (cost-efficient), especially for those platforms which today are already
complying with various national regimes, which would remain in place. A harmonised approach on disclosure
requirements would ensure that investors and fund seekers can rely on the same minimum standards on a cross-
border basis. This would help to facilitate greater trust in cross-border activity as investors could rely on the same
standards when accessing platforms cross-border. Likewise, it would aid cross-border fund seekers in that the
information requirements would be largely aligned, meaning that different platforms could be tapped throughout
the EU without requiring substantial changes in this regard. Platform operators would benefit as well, given that they
would need to implement fewer changes to their platform setup when entering another Member State.
Furthermore, as the sound provision of information and disclosure to investors' lies in the interest of platform
operators, there will be few operators that would be required to make substantial changes to their arrangements.
This means that the compliance costs would be kept to a minimum.
The policy action however insufficiently addresses the current regulatory fragmentation, for instance with regard to
authorisation requirements. While the option does not hold any detrimental impacts in this regard, it would not
solve the current issues arising from regulatory fragmentation. Operators would still need to apply for national
authorisations in Member States with bespoke regimes already in place, thereby hindering cross-border market
entry. Without EU rules granting passports to the platforms, authorisation requirements are likely to remain
significantly different across Member States. There is also uncertainty as to how compliance with industry standards
would be handled and/or supervised. Such standards would not be binding and would take the form of guidance.
Member States would still have the possibility to impose binding standards at national level on top of these,
41
The European Crowdfunding Network is a Brussels-based professional network promoting adequate transparency, (self)
regulation and governance. Their Code of Conduct is available at: http://eurocrowd.org/about-us/code-of-conduct-2/.
42
Regulation (EU) 2017/112.
38
kom (2018) 0113 - Ingen titel
1865157_0040.png
maintaining or amending the national bespoke regimes. In this situation, with major jurisdictions that have already
implemented a national crowdfunding regime, a self-regulatory approach developed by the industry may also result
in additional complexity. The difficulty and costs associated with this option would thus not be likely to help improve
cross-border transactions. Investor confidence would also not be likely to improve under this policy option as a high
amount of legal uncertainty would remain.
The precise compliance costs arising from this policy option are very difficult to assess, given that they will vary
across operators, depending on the current platform specifications. Assuming that 200-250 platforms are captured
by the initiative
43
we estimate total one-off compliance costs to lie in the range of EUR 888,800 – 2,222,000
44
or EUR
4,444 – 8,888 per platform for the necessary IT changes.
45
The costs of compiling a single KIIS are estimated at EUR
3,000 of which EUR 1,000 are regulatory costs. There may also be certain costs imposed on NCAs. The level of
these costs will however depend on how compliance with the disclosure requirements would be monitored. These
costs would be minimal and not exceed supervisory costs of monitoring the operators of a pure order transmission
broker regulated under MiFID. It should be noted though, that similar costs also arise under the current regulatory
approach. In fact, depending on the national regime, these costs may be higher than those implied by the policy
option. Unfortunately, there is not firm level data available that would give possibility to go in greater detail.
7% of respondents to the Inception Impact assessment found option 2 to be preferable, expressing a view that
collection of best practises would be more favourable to a legislative initiative. An association for digital
development suggested that the mapping of best practices (for the industry and the local regulatory regimes) with
the intent to recommend a set of non-binding standards would be able to achieve the desired effects. According to a
respondent representing the financial services industry,, a good collection of best practices could be used for setting
minimum standards and thus enable cross border operations. An organisation representing SMEs argued that the
benefits of harmonisation are not clear, in the sense that is uncertain whether the initiative seeks to protect
investors or the enterprises and regulatory competition between Member States is desirable.
43
Based on figures in 'ESMA response to the Commission Consultation Document on Capital Markets Union Mid-Term Review
2017' & Commission calculations based on ECN crowdfunding volumes
44
Based on the assumption that firms would require, on average, 2-4 weeks work of an IT professional to implement the
necessary changes, assuming an annual cost of EUR 100,000 per IT professional.
45
It should be noted that many platforms already have arrangements in place providing information on elements which would
be in the KIIS. Therefore these estimates should be seen as an upper limit.
39
kom (2018) 0113 - Ingen titel
1865157_0041.png
Table 5. Key benefits and costs, by stakeholder type – Option 2
Investors
- Lower cross-border
access costs in the form
of greater transparency
(direct)
- Greater choice of
funding
products
(indirect)
- Reliance on self-
regulatory mechanisms
for service provision
(excluding disclosure)
Platforms
- Greater ability for platforms to adapt their business
models (if no conflicting national regimes; indirect)
- Low compliance costs on authorisation and
organisational requirements (direct)
- Lower cross-border market entry costs in some
countries (direct)
- Use own reputational capital to attract more volumes
(indirect)
- Higher enforcement costs to implement new
disclosure requirements (direct)
- Regulatory uncertainty in areas where national
regimes are in place (indirect)
- Limited regulatory license effect to attract more
investors (indirect)
Firms
- Small cost reduction for access due to limited
pass-on of higher revenues for platforms that
can benefit from a larger investor base
(indirect)
- Greater choice of funding tools (direct)
Competent authorities
Benefits
- Lower administrative and
enforcement
costs
due
to
simplified
authorisation
and
monitoring of operations (direct)
Costs
- Higher compliance costs to implement new
disclosure requirements (direct)
- Limited tools to identify and
manage wrongdoing of regulated
entities leading to potential new
enforcement costs (indirect)
40
kom (2018) 0113 - Ingen titel
1865157_0042.png
4.4 A product-based approach: bringing crowdfunding within
the existing EU single rulebook (option 3)
This option brings crowdfunding within the existing EU single rulebook, under different regimes for
investment and lending-based crowdfunding activities. Under NCA's authorisation, passport is
provided within the perimeter set by the existing legislation (MiFID) for investment-based platforms
and under a new regime mirroring MiFID passport for lending-based platforms. The regime foresees
capital requirements to deal with continuity risk for both lending and investment-based, plus MiFID-
like organisational requirements. Some degree of transparency is ensured by the individual regimes,
in line with current pre-contractual disclosure obligations.
This option would imply amendments to existing financial services legislation to carve-in
proportionate provisions for crowdfunding activity, according to the type of financial product which
is the object of the crowdfunding services (e.g. issuance of equity, granting of loans). The option
would ensure an efficient interplay between several other EU legislations (Prospectus Directive,
Payment Services Directive, Investor-Compensation Schemes Directive and Alternative Investment
Fund Managers Directive). Nonetheless, credit intermediation for business purposes (irrespective of
the natural or legal subjectivity of the borrower), which is currently not regulated at European level,
would require the creation of a separate regime, specifically crafted for this credit intermediation
service.
4.4.1 Rationale and key characteristics
The rationale of this option is that products provided on a crowdfunding platform may require a
targeted regulatory response, according to the nature of such product. Investment services, i.e.
reception and transmission of orders in transferable securities (like equity or debt securities), and
credit intermediation are different in the magnitude of the market failures identified in the problem
definition, so subject to two different regulatory regimes. For instance, crowdfunding investment-
based instruments (e.g. transferable securities) would be captured under the Markets in Financial
Instruments (MiFID) regime and subject to the licensing requirements for investment firms with
some proportionate adjustments.
Investment services do typically trigger stronger fiduciary duty (and also obligations) compared to
credit intermediation. The assumption behind this different approach is that lending provides access
to a financial product that has some distinguishing characteristics compared to securities, warranting
a different set of regulatory requirements, like:
-
-
Less junior claim than most investment-based products in the ranking in case of bankruptcy
(greater legal protection); and
Clear payoff structure, often subject to more systematic issuance over time, as it comes in
smaller amounts (so greater reputational commitment by the borrower to support
relationship).
Investment-based financial instruments, mainly securities like shares or debt instruments would
instead warrant a different policy intervention because of the following distinguishing features:
-
-
More junior ranking in case of bankruptcy (less legal protections);
More complex information than most of the lending products on payoffs structure or returns
over time;
41
kom (2018) 0113 - Ingen titel
Relatively less frequent compared to lending, but raising much higher capital (less
reputational capital involved).
As a result, the option foresees amendment(s) to current EU legislation to enable the crowdfunding
platforms to scale under the existing passporting framework, with proportionate rules. By building on
the existing single rulebook, the regulatory framework can make good use of established solutions to
governance and operations of the platforms (organisational requirements), as well as disclosure that
is more tailored to the risk profile of the services provided and its typical investor. The policy option
would introduce amendments to existing legislation that currently touches upon the various
crowdfunding business models, as identified within the EU28. The goal would be to ensure that the
requirements imposed under the respective legislations are proportionate to the level of activity
undertaken by a crowdfunding platform and that certain exemptions are available if necessary. This
would also require issuing clarifications and guidance to Member States with regards to
crowdfunding activity in relation to current EU legislation – ensuring coherent definitions and
interpretations of platform activities, categorisation and treatment of business models. Furthermore
this option would require a separate regime for lending-based crowdfunding activities, whose
instruments could not qualify as
transferable securities
under the MiFID definition. This option would
provide platforms with more legal certainty and a more proportionate European framework that
could be followed to expand business their businesses. There would however be a risk of diminishing
innovation of business models within the sector as all platform operators would have to adhere to a
common set of rules determined at the European level.
-
42
kom (2018) 0113 - Ingen titel
1865157_0044.png
Table 6. Key requirements – Option 3
Authorisation procedure
Governance & operations
Information disclosure & conduct
Duty to act fairly, transparently and professionally in the
best interest of clients (fiduciary duty)
Evaluation with sound standards
Appropriateness test
Ongoing disclosure on the project
Outsourcing rules
Safeguarding assets (if go through the platform)
Skills, knowledge and expertise required for the staff and
the management body
Appropriate and sound resources, procedures and
arrangements for the provision of services/activities
Reasonable steps to ensure continuity and regularity in
the performance of investment services/activities.
Internal control mechanisms, sound administrative and
accounting procedures.
Recording obligations
Membership of an investor compensation scheme
Security mechanisms to guarantee the security and
authentication
Identification of a target market of end clients
Pre-contractual
information
disclosure
(credit
characteristics, interest rate, duration and number of
instalments etc.)
Assess borrowers' creditworthiness
Limit on individual exposures
Harmonisation tool
Investment-
based
CF
platforms
Passporting regime under existing
legislation (MiFID), so is NCA's
possibility to act unilaterally for
investor
protection
reasons
(implemented by NCAs)
Adjusted capital requirements
Conflict of interest policy
Shareholders' vetting
Management with high repute, requirements on
management qualified shareholders with prior
notifications/checks
Omnibus
Directive
(amending legislations)
CF
Lending
platforms
Passporting regime under new EU
legislation (implemented by NCAs)
Adjusted capital requirements
Conflict of interest policy
Fit & properness requirements
Shareholders' vetting
Management with high repute, requirements on
management qualified shareholders with prior
notifications/checks
Regulation (maximum
harmonisation)
Note: 'CF', 'IB', 'LB' and 'NCAs' stand for 'crowdfunding', 'investment-based', 'lending-based' and 'National Competent Authorities' respectively.
43
kom (2018) 0113 - Ingen titel
1865157_0045.png
With regard to authorisation procedures (within the first problem driver), investment-based
crowdfunding platforms would be required to obtain an investment firm licence, considering the
services provided, under MiFID (title II, chapter I). For lending-based platforms a new ad-hoc regime
would be needed under this policy option, also with passport. However, a MiFID licence would imply
that a passport would be available, but it would not prevent Member States from imposing
additional requirements for investor protection. In practice, a MiFID-licensed platform would still
need to comply with different national investor protection regimes.
MiFID rules for governance and operations would include an initial capital endowment to protect the
customers of investment firms or credit intermediation platforms from the risk of insolvency of the
firm and to ensure operational continuity, their management (high repute, qualifications), rules on
qualified shareholders with prior notifications/checks, compulsory participation in an authorised
investor compensation scheme, etc.
46
. Under legislation for investment services (MiFID), the initial
capital requirements are EUR 730,000 or, if firm receives and transmits orders and/or executes
orders and/or manages portfolio and holds client money but does not deal on its own account, EUR
125,000. Member States may lower the initial capital requirement of EUR 125,000 to EUR 50,000 if
the firm is not authorised to hold client money. In addition, MiFID sets out a number of requirements
in relation to safeguarding client assets, including requirements to make organisational
arrangements ensuring that client assets can be distinguished from those of the platform in case of
insolvency.
Disclosure and conduct requirements would include general disclosure (including disclosure of fees
and costs) and requirements pertaining to the communications with the client would be applicable,
as would be an inducements regime. To ensure that investors understand the features and risks of
the investments, the operators of the platforms are subject to application of suitability and
appropriateness tests: such as, to the extent investment advice is provided, the requirements include
an appropriateness test and a Know Your Costumer assessment of the client's knowledge and
experience, person's financial situation, risk tolerance, etc. When the platforms provide services that
do not involve "investment advice" there is also an appropriateness test. Moreover, there are
additional safeguards for the clients/who can invest including the relevant caps on the amount
invested. There is a best execution duty where the provider has to take all sufficient steps to achieve
the best available results, when deemed executing orders, in terms of costs, price, speed, etc. and
should handle prompt client orders. The Prospectus Regulation requires a document to be approved
by the national competent authority of the home Member State and published when securities are
offered to the public or admitted to trading on a regulated market. This requirement only applies to
transferable securities as defined in MiFID. Therefore, an obligation to publish a prospectus could
apply to offerings of securities through crowdfunding platforms.
4.4.2 Impacts
Using well-established and tested regulatory frameworks would ensure the continuation of a
coherent financial system that is tailored for both large and small firms alike. This would also reduce
the risk of regulatory arbitrage as similar activities would be governed under the same rule book as
well as potential inconsistencies in terms of overlapping legislation. The option would eliminate
major regulatory barriers currently preventing cross-border activity by ensuring that Member States
46
Please, see Directive 2014/65/EU, articles 9, 10, 11, 15.
44
kom (2018) 0113 - Ingen titel
1865157_0046.png
have coherent definitions, interpretations and thus honour passporting rights without imposing
additional requirements. This option also embeds a more stringent investor protection, which would
also greatly enhance investor trust towards crowdfunding. Including crowdfunding activities into the
single financial rule-book would ensure investor protection and provide more clarity as to what the
level of risk that is being undertaken. It would also help ensure that these characteristics are
consistent across all platforms within the EU28.
Crowdfunding is about smaller capital raising activities for new start-ups or small scale up businesses.
The type of MIFID II/MIFIR obligations (organisational, disclosure, and business conduct rules) might
be disproportionate. The specific compliance cost increase that would arise from a general obligation
for investment-based crowdfunding operators to hold an investment firm licence are very difficult to
estimate. Approximately 40% of investment-based platform operators already hold a MiFID licence
at this stage
47
(either directly or via their parent firm) meaning that no additional costs would arise
for these entities. For other platform operators the costs will heavily depend on the precise
requirements that they already fulfil under their current regulatory status. In most cases, they will
need to hold additional regulatory capital in order to comply with MiFID. This will be in the range of
EUR 25,000 – 50,000, whereby the higher estimate assumes that no regulatory capital is currently
held and that the requirement under MiFID will be limited to EUR 50,000 (otherwise EUR 125,000). In
terms of compliance costs arising from organisational and business conduct rules it is estimated that
one-off costs will range from EUR 25,000 – 50,000 with recurring costs lying in the range of EUR
12,000 – 20,000
48
. It should be noted though that these costs may be significantly lower for some
nationally licensed platforms that already apply organisational and business conduct rules and
therefore (almost) meet the respective MiFID requirements. The cost impact on lending-based
platforms is even more difficult to estimate. For those lending-based platforms licensed under a
national bespoke regime the costs appear to be in a similar range as those discussed above. The costs
will depend on the precise requirements set out in the new ad-hoc legislation as well as current
internal practices and rules of those platforms.
At the same time, these rules may not be fit for purpose. Crowdfunding encompasses many different
business models, which might not all be addressed, and could therefore have unpredictable
regulatory spillover effects. In particular, separate regimes for investment-based and lending-based
crowdfunding would treat differently the provision of services that are very similar in a crowdfunding
context (despite the services are applicable to intermediation of different products). As a result, this
option may be unable to capture, in a proportionate way, a growing number of platforms mixing
different business models, which may involve lending and investment-based dealings (so de facto
putting a big constraint on the ability of the industry to keep innovating). Also, as discussed in the
following section, the provision of a loan with a dispersed lending structure does look like a provision
of a financial instrument.
47
48
ESMA response to the Commission Consultation Document on Capital Markets Union Mid-Term Review 2017
Based on MiFID II Impact Assessment and EC calculations
45
kom (2018) 0113 - Ingen titel
1865157_0047.png
Table 7. Key benefits and costs, by stakeholder type – Option 3
Investors
- Lower access costs in the form of
greater transparency (direct)
- Greater protection against wrongdoing
(direct)
- Greater geographical reach allowing for
more risk diversification (direct)
- Less choice of funding products
(indirect)
- Risk of overinvestments if investors are
overprotected on legal risks, but still face
same market risk (indirect)
Platforms
Firms
Benefits
- Less regulatory uncertainty, which may
reduce compliance costs (direct)
- Lower cross-border market entry costs
(direct)
- Medium cost reduction due to some
cross-border level playing field (indirect)
- Greater choice of funding tools (direct)
Competent authorities
- Lower administrative costs for those
member states that would need to rol
back their bespoke national regime
(direct)
- Lower enforcement costs, as the
regulatory regime is streamlined and
aligned with Single Rulebook, as well as
tailored to (direct)
Costs
- Lower ability for platforms to adapt
their business models over time (indirect)
- Greater compliance costs, especially for
domestic players (direct)
- Higher compliance costs to implement
new disclosure requirements (direct)
None
46
kom (2018) 0113 - Ingen titel
1865157_0048.png
4.5 A complementary service-based solution: a regime for
'European Crowdfunding Services Providers' (ECSPs;
option 4)
This option creates a European-wide definition of crowdfunding (combining investment and lending-
based crowdfunding activities under a single regime). Under ESMA's authorisation, this regime allows
providers to passport the services in this scope and operate domestically and cross-border. The
regime would co-exist with national ones, however the entity of a crowdfunding service provider
could only hold one license at a time (i.e. either ECSP, either national, either MiFID). This would allow
platforms that are not operating under 'ECSP label' to continue providing services above the EUR 1
million threshold in the domestic market. The comprehensive passport regime is coupled with no
capital requirements, but MiFID-like organisational and conduct requirements. A tailored
transparency regime for projects is set out under the Key Investor Information Sheet (KIIS), as for
option 2.
This option would entail a stand-alone voluntary European crowdfunding regime under the label of a
European Crowdfunding Services Provider (ECSP), which platforms would choose when wishing to
conduct cross-border business. This would leave the tailored national crowdfunding frameworks
unchanged, whilst providing an opportunity for platforms that want to scale their operations at a
European level and wishing to conduct cross-border business. If a platform operator decides to
provide crowdfunding services via the ECSP label, a comprehensive passport regime would be
granted, so to give access to the full European market.
It should be noted that an entity holding an ECSP license would not be permitted to hold another
license with the exception of a license for the provision of Payment Services (as regards PSD2). In
practical terms this would mean that a platform would have choose between a European license or a
national license for local activity. ECSP license holders would be permitted to provide the essential
crowdfunding services, that allow for enabling and less burdensome regulatory requirements.
Platforms wishing to provide services outside of those outlined below would have to comply with the
existing framework for financial service providers (i.e. MiFID, AIFMD), thus ensuring a level-playing
field between all financial service providers.
4.5.1 Rationale and key characteristics
The rationale of this option is that problem drivers are largely unrelated with the type of financial
product or service that is actually intermediated on these platforms, but it is rather the combination
of (i) crowdfunding business (services) with dispersed investor base and (ii) products with a financial
return that magnify the problems discussed in section 1.2. In effect, the distinction between some
financial products, whether an unsecured loan or a debt security, is arguably limited in economic
terms, when it comes to financing startups or small businesses. As a consequence, the 'crowdfunding
service', combining a dispersed ownership structure with a product embedding a financial return,
and not 'the product' itself, would be the object of this policy intervention.
The ECP regime would determine an authorisation system, whereby platforms would be authorised
once and be able to passport this authorisation (either through secondary establishment or provision
of services) across the EU internal market and providing a powerful tool to overcome problem driver
1. The authorisation would check compliance with requirements in the area of governance,
operations, information disclosure and conduct. This authorisation is without prejudice to the
47
kom (2018) 0113 - Ingen titel
1865157_0049.png
obligation to be authorised for other activities that are outside the scope of this Regulation, such as
authorisation for the provision of payment services under PSD2 legislation. The authorisation body
would be ESMA, whether the instruments traded are respectively transferable securities or loan-type
agreements because the scope captures the provision of investment services in any type of financial
product, in line with the objective to promote sufficient supervisory convergence in the CMU. For
instance, the scope does not capture platforms directly providing loans to private entities or
individuals through pooling of investors' assets. ESMA would also maintain a public register with
authorised platforms and the services they are authorised to perform in the EU.
Table 8. Key requirements – Option 4
Authorisation
procedure
Governance & operations
Conflict of interest rules
No capital requirements
Communication channel between
investor & fund seeker
Rules on protection of personal
data (if not captured by GDPR)
49
Fit and properness requirements
Light record keeping
KYC due diligence (investors and
fundraisers)
Information disclosure & conduct
Harmonisation
tool
Comprehensi
ve
passporting
regime under
ESMA
authorisation
Key investment information sheet (KIIS)
Ongoing information disclosure
Rule on the functioning of the platform &
rules on due diligence process
Disclosure of measures to manage risks
Disclosure of aggregate information about
activities on the platform
Regulation
Rules dealing with governance and operations of crowdfunding platforms include requirements like
conflict of interest policies. This policy would ensure that platforms identify and manage potential
conflicts of interest, ensuring that any conflict is disclosed to the platform's clients. This option does
not foresee capital requirements, as the platform operates services that do not warrant prudential
treatment for minimal operational and continuity risk. This is also in line with the objective to create
a regime that enables cross-border business activity, which would make this requirement fairly
disproportionate considering the operational risk undertaken and risk of disruption in the market.
For what concerns conduct and information disclosure to address problem driver 1 and 2, a key
feature of the regime is the Key Investment Information Sheet (KIIS), which offers a standardised
template with the minimum information necessary about risk and characteristic of the instruments
sold to investors (whether a share or a loan agreement, the document will adapt its content
accordingly). This document could be issued without pre-approval, but only with ex post monitoring
by the competent authority about its key characteristics and request to adjust (if necessary).
Potential alternatives could be either to leave disclosure to voluntary action (current baseline in
many member states) or to go deeper into the application of the prospectus regulation. The former
does not provide any minimum guarantee that the information to investors will be sufficient to
understand the risk of their investments, so not addressing the enhanced information asymmetry of
the second problem driver. The latter, instead, is more invasive and would not meet the attempt of
this regime to be proportionate. The regime would foresee the obligation on platforms to apply KYC
rules both for investors and fundraisers. This is also in line with the requirements foreseen with AML
and CCD.
The ECP regime leaves crowdfunding platforms, intermediating projects above EUR 1 million over 12
months, with the need to apply for a licence to provide the abovementioned services or additional
49
General Data Protection Regulation (GDPR), Regulation (EU) 2016/679.
48
kom (2018) 0113 - Ingen titel
1865157_0050.png
ones at national level (with no passport). The attractiveness of the national regime, whether an ad
hoc regime or based on existing EU legislation (MiFID), would be preserved for market projects that
are above EUR 1 million consideration and below EUR 8 million (so outside the ECP regime), in
alignment with conditions set by the Prospectus regime.
50
As a result, the ECP regime would well co-
exist with national ones, since the latter would still have value in providing the framework for
issuances up to EUR 8 million.
4.5.2 Impacts
This policy option would determine a rather swift and sizeable reduction of market entry costs
(regulatory and supervisory costs) for crowdfunding platforms operating (or intending to operate)
cross-border, since they would only be authorised once and the regime is lighter and more
proportionate than extending the MiFID one. The proposed regime would also allow for flexibility in
capturing platform activities combining multiple business models, as it provides a single regime that
applies to both investment-based and lending-based models (reducing regulatory uncertainty). The
foreseen safeguards for investors may also produce a moderate regulatory license effect that would
attract more investors. National competent authorities would also be affected by a lower amount of
directly authorised entities at national level. Firms may benefit from greater cross-border
competition among ECPs that would potentially emerge. Investors would also benefit from lower
market access costs in the form of greater transparency, lower monitoring costs and greater
geographical reach in diversification. Businesses, in addition, would be able to access a cheaper
funding tool than traditional unsecured bank funding.
The EU regime would co-exist with current national regimes for projects up to the EUR 1 million
threshold. The national regimes would retain their exclusive relevance above the EUR 1 million
threshold or for platforms that provide additional services not captured by the EU regime.
Domestic platforms may also face some additional compliance if they are operating in a country with
no or light bespoke regime (very limited number and mostly small member states). Firms that are
raising funds on ECP platforms would most likely encounter a reduction in costs for the service and
easiness of access to alternative funding tools to expensive short-term bank finance. However, they
would also have to face some costs for the preparation and publication of the Key Investor
Information Sheet, which stands around EUR 3 000 (plus EUR 1 600 to ensure regular updates).
50
Regulation (EU) 2017/112.
49
kom (2018) 0113 - Ingen titel
1865157_0051.png
Table 9. Key benefits and costs, by stakeholder type – Option 4 (see quantification in Annex 3)
Investors
- Lower access costs in the form of
greater transparency (direct)
-
Moderate
protection
against
wrongdoing (direct)
- Greater geographical reach allowing for
more risk diversification (direct)
Platforms
- Less regulatory uncertainty, which may
also reduce compliance costs (direct)
- Significantly lower cross-border market
entry costs (direct)
- Greater ability for platforms to adapt
their business models over time (indirect)
Firms
- High cost reduction due to some cross-
border competition putting pressures on
margins or due to increase in volumes
passed on clients (direct)
- Greater choice of funding tools and
lower funding costs (direct)
Competent authorities
- Lower administrative burdens
because of the reduction in directly
authorised entities (direct)
- Lower enforcement costs, as the
regulatory regime is streamlined and
aligned with Single Rulebook (direct)
- One-off and recurrent costs on ESMA
to set up authorisation capability
(direct)
- Regulatory uncertainty in the ability
to co-exist with national regimes
(indirect)
Benefits
Costs
None
- Greater compliance costs, especially for
domestic players (direct)
- Higher compliance costs to implement
new disclosure requirements (direct)
50
kom (2018) 0113 - Ingen titel
1865157_0052.png
5 Comparing the policy options
This section reviews the three options and assesses them against the benchmark of effectiveness and
efficiency (cost effectiveness), compared with the baseline. Policy options are assessed against the
baseline, unless stated otherwise.
Table 10. Key characteristics of the policy options
Authorisation
Option 2
Notification only
No passport
NCA supervision
IB =
Passport, if
foreseen by existing
legislation
LB =
New EU passport
regime
NCA supervision
Governance
Operations
Best practices
&
Conduct & Transparency
KIIS
Legal tool
Regulation (KIIS)
NO KIIS
General fiduciary duty
Capital requirements
IB =
Amendments
Ongoing disclosure
Option 3
Conflicts of interest
to MiFID II
Strong
conduct
policies
LB =
Regulation
obligations
Safeguarding rules
KIIS
No general fiduciary duty
Comprehensive
No capital requirements
Ongoing disclosure
Regulation
Option 4
passport regime
Conflicts of interest
No
major
conduct (single regime)
ESMA supervision
policies
obligations
No safeguarding rules
Note: 'CF', 'IB','LB' and 'NCAs' stand for 'crowdfunding', 'investment-based', 'lending-based' and
'National Competent Authorities'.
The evolution of the baseline, under current market and policy dynamics, would see a worsening of
the problems identified in previous chapters. Crowdfunding platforms will be even less able to scale-
up cross-border and the increasing conflicts between national regimes may create loopholes for
investor protection (via disclosure requirements) and the integrity of the market.
Option 2 would ensure flexibility and adaptation to new business models, but it would create
uncertainty surrounding the self-regulatory enforcement mechanism and its interaction with national
regimes already in place. It would not provide a passport. As a result, the option would be relatively
effective in achieving objective 1 and 2b (see
Table 11 for full comparison), but with the problem of the regulatory uncertainty for platforms
moving cross-border and for investors, with negative spillover on the overall investor protection
framework. The transparency issue concerns with the reliance on reputational capital for what
concerns conduct and organisational requirements that allow to know how the platform is governed
and operated, whereas disclosure of the marketed instrument/project would be aligned to the other
two options (at highest level). The option would have a neutral impact on its effectiveness towards
objective 2a, as it will be left to self-regulation (negative impact) and in some countries to national
regimes (positive impact). The option would be also cost effective in achieving the objectives,
because it would reduce costs compared to the baseline, but at the same time improve the score on
reaching objectives 1 and 2b.
51
kom (2018) 0113 - Ingen titel
1865157_0053.png
Option 3 carves-in the crowdfunding regime in the Single Rulebook. Therefore, it strengthens the
enforcement and investor protection framework, at the expense of flexibility for platforms and
choice and lower funding costs for firms. As a consequence, option 3 performs best with
strengthening integrity, due to strict governance and organisational requirements, as well as greater
enforcement tools. The option performs well also in terms of transparency, but not at the highest
level due to the application of the ongoing disclosure requirements foreseen under the existing
Single Rulebook (based on the fiduciary duty relationship that would require the intermediary to
provide some degree of ongoing disclosure about the project), rather than the tailored template
(KIIS) under harmonised regimes for option 2 and 4. The option would be also more effective in
enabling cross-border scale-up, because it provides for some reduction in market entry cost but with
the caveat of the gold plating possibility, which constraints the possibility to be even more enabling.
The efficiency of the option in achieving this objective is at best neutral, as the gold plating and the
different approach to investment and lending-based platforms are achieving, in the same way than
option 2, two out of three objectives, but at much higher cost.
Option 4 creates a voluntary EU label for crowdfunding provider that combines flexibility (firms
choose if they want to apply for it) with proportionate investor protection and organisational rules.
Platforms intending to operate cross-border may apply for the label due to significant cost reductions
(see Annex 3). This option thus performs best in terms of effectiveness for two out of three specific
objectives. For objective 1, it provides a common regime for investment and lending-based platforms
(which provides flexibility to adapt business models), as well as a comprehensive passporting regime
(which may enable active selling). The combined effect of the two would boost cross-border
expansion and perhaps consolidation too. For objective 2a, the option builds similar safeguards
tailored for crowdfunding platforms, but not as far as option 3 goes. For objective 2b, it offers the
same level of high-quality tailored transparency that option 2 provides (KIIS), but it also offers a more
harmonised enforcement mechanism under a single authority and common rules providing
transparency on the operations and governance of the platform (like option 3). In terms of efficiency,
option 4 is very cost effective because it achieves more than option 3 (the second best) with
significantly lower costs for investment-based platforms.
51
Furthermore it preserves the existence of
a variety of business models and potential for innovation that currently exists under the tailored
national regimes. In addition, it enables more cross-border scale-up, as it reduces regulatory
uncertainty giving clear allocation of task on supervision, which at the same time lowers
administrative costs for competent authorities.
Table 11. Benchmarking policy options
Objectives
EFFECTIVENESS
Enabling cross- Strengthening
border scale-up
platforms' integrity
Policy option
(objective 1)
(objective 2a)
EFFICIENCY
Promoting
transparency for (cost-
investors
effectiveness)
(objective 2b)
51
For lending-based platforms, the costs would be similar as a new regime would need to be created for
crowdfunding service in these products.
52
kom (2018) 0113 - Ingen titel
1865157_0054.png
Option
1:
0
No policy change
Option 2 Building
on reputational
capital
Option 3 Existing
+
Single Rulebook
Option 4
++
ECP regime
0
0
0
+
+
++
+
+
++
+
As result of the above benchmarking, option 4 is preferred over the other options. It is more effective
than option 3, as a greater enabler of cross-border scale-up and transparency for investors, and
option 2 in all respects, as it provides a powerful passporting regime, a tailored transparency of
projects and platform processes and greater integrity with more effective organisational
requirements. Option 4 is also more efficient than option 3, but as cost effective as option 2 (which
imposes very minimal costs to improve the transparency framework against the baseline). Option 4
would be also coherent with the legislative framework, as it allows coexistence of established
financial frameworks (like MiFID) with this regime, with a carve out in line with the parameter of EUR
1 million set in another key piece of legislation (Prospectus Regulation). The framework set out in
option would minimise risks of regulatory arbitrage, while being enabler of cross-border activities in
line with a solid investor protection and financial stability framework.
Finally, the design of Option 4 is also more future-proof as it integrates both investment-based and
lending-based models within one regulatory framework. This provides flexibility for platforms
wishing to operate hybrid models as well as allows the possibility to offer more innovative products,
not limited to equity or loans. In light of recent developments within the area of
Initial Coin Offerings
that are still currently, this may ensure the possibility to include such innovations within the scope of
the regime at some point in the future if deemed necessary. Focusing on service provision whilst
accordingly adapting the Key Investment Information Sheet would provide a forward looking
approach towards the rapidly changing market.
53
kom (2018) 0113 - Ingen titel
1865157_0055.png
6 Overall impact of the preferred option
This section reviews the overall impact of the preferred option of establishing a regime for European
Crowdfunding Providers (ECPs). As discussed in section 4.2, the EU regime would be based on three
pillars:
1. Authorisation with comprehensive passporting regime;
2. Governance and organisational rules; and
3. Conduct and disclosure rules, including the 'Key Investor Information Sheet'.
The European passport for platform operators would allow them to pursue their core activities
across Member States and seamlessly intermediate projects throughout the EU. It thereby addresses
the issues of prohibitive regulatory costs currently witnessed by platform operators when attempting
to enter certain EU markets, particularly those markets whereby a national bespoke regime for
crowdfunding is applicable. The costs of non-Europe in crowdfunding services can be estimated at
around EUR 20 to 25 billion in terms of market activity that markets can potentially generate in the
medium term (see Annex 3 for more details).
Notably, this regime would reduce complexity and the interaction with investment-based
crowdfunding under MiFID, by introducing a common definition of crowdfunding, and establishing
common rules in terms of how platforms should handle the intermediation of security and non-
security-based products (including loans). As a result, also lending-based platforms will fall under this
regime. The new ECP regime will significantly lower the barriers to cross-border market entry for
platform operators, investors and project owners alike. Operators would then channel EU
investments and projects through few pan-European platforms, regardless of the geographical
location of the users. On the one hand, this will increase the competitive pressure on platform
operators with beneficial effects for both investors and fund seekers in terms of price, choice and
innovation. The heightened competitive pressure will facilitate a more rapid consolidation of the
sector and may lead less competitive platforms that are currently protected from cross-border
competition to leave the market. On the other hand, the competitive platform operators that remain
in the market will benefit in terms of increased network effects, which thus make their respective
platform more attractive to potential users. Ultimately, this would generate benefits for small
businesses in terms of greater access to early stage financing and flexible funding tools.
At the same time, the ECP regime avoids imposing certain obligations that arise from a general MiFID
license in order to make the regime more proportionate given the types of core activities of ECPs.
This includes omitting minimum capital requirements, lowering organisational requirements (e.g. no
requirements placed on
shareholders and members with qualifying holdings)
and limiting business
conduct requirements to those appropriate for operating a primary market like a crowdfunding
platform (e.g. no best execution requirement and reporting, no circuit breakers etc.). In effect,
crowdfunding platform operators that choose to apply for the ECP label will face lower compliance
costs, not only in comparison to MiFID but also to some of the more stringent national regimes. For
currently MiFID regulated firms, the ECP regime implies total potential cost savings of approximately
EUR 4 – 7.75 million in terms of one-off costs
52
and EUR 27,500 – 60,500 in terms of recurring costs
per year. The estimated one-off costs savings for platform operators regulated outside of MiFID
52
Including capital requirements under MiFID
54
kom (2018) 0113 - Ingen titel
1865157_0056.png
(including bespoke regimes) lie in the range of EUR 15 – 29 million with recurring cost savings of
195,000 – 240,000 per year
53
.
ECPs already holding a MiFID licence are likely to face certain additional costs, if they choose the EU
label but they decide not to go cross-border. If the commercial activities of an operator are covered
by the ECP, a MiFID licenced firm may be granted a passport with negligible costs related to the
initially notification to the NCA and ESMA of the decision to ask for the label. Operators that also
engage in activities that continue to require a MiFID licence, however, may be required to establish a
second legal entity in order to take advantage of the ECP. The ECP will only cover the core activities
of operators meaning that other ancillary services cannot be provided, unless the entity holds a
respective licence. This will normally be a MiFID licence in the area of investment-based platforms
(AIFM licence is also possible depending on the business model) and a PSD2 licence for lending based
platforms, needed for the provision of payment services.
The ECP regime will also benefit investors by establishing a common disclosure mechanism
concerning the characteristics of respective investments and associated risks. A standardised
template in form of the KIIS will enable investors to directly compare potential pay-offs and risks
associated with projects across platforms and Member States. This will allow for better informed
investment decisions and, in effect, increase the overall efficiency of capital allocation through CFPs.
At the same time, the highly tailored nature of the KIIS transparency regime avoids placing
unnecessary high costs on fund seekers and platforms, as it would be the case under more stringent
requirements than those imposed by the KIID. Moreover, the ECP transparency requirements in
terms of operations and governance of platforms will facilitate investors and fund seekers to
compare ECP market offerings more accurately. This should give rise to increased competitive
pressure in the market, thereby benefitting both user groups.
Increased cross-border competition between platforms will work to the advantage of fund seekers in
particular, as they carry the majority of the costs associated with the funding process. The option will
thereby help to reduce the funding costs for businesses, including SME's and micro companies who
are the dominant users of ECPs. These fund seekers will benefit furthermore from the wider
geographical reach of platforms, as offerings are made available to a larger group of potential
investors. This may increase the level of funding achieved on the one hand, while simultaneously
decreasing the time needed to reach the envisioned funding sum(s). ECPs will thereby be even more
effective in helping to bridge the funding gap of SME's and micro companies, often experienced at an
early stage of development.
The preferred option also holds implications in terms of costs and administrative burden on ESMA,
which will be potentially reflected on the EU budget. In order to authorise ECPs, it is estimated that
there will be a one-off costs of approximately EUR 500,000 in order to setup respective IT systems
and arrange for a team to take charge of the authorisation process
54
.
Given that the regime will only cover a limited breadth of commercial activities, however, the cost
implications for ESMA will be lower than those arising from a respective MiFID authorisation with
NCAs at national level. Bespoke regimes that also cover advisory activities will similarly imply higher
53
54
See Annex 3 for breakdown of costs and assumptions made in the calculations
Estimate based on cost estimation from ESMA and European Commission calculations
55
kom (2018) 0113 - Ingen titel
1865157_0057.png
costs for NCAs. While it is difficult to provide concrete estimates as to the costs level, it can be
assumed that the supervisory costs will be comparable to those associated with national regimes
that only cover the activity of 'order transmission'. On this basis, and based on cost estimation
provided by ESMA, it is expected that the authority will face total costs of approximately EUR 2 320
000 – 2 840 000 annually. These costs mainly arise from additional staffing needed to ensure an
effective supervisory system, examination of KIIS's, and translation of documents. Meanwhile, ECPs
falling under the supervision of ESMA will be required to pay an annual fee in order to offset a part of
these costs. These fees will be capped at 0.5% of annual revenues of respective ECPs, in order to
assure that fixed fees do not hinder smaller platforms from opting into the new regime.
The initiative may furthermore give rise to positive social externalities. Given that the ECP regime will
impose common transparency and conflict of interest obligations on platform operators, investors
will be better protected against fraudulent activities and misselling. Likewise, mandatory risk
warnings will help to avoid that investors take on risks that are inappropriate for a respective
investor's risk aversion and will facilitate greater diversification of investments. There may also be
beneficial (indirect) effects in terms of job creation and innovation. SMEs currently employ 67% of
the European workforce
55
and are a significant driver of innovation. At the same time, SME's
continue to experience significant problems to raise funds (i.e. lack the ability to expand and invest in
R&D to the extent they would ideally want to). The 2016 ECB SAFE study shows that this is a
particularly pressing problem in Greece, Ireland, Italy and Portugal. In addition, the 2016 European
Commission's Innobarometer survey confirms that access to funding is a key obstacle for spurring
R&D and the commercialisation of innovative products or services.
Beyond this, there is a limited impact expected to arise from the initiative on third countries. After
the departure of the United Kingdom from the European Union, it may be necessary to ensure that
crowdfunding service provision is not abruptly interrupted, perhaps via third country rules.
No relevant environmental impacts are expected. There may however be beneficial indirect impacts,
for example, where crowdfunding platforms help to fund environmental projects or new innovative
green technologies. A more competitive European market will help to reduce the funding costs for
such projects, as well as facilitate increased funding levels and reduced time-to-fund.
55
Source: Eurostat
56
kom (2018) 0113 - Ingen titel
7 Monitoring and evaluation
Given the pace at which the crowdfunding market evolves, providing for a robust monitoring and
evaluation mechanism is very important. The monitoring and evaluation mechanism should ensure
that the envisaged network effects are realised while maintaining the necessary safeguard regarding
consumer protection.
The Commission could establish a detailed programme for monitoring the outputs, results and
impacts of this initiative. The monitoring programme shall set out the means by which and the
intervals at which the data and other necessary evidence will be collected. It shall specify the action
to be taken by the Commission, by the Member States and by the ESAs in collecting and analysing
the data and other evidence.
The Commission services would monitor the effects of the retained policy option on the basis of the
following non-exhaustive list of indicators:
1.
Impacts on the platforms:
a.
Number of countries where platforms opt-in
b.
Yearly volume of crowdfunding in EU countries
c.
Investor base by type of investors
d.
Number and volume of projects funded cross border
e.
Cross border investments
f.
Inward and outward investment from third countries
2.
Direct Costs
a.
Licensing fees
b.
Supervisory and regulatory fees
c.
Enforcement costs
3.
Indirect costs/benefits
a.
Evolution of fees paid to finance projects / to invest
b.
Evolution of average ticket size
Concerning the first set of indicators, while the Commission will be in charge of monitoring the take
up of the legislation according to EU law, the other indicators from 1.b to 1.f are to be collected
through the help of the Member States, the ESAs and market associations such as the ECN.
Concerning the second set of indicators, the involvement of supervisors is necessary. Surveys among
Member States' competent authorities will be used for this purpose. However, indicator 2.b will likely
need the involvement of stakeholders. Finally, concerning the last set of indicators, the ESAs,
supervisors and market associations, such as the ECN, would be best placed to monitor the
development of these factors.
57
kom (2018) 0113 - Ingen titel
1865157_0059.png
Annex 1: Procedural information
1. Lead DG, Decide Planning/CWP references
Lead Directorate-General:
Directorate-General for Financial Stability, Financial Services and Capital Markets
Union (FISMA).
The initiative is included in the
Commission Work Programme 2018
as agenda planning item
PLAN/2017/1676.
2. Organisation and timing
Organisation and timing of Inter Service Steering Group’s meetings:
three meetings on 9 March, 6 October
and 10 November 2017. The Inter Service Steering Group included representatives of the Economic and
Financial Affairs (ECFIN), Competition (COMP), Internal Market, Industry, Entrepreneurship and SMEs
(GROW), Justice and Consumers (JUST), the European Political Strategy Center (EPSC), the Legal Service (LS)
and the Secretariat General (SG).
3. Consultation of the RSB
The Regulatory Scrutiny Board (RSB) has delivered its opinion on a draft of the Impact Assessment on 15
December 2017.
4. Evidence, sources and quality
The impact assessment draws on an extensive amount of desk research, external studies, targeted
consultations, interviews, focus groups, workshops and other. The material used had been gathered since
the Commission Services started monitoring the market in 2013. This includes meetings with stakeholders,
studies carried out on behalf of the Commission and by industry stakeholders, staff working documents,
opinions and advice by the supervising authorities, as well as other studies, including academic research
papers. These include, but are not limited to the following:
Three regulatory workshops with Member States were held in December 2014, February 2016 and in
November 2017, in the framework of the Expert Group of the European Securities Committee
(EGESC)
56
;
Four meetings of the European Crowdfunding Stakeholder Forum (ECSF), of which the most recent
was held on 17 February 2016
57
;
56
57
Minutes of the meetings are available at:
http://ec.europa.eu/finance/securities/egesc/index_en.htm.
Agendas, minutes and meeting documents are available at:
http://ec.europa.eu/finance/general-
policy/crowdfunding/index_en.htm#maincontentSec6.
58
kom (2018) 0113 - Ingen titel
1865157_0060.png
A study crowdfunding markets in the EU (both platforms and projects) in the period 2013-14 and
analysing selected national legislative interventions on crowdfunding, including market trends
before and after those interventions (published in November 2015)
58
;
In April 2016 the Financial Services Users Group (FSUG) published a study (prepared by Oxera)
assessing (i) the level of awareness among the general population of potential (and actual) users of
crowdfunding as a form of seeking a financial return; and (ii) among those who are aware of
crowdfunding, the level of awareness of the associated risks
59
;
A study on "Crowdfunding innovative ventures in Europe - The financial ecosystem and regulatory
landscape", published in February 2015. The study identified the main crowdfunding models, the
market development and trends, the positioning in financing market, the potential for innovation,
the success factors for campaigns, a regulatory state of play in Europe and in some third countries,
and the perspectives for an evolving regulatory landscape. The study provides initial concepts for
self- or co-regulation in the sector in order to spur the development of the industry, whilst
enhancing consumer protection and transparency
60
;
A report by the Joint Research Centre of the Commission on "Understanding crowdfunding and its
regulations", published in 2015
61
;
A study on " Assessing the potential for crowdfunding and other forms of alternative finance to
support research and innovation", which is expected to deliver a more comprehensive picture of the
potential for crowdfunding investors to improve access to risk finance in the EU for, in particular,
SMEs and small mid-caps.
A project that aims at identifying, analysing and publicising best practice in Europe's crowdfunding
market in relation to the cultural and creative sectors.
A Commission Guide on Crowdfunding for SMEs in 23 languages
62
.
The advice and an opinion on investment-based crowdfunding published by the European Securities
and Markets Authority (ESMA) in December 2014
63
;
The opinion on lending-based crowdfunding published by the European Banking Authority in
February 2015
64
.
The reports of the Cambridge Centre for Alternative Finance, Judge Business School
65
.
Study commissioned by DG FISMA on
identifying market and regulatory obstacles to cross-border
development of crowdfunding in the EU
66
.
58
"Crowdfunding: Mapping EU markets and events study". Available at:
http://ec.europa.eu/finance/general-
policy/crowdfunding/index_en.htm#maincontentSec1.
59
"Crowdfunding from an investor perspective". Available at:
http://ec.europa.eu/finance/general-
policy/docs/crowdfunding/160428-crowdfunding-study_en.pdfhttp://ec.europa.eu/finance/general-
policy/docs/crowdfunding/160428-crowdfunding-study_en.pdf.
60
Available at
https://ec.europa.eu/digital-single-market/en/news/crowdfunding-innovative-ventures-europe-
financial-ecosystem-and-regulatory-landscape-smart.
61
Available at
http://publications.jrc.ec.europa.eu/repository/bitstream/JRC92482/lbna26992enn.pdf.
62
Available
on
the
Europa
website:
http://ec.europa.eu/growth/access-to-finance/funding-
policies/crowdfunding/index_en.htm.
63
ESMA's Opinion and Advice are available at:
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-
1378_opinion_on_investment-based_crowdfunding.pdf
and
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-
based_crowdfunding.pdf,
respectively.
64
EBA's Opinion is available at
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
03+(EBA+Opinion+on+lending+based+Crowdfunding).pdf.
65
The reports are available at:
https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/
59
kom (2018) 0113 - Ingen titel
1865157_0061.png
The material used to inform this impact assessment comes from reputable and well-recognised sources that
act as benchmarks and reference points for the crowdfunding industry. Findings were cross-checked with
results in other publications in order to ensure biases caused by outliers in the data or vested interests by
the author.
66
Once publication arrangements are finalised, the study will be published on the Commissions' webpage:
https://ec.europa.eu/info/business-economy-euro/growth-and-investment/financing-investment/crowdfunding_en
60
kom (2018) 0113 - Ingen titel
1865157_0062.png
Annex 2: Stakeholder consultation – Synopsis Report
1. European Commission's public consultations
Over the last four years, the evolution of crowdfunding and peer-to-peer lending in the EU has been
thoroughly monitored by the Commission services. Crowdfunding and peer-to-peer markets have been the
object of four public consultations as well as of external studies. Furthermore, the Commission Services
engaged in regular dialogues with European Supervisory Authorities, Member States and operators of the
crowdfunding and peer-to-peer sectors, such as crowd-platform providers as well as organisations
representing crowdfunding and peer-to-peer lending market operators.
1.1.
2017 FinTech consultation
In 2017, stakeholders were consulted through a public consultation
67
on
'Fintech: a more competitive and
innovative European financial sector'.
The consultation remained open for 13 weeks and received feedback
from 226 respondents covering individuals, industry (from a variety of market participants), national and
European regulators and supervisors, users and trade unions. A summary of the contributions together with
a detailed summary of individual responses to the public consultation were published as a feedback
statement by the Commission services on 12 September 2017
68
.
Respondents by country
Respodent by category
20%
28%
7%
12%
3%
5%
5%
4%
18%
8%
10%
Companies
Individuals
81%
BE
ES
UK
NL
FR
FIN
DE
Others
IT
Public institutions or international
organisations
The consultation raised the following three questions on crowd and peer-to-peer finance- related activities,
which aimed at assessing if stakeholders' perceptions on the potential impact of crowdfunding and peer-to-
peer lending on consumer protection, collection and use of personal data and financial stability have evolved
over time:
67
European Commission, Public consultation on 'Fintech:
a more competitive and innovative European financial sector',
available
here
68
European Commission, 'Summary
of the contributions to the Public Consultation on Fintech: a more competitive and
innovative European financial sector',
published on 12 September 2017, available
here
61
kom (2018) 0113 - Ingen titel
1865157_0063.png
Text of question 1.6 – Are national regulatory regimes for crowdfunding in Europe impacting on the
development of crowdfunding? In what way? What are the critical components of those regimes?
Text of question 1.7 – How can the Commission support further development of Fintech solutions in
the field of non-bank financing, i.e. peer-to-peer marketplace lending, crowdfunding, invoice and
supply chain finance?
Text of question 1.8 – What minimum level of transparency should be imposed on fund-raisers and
platforms? Are self-regulatory initiatives (as promoted by some industry associations and individual
platforms) sufficient?
In addition, two general questions were inquiring about existing regulatory barriers and licensing needs
more globally (questions 3.3
69
and 3.4
70
).
In total, 724 responses to these questions were received, with an average of 145 responses to each
question. The geographical distribution of the responses as well as the variety of responding stakeholders
provided the Commission services with a comprehensive overview of the status of the crowd and peer-to-
peer market in the EU. The consultation included specific questions on crowdfunding-related activities, on
automated matching platforms that apply innovative technologies and their relative impact. On a total of
226 responses to the public consultation, on average, 66.4% of stakeholders responded to the specific
questions on crowdfunding, peer-to-peer/marketplace lending. Around 68% of respondents to the specific
questions were supportive of the fact the specific changes should be made.
The key messages emerging from the assessment of the responses to the consultation were:
1.
National regimes hinder the development of the crowdfunding / peer-to-peer lending markets at
the EU level
- More than half of the respondents considered that current national regulatory
regimes for crowdfunding / peer-to-peer lending in Europe have a direct impact on the development
of these markets and on the sector's development. This belief was shared across by all types of
respondents (private individuals, private organisations, public authorities and international
organisations).
2.
EU regulatory intervention needed to harmonise the regulatory framework, counter market
fragmentation, preserve financial stability, ensure a level-playing field and limit regulatory
arbitrage
- Almost half of the respondents believed that national regulatory regimes hindered cross-
border crowdfunding / peer-to-peer lending activity and that harmonisation at the EU level was
required in particular to counter the fragmentation of the EU market mainly attributable to
divergences in the regimes adopted by different Member States.
3.
National regimes limit competition -
Some stakeholders argued that hindering cross-border activity
by juxtaposing national regulations impeded real competition, and made it difficult for platforms to
scale up and reach the necessary size to be profitable in the longer term.
4.
EU regulatory intervention needed to reduce lack of trust and information asymmetry
- For some
stakeholders, a EU regulatory intervention is needed mitigate the lack of trust and information
asymmetry (e.g. investors need to better understand the level of risk that they incur into when using
foreign platforms). In the same vein, stakeholders emphasised that higher degrees of transparency
69
Text of question 3.3 -
What are the existing regulatory barriers that prevent FinTech firms from scaling up and
providing services across Europe? What licensing requirements, if any, are subject to divergence across Member States
and what are the consequences? Please provide details.
70
Text of question 3.4 -
Should the EU introduce new licensing categories for FinTech activities with harmonised and
proportionate regulatory and supervisory requirements, including passporting of such activities across the EU Single
Market? If yes, please specify in which specific areas you think this should happen and what role the ESAs should play in
this. For instance, should the ESAs play a role in pan-EU registration and supervision of FinTech firms?
62
kom (2018) 0113 - Ingen titel
could help reducing financial integrity risks. In crowdfunding / peer-to-peer lending platforms,
different types of risks are likely to appear: insolvency of the platform operators, misappropriation
of client funds or assets, conflict or misalignment of interest, security of client data, etc.
What clearly emerged from the assessment of the responses was that a legislative intervention is considered
necessary first to reduce market fragmentation and to remove obstacles to cross-border expansion. 73% of
respondents replied positively to the fact that a EU intervention would be also needed to harmonise the
existing definitions of crowdfunding / peer-to-peer lending at the EU level, to reduce divergent national
licensing requirements as well as to diminish uncertainty in the application of current national bespoke
regimes preventing the scaling up of crowdfunding / peer-to-peer lending activities at EU level.
1.2.
Feedback on the inception impact assessment
A public consultation on the Inception Impact Assessment was launched on the 30 October 2017 and closed
on the 27 November 2017, in which stakeholders were asked to provide views concerning the context,
problem definition, objectives and policy options of possible EU action. The Commission Services received 41
feedbacks from individuals, companies, public organisations and governments coming from 16 Member
States. The feedback focused predominantly on the four policy options and can be summarised as follows:
1) Respondents generally welcomed the initiative and agreed on the need for EU action, stressing that
further development of the crowdfunding market to be capped under the laws in force. No respondent
supported option 1 (status quo).
2) Three respondents (two competitors and a crowdfunding industry association) expressed their preference
towards option 2, arguing that the industry is still young, and it should be given the possibility to freely
develop in an enabling regulatory environment: therefore a light touch approach would be preferable.
3) Eleven respondents (four competitors, two consumer protection associations, one platform, one SME
organisation, one academic institution and a Member State Ministry) argued that option 3 would be
desirable, as it strikes an optimal balance between securing reliability and trust among investors and
creating a level playing field: especially the latter was indicated as a vital issue for allowing crowdfunding
platforms to effectively compete with other funding providers and raise the crowdfunding market volume.
Such a level playing field could be only achieved, according to these respondents, by directly intervening on
the national legislations, so to eliminate those inconsistencies in the implementation of the EU legislation
preventing the cross-border scale-up of operations.
4) Eight respondents (four crowdfunding platforms, two SME organisation, a competitor and a EU citizen)
suggested the European Commission to go ahead with option 4, for two main reasons: on one hand this
option would allow platforms that are not willing to scale up their operations to continue operating under
the national regulations those are already compliant with, whilst platforms eager to go cross border could do
so by opting in the EU regime. On the other hand, being this a standing-alone regime, there would be no
gold-platting risk, hence its consistent application would be granted.
5) Ten respondents (seven from crowdfunding industry, one business association, one SME organisation and
one EU citizen) declared to appreciate both options 3 and 4. One of them found option 4 to be a fall back of
option 3, to be chosen if the latter takes too long to be enforced of if proves impossible to implement, and
this view was also shared by one more respondent, who found option 4 would provide for a balanced
63
kom (2018) 0113 - Ingen titel
1865157_0065.png
framework in case option 3 was not chosen. Another respondent found that option 3 is the best choice in a
long term period, but that option 4 is the most viable in the short term.
6) Three crowdfunding industry organisations proposed a tailored option, in between options 3 and 4,
proposing a harmonisation of national regimes such to grant a level playing field and, at the same time, such
to prevent Member States from goldplating in the implementation phase.
The Commission Services also discussed the inception impact assessment with the Expert Group of the
European Securities Committee on 10 November 2017. Most of the Member States recognised the need for
regulatory intervention at EU level to address the cross-border issues that platforms face. While some
Member States considered that a choice between options 3 and 4 would depend on further clarifications
and the exact requirements that are set out under each, some other Member States expressed a preference
for harmonisation of national regimes (option 3). Two Member States were sceptical about the usefulness of
EU legislation in this field. Three Member States also suggested that it might be useful to consider action on
Initial Coin Offerings.
1.3.
Previous public consultations
In addition to the recent Fintech and the Inception Impact Assessment public consultations, the Commission
services collected stakeholder views through three previous consultations:
a public consultation on the 'Capital
Markets Union mid-term review'
(2017) to which many of the
respondents argued in favour of the development of a proper legal framework for crowdfunding / peer-
to-peer lending across the EU. In particular, developing a pan-European harmonised disclosure regime
for crowdfunding / peer-to-peer lending amounts that are below the exemption thresholds of the
recently agreed Prospectus Regulation was also described as essential by some national regulators. In
addition, respondents sated that the application of FinTech innovations must ensure appropriate
investor and consumer confidence and protection
a public consultation on 'Building
a Capital Markets Union
71
'
(2015), whose main aim was to consult all
interested parties on the Commission’s overall approach to improving access to financing for all
businesses across the EU, increasing and diversifying the sources of funding and making the markets
work more effectively. From the assessment of the responses to question 9
72
, it emerged that the
development of the crowdfunding market has been quite different across the EU across. Some Member
States have taken legislative measures to enhance the potential of crowdfunding / peer-to-peer lending;
while these national approaches might encourage crowdfunding / peer-to-peer lending activity locally,
but may not be necessarily compatible with each other in a cross-border context. Furthermore,
respondents to the CMU Green Paper consultation identified a number of barriers to the development
of appropriately regulated crowdfunding / peer-to-peer lending platforms: regulatory barriers, poor
availability and quality of information, and other barriers such as a lack of secondary markets and
taxation barriers. Some respondents considered that EU intervention would facilitate cross-border
transactions at lower costs
71
The European Commission,
Green Paper on Building a Capital Markets Union,
COM(2015) 63 final, {SWD(2015) 13
final}, 18.02.2015, available
here
72
Text of question 9 -
Are there barriers to the development of appropriately regulated crowdfunding or peer to
peer platforms including on a cross border basis? If so, how should they be addressed?
64
kom (2018) 0113 - Ingen titel
1865157_0066.png
a public consultation on
'Crowdfunding in the EU – exploring the added value of potential EU action
73
'
(2013), which received 893 responses and whose aim was to explore how EU action could promote
crowdfunding / peer-to-peer lending in the EU. Also in this case, from the assessment of the responses
to the consultation, it emerged that most stakeholders considered desirable higher level of
harmonisation across the EU and, in this regard, a EU legislative action was supported by most
stakeholders
2. Further targeted consultations
The Commission Services also consulted through workshops, bilateral meetings and other means with the
European Supervisory Authorities, National competent authorities, Member States, trade bodies and their
members as well as consumer groups. Three regulatory workshops on crowdfunding / peer-to-peer lending
with Member States were held in December 2014, February 2016 and in November 2017, in the framework
of the Expert Group of the European Securities Committee (EGESC).
74
Experts pointed to a number of issues
that could be addressed in order to avoid legal barriers and promote crowdfunding / peer-to-peer lending
activity in the EU, such as information sharing, data gathering, establishing a common taxonomy, supporting
passporting, and more convergent information disclosure requirements for securities issues below the
prospectus threshold.
The Commission has also set up a European Crowdfunding Stakeholder Forum (ECSF) in 2015 as the expert
group of representatives of associations of concerned stakeholder groups and national authorities.
Workshop was held on cross-border crowdfunding in June 2017 on the study "Identifying market and
regulatory obstacles to the cross-border development of crowdfunding in the EU". Finally, the Commission
engaged in a series of bilateral calls and discussions with platforms that engage in cross-border activity to
discuss the issues they are facing. It was clearly identified that even platforms with a MiFID passport have
difficulties in expanding operations across borders.
3.Overview by stakeholder groups from the consultations
Following the open public consultations, targeted discussions, and the inception impact assessment,
stakeholders are generally supportive of an EU initiative:
Member States tend to support EU regulation in this area and some suggested we should propose a
harmonisation of national regimes, as long as the rules are proportionate.
Industry: Platforms generally considered that the fragmentation of national crowdfunding regulation
significantly increased the time and cost for expanding abroad and that this either reduces
73
The European Commission,
Consultation document on crowdfunding in the EU – Exploring the added value of
potential EU action,
03.10.2013, available
here
74
Minutes of both meetings (held on 18 December 2014 and 10 February 2016, respectively) are available at:
http://ec.europa.eu/finance/securities/egesc/index_en.htm.
65
kom (2018) 0113 - Ingen titel
1865157_0067.png
significantly cross-border ambitions or discourages to engage with it in the first place. Enabling
regulation at the EU level should help remove barriers in some Member States that currently
prevent or render severely more complicated the development of platforms on a cross border basis,
but again as long as the rules are proportionate.
Investors: concerns about the reliability of the investment and the lack of regulation of platforms are
the two most important reasons not to invest for both forms of crowdfunding.
SMEs would welcome a regime that would provide for more alternative finance opportunities; trust
in platforms for fund raisers is as important as for investors.
Supervisors (ESMA, EBA) underline that the risks in the sector need to be adequately addressed.
4. European Commission's publications
The Commission published a Staff Working Document "Crowdfunding
in the EU Capital Markets Union
75
" in
2016. The Staff Working Document assesses national regimes, identifying best practice, and presents the
results of the Commission's monitoring of the evolution of the crowdfunding / peer-to-peer lending sectors.
The report demonstrated that that crowdfunding / peer-to-peer lending remain relatively small in the EU but
is developing rapidly. It has the potential to be a key source of financing for SMEs over the long term.
5. External studies
The Commission Services commissioned a number of studies aimed at improving the general knowledge,
collecting data and evidence on the developments in crowdfunding / peer-to-peer lending markets, business
models and regulatory frameworks. In this respect, the following four studies provided the Commission
Services with additional element in support to the development of an impact assessment:
In November 2017, a study from the European Crowdfunding Network and Osborne Clarke "Identifying
market and regulatory obstacles to the cross-border development of crowdfunding in the EU",
providing
an assessment of the potential for development of cross-border crowdfunding / peer-to-peer lending
business and illustrating the market and regulatory barriers that platforms currently face when
attempting to transact across borders. It also illustrates the ways in which platforms are currently
attempting to overcome these barriers and that this involves very high transaction costs. Furthermore, it
provides an analysis of the disclosures and safeguards currently mandated at national level,
recommended by industry code of conduct as well as voluntarily applied by the platforms themselves.
Finally, it provides an analysis of 6 main European markets for crowdfunding and an overview of all EU
markets.
In January 2017, a study (prepared by EY, Open Evidence, Politecnico di Milano and European
Crowdfunding Network) assessing whether alternative finance has the potential to help finance for
innovative companies to support research and innovation
76
.
In April 2016, the Financial Services Users Group (FSUG) published a study (prepared by Oxera) assessing
(i) the level of awareness among the general population of potential (and actual) users of crowdfunding /
75
76
The European Commission,
Crowdfunding in the EU capital markets union,
CWD(2016) 154 final
Assessing the potential for crowdfunding and other forms of alternative finance to support research and innovation".
Available
at:
https://publications.europa.eu/en/publication-detail/-/publication/3190dbeb-316e-11e7-9412-
01aa75ed71a1
66
kom (2018) 0113 - Ingen titel
1865157_0068.png
peer-to-peer lending as forms of seeking a financial return; and (ii) among those who are aware of
crowdfunding / peer-to-peer lending, the level of awareness of the associated risks
77
.
In November 2015, a study (prepared by Crowdsurfer and EY) mapping crowdfunding markets in the EU
(both platforms and projects) in the period 2013-14 and analysing selected national legislative
interventions on crowdfunding, including market trends before and after those interventions.
78
6. Other EU institutions and authorities' work on crowdfunding / peer-to-peer lending
The European Commission has also benefitted from the work done by the European Supervisory Authorities
(ESAs), which have also carried out work on crowdfunding / peer-to-peer lending. In particular, the ESAs
published:
An opinion
79
and an advice
80
issued by the European Securities and Markets Authority (ESMA) on
investment-based crowdfunding.
In its considerations, ESMA highlighted that significant risks potentially
affecting crowdfunding / peer-to-peer lending are not currently addressed at the EU level. In this respect,
ESMA concluded that the development of a EU-level regime for crowdfunding / peer-to-peer lending
could be considered
81
An opinion issued by the European Banking Authority (EBA) on
lending-based crowdfunding
82
. EBA
started its analysis of lending-based crowdfunding in autumn 2013, with a view to determine the
potential risks to participants in this markets (i.e. lenders, borrowers and platform providers); the driver
of these risks and to assess the extent to which regulation would be required to ensure that market
participants can have confidence in this market innovation. The EBA concluded that 'the
convergence of
practices across the EU for the supervision of crowdfunding is desirable to avoid regulatory arbitrage,
create level-playing field, ensure that market participants can have confidence in this market innovation,
and contribute to the single European market'
83
.
77
Crowdfunding from an investor perspective". Available at:
http://ec.europa.eu/finance/general-
policy/docs/crowdfunding/160428-crowdfunding-study_en.pdf
78
Crowdfunding:
mapping
EU
markets
and
events
study.
Available
at:
https://ec.europa.eu/info/sites/info/files/crowdfunding-study-30092015_en.pdf
79
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1378_opinion_on_investment-
based_crowdfunding.pdf
80
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-
based_crowdfunding.pdf
81
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-
based_crowdfunding.pdf
, p.5 point 9
82
ESMA's Opinion and Advice are available at:
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-
1378_opinion_on_investment-based_crowdfunding.pdf
and
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-
based_crowdfunding.pdf
,
respectively;
EBA's
Opinion
is
available
at
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
03+(EBA+Opinion+on+lending+based+Crowdfunding).pdf
.
83
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-
based_crowdfunding.pdf
, p.2, points 8 and 9
67
kom (2018) 0113 - Ingen titel
Annex 3: Who is affected and how?
Practical implications of the initiative
There will be no direct implications for enterprises falling under the scope of the initiative due to the
element of optionality. The regime will provide an opportunity to adopt an optional label if found needed for
cross-border expansion into the Single Market. However if platforms wish to remain under their current
regime, this initiative will not have any direct implications on them. Indirectly, these platforms may become
subject to higher levels of competition from other platforms within the Single Market that will adopt this
label and thus freely expand across borders.
For platforms that choose to adopt the European label, this initiative will provide a legal framework for them
to freely provide their services across European borders. The regulatory requirements under this framework
will be less costly then under MiFID. However, they may, depending on the home country,
be
more
restrictive and demanding than the national regime. This will however still be beneficial as platforms will be
able to operate under legal certainty throughout the EU, something which was previously unavailable,
required costly legal consultations and in some cases, changes in the core business model that prevented
scalability. One advantage however, will be the fact that a platform will have to give up its' national license if
it chose to operate under the EU regime in order to ensure that requirements under the two licenses do not
clash and that the platform can enjoy full passportability.
Investors will first of all enjoy the benefits of a clear pan-European framework that will provide for certainty
when investing on crowdfunding platforms in different Member States. A coherent and commonly
recognised EU label will decrease their search costs when selecting platforms and reduce misinterpretations
of the terms and conditions applicable to an investment. Saved time will potentially be used for better
evaluation of particular investments and thus may result in better returns. Furthermore, this will provide
investors with advanced sectoral and geographical diversification opportunities for their investments, thus
decreasing risk exposure.
Local administrations that frequently interact with platforms attempting to enter their home market place
will save time and resources. As the European label will be authorised by a central European authority, there
will be limited opportunities for arbitrage and risk of loose interpretation by other jurisdictions that the host
country would have to prevent. This will also to some extent reduce the administrative burden and increase
efficiency as platforms will not have to set up a different platform in each Member State they wish to
operate in.
The proposal will also have practical implications for the European Securities Markets Authority (ESMA).
Holding the authorisation and supervisory powers, ESMA will likely have to hire additional staff (2-3
individuals) that would carry out the functions foreseen in Option 4 and would thus result in additional costs
for the Authority. This would however ensure consistent interpretation of rules and business models.
68
kom (2018) 0113 - Ingen titel
1865157_0070.png
Summary of costs and benefits
I. Overview of Benefits (total for all provisions) – Preferred Option
Description
Type
entity
of Amount
Comments
Direct benefits
MiFID
licensed
platforms
As the Regulation does not foresee any minimum capital requirements for ECPs, The costs saving estimates with regard to the national bespoke
there would be a reduction of minimum capital of EUR 50,000 – 125,000 per firm regimes assume that MiFID regulated platforms would offer
(depending on the type of MiFID license).
services in half of the Member States that currently require
additional authorisation (9 Member States)
86
i.e. the 42 MiFID
This would bring about a total potential one-off cost reduction of EUR 550 000 –1 licenced ECPs would save EUR 17,750 – 34,000 times 4.5. This
375 000. This figure is based on the assumption that all currently MiFID cost saving figure is strongly dependent on the assumption
authorised ECPs who hold a licence only for 'order transmission' and 'placing regarding ECPs planned cross-border expansion. It should also be
without firm commitment' (11 firms currently
84
) would apply for the ECP licence noted that the costs arising from entering national regimes will
and drop out of MiFID.
vary strongly across Member States and that there is a lack of
It is furthermore estimated these MiFID licensed platform operators could save accurate cost data in general. The figure represented here is
EUR 2 500 – 5 500 on recurring compliance costs (business conduct & operational based on a survey which only produced broadly reliable figures
requirements). Assuming again that all 11 MiFID licenced ECPs that engage only for ES, FR and the UK.
in 'order transmission' and 'placing without firm commitment' would opt into the
new regime, this would imply a cost reduction of EUR 27 500 – 60 500 across the
industry per year.
In addition, all MiFID licenced ECPs (42 in total including platforms that act as
tied agents of MiFID firms) would save authorisation fees and compliance costs
when entering markets that currently have a bespoke national crowdfunding
regime in place. The total one-off compliance costs to access markets with
national regimes are estimated to lie in the range of EUR 17 750 – 34 000.
85
This
84
85
Compliance
cost
reductions
Source: ESMA Crowdfunding survey and input from targeted consultation
Average based on ECENTRCOLLAB survey
69
kom (2018) 0113 - Ingen titel
1865157_0071.png
assumption implies a (one-off) cost saving in the range of EUR 3 354 750 and EUR
6 426 000 across the industry.
Other
platforms
Platforms would save authorisation fees and compliance costs when entering
markets that currently have a bespoke crowdfunding regime in place. The total
one-off costs under national regimes are estimated to lie in the range of EUR 17
750 – 34 000
87
. Assuming that respective operators are regulated under one
existing bespoke regime already, this would imply total potential cost savings of
EUR 13 490 000 – 25 840 000 based the current number of platforms regulated
outside of MiFID (190) and assuming that they would offer services in half of the
other Member States with a bespoke regime (9 in total but already holding
authorisation in one of them).
In addition, equity based platform operators regulated outside of MiFID (60 in
total) would save the costs of acquiring a MiFID licence which they would
currently need to hold in order to access Member States that do not have a
bespoke regime in place. This would bring costs savings of:
EUR 1 500 000 – 3 000 000 (capital requirements)
EUR 195 000 – 240 000 (recurring cost saving annually compared to estimated
costs under MiFID)
The costs savings in relation to MiFID only apply to investment-
based platforms that currently do not hold a MiFID licence (60).
It is assumed that half of these firms would decide to also hold a
MiFID license in order to access Member States applying MiFID
to investment-based crowdfunding. The saving potentials do not
account for other costs such as cost of establishment, legal costs
or other technical assistance.
Lower
SMEs
SMEs would benefit in terms of reduced funding costs compared to other forms Funding costs are the result of both market (macro) interactions
86
This will depend on the business model of the platform operator, the instruments on the platform as well as the national regulatory and supervisory approach. Given the current setup of
national bespoke regimes, it is assumed that platform operators holding a MiFID licence may potentially face problems concerning recognition of their MiFID passport in 9 Member States
(AT, BE, ES, FR, IT, DE, PT, FI, LT)
87
Average based on ECENTRCOLLAB survey and input from targeted consultation
70
kom (2018) 0113 - Ingen titel
1865157_0072.png
funding costs
for SMEs
of financing currently used. It is estimated that financing via crowdfunding
platforms can reduce funding costs of SME's significantly. Average fees for equity
crowdfunding issuance range between 5% and 7%, compared to interest rates on
bank overdrafts and short-term unsecured bank lending (which are key financing
tools for SMEs).
88
and bilateral contractual relationships. They are also
idiosyncratic, as depending on the individual risk of the firm. As a
result, it is not possible to make a total estimate of the benefits
(in terms of funding costs) that will trickle down to businesses.
Indirect benefits
Portfolio
diversificatio
n
Investors
A small fraction of EUR 720 billion.
Crowdfunding platforms would enable alternative finance as an
alternative investment vehicle for European investors who sit on
a large stock of cash that could be allocated in other ways (EUR
720 billion).
89
Platforms would be able to expand within the single market and
enjoy the network effects, as described in section 1.1.1.2. When
using the size relative to GDP of the crowdfunding market in the
US (which has a more mature crowdfunding market) as a
measure of potential network effects in a Single Market, the
crowdfunding cost of non-Europe can be estimated as much as
EUR 29 billion (i.e. the difference between the crowdfunding
market size today and what it could have been if the market was
developed cross-border like the US).
Network
effects
(scaling
effect)
Platforms
up
Between EUR 20 and 25 billion
88
89
See SAFE survey available at https://ec.europa.eu/docsroom/documents/26641.
This estimate suggested by the
71
kom (2018) 0113 - Ingen titel
1865157_0073.png
II. Overview of costs (per entity) – Preferred option
Consumers -Investors
On
e- Recurrent
off
-
-
Businesses
One-off
Recurrent
Administrations
90
One-off
Recurrent
Investment-based
Lending-based
Investment-based
Lending-based
EUR 500 000
94
These costs will
be mainly arise
from
the
necessary
IT
changes in order
to set up an
authorisation as
well
as
supervisory
system.
These
fixed costs are
expected to arise
over a one year
preparatory
phase and 1
st
year
of
full
implementation
of
the
new
regime.
Authorisat
Direct
ion
costs
-
-
EUR 5, 000 – 10 000 per license
Does not apply to already MiFID
authorised firms. This implies that
total cost on industry would be in
the range of EUR 300 000 – 600
000
92
(if all platforms are assumed
to opt-into the ECP regime)
91
EUR 5, 000 – 10 000
per license fee
Total
costs
on
industry would be in
the range of EUR
650 000 – 1 300
000
93
(if all platforms
are assumed to opt-
into the ECP regime)
EUR 1 000-2 500
Estimate to account for potential
updates to authorisation and/or
requests
from
the
regulator
(infrequent i.e. estimated annual
average)
EUR 1 000 - 2
500
Estimate
to
account
for
potential
updates
to
authorisation
and/or requests
from
the
regulator
(infrequent i.e.
estimated annual
average)
EUR 520 000 – 650
000
95
This assumes that
ESMA would need 4-
5 FTE in order to deal
with authorisation
requests
90
91
The recurrent administrative costs represented in this table reflect costs estimates once the Regulation is fully implemented in 2020
Estimate based on average direct authorisation costs in Member States under bespoke regimes (EUR 4,900 for investment-based; EUR 5,200 for lending-based - Source: ECENTRCOLLAB
survey, costs only available for AT, NL, FR, MT,NL and UK) and MiFID authorisation costs for 'moderately complex firms' (estimated in the range of EUR 5,500 - 15,000)
92
Based on ESMA figures on number of platforms already MiFID regulated (33 of a total 99 platforms)
93
Based on ESMA figures and ECN volumes we estimate that there are currently a total of 130 lending-based platforms
94
Estimate based on cost estimated provided by ESMA and DG FISMA estimations
95
Based on salary calculations provided by ESMA and DG FISMA estimations
72
kom (2018) 0113 - Ingen titel
1865157_0074.png
Indirect
costs
-
-
EUR 10 000 – 25 000
96
EUR 10 000 – 25
N/A
000
97
EUR 7 500 – 30 000
98
Magnitude
will
heavily depend on
current
organisational setup
of the platform
operator
and
required
changes
needed.
The estimates cover
the costs to meet
requirements
as
regards:
-
Communication
channel
between
investor & fund
seeker
-
Protection
of
personal data
- Fit and properness
- Record keeping
- KYC due diligence
The costs mainly
arise from changes
needed to the IT
systems.
N/A
EUR 5 000 – 25 000
Magnitude will heavily depend on
current organisational setup of the
platform operator and required
changes needed.
The estimates cover the costs to
meet requirements as regards:
- Communication channel between
investor & fund seeker
- Protection of personal data
- Fit and properness
- Record keeping
- KYC due diligence
The costs mainly arise from
changes needed to the IT systems.
Does not apply to already MiFID
compliant firms.
Organisati
onal rules
Direct
(governan
costs
ce
&
operation)
-
-
EUR 7 500 – 10
000
99
These recurrent
costs relate mainly
to maintaining the
IT systems and
storage of data
EUR 7 500 – 10
000
These recurrent
costs relate to
maintaining the IT
systems
and
storage of data
EUR 7 500 – 10
000
These recurrent
costs relate to
maintaining the
IT systems and
storage of data
EUR 390 000 - 520 000
100
This assumes that ESMA would need 2-3
FTE in order supervise and monitor for
compliance with organisational
and
conduct rules
Indirect
costs
-
-
-
-
-
-
-
96
Estimate based on assumption that one person working full-time will spend 1 -3 months on the preparation of the authorisation (at EUR 75,000 annual salary) plus other additional costs
such as technical and legal assistance, meeting potential national audit requirements etc.
97
Same assumptions as for investment-based platforms
98
Lending-based platforms are estimated to have EUR 2,500 – 5,000 higher one-off costs to account for less stringent conduct rules for lending based platforms currently in place
99
Based on one-off costs for meeting organisational requirements in MiFID IA, assuming that costs would be lower given more proportionate / less stringent requirements in ECP regime
100
Based on salary calculations provided by ESMA and DG FISMA estimations
73
kom (2018) 0113 - Ingen titel
1865157_0075.png
Conduct
rules
-
-
EUR 2 500 – 6 000
102
EUR 1 500 – 4 000
Will depend on exact
Will depend on exact requirements
requirements
and
and current business conduct
current
business EUR 1 000 – 2 000
procedures of operator.
conduct procedures
Does not apply to already MiFID
of operator.
compliant firms
101
EUR 390 000 - 520 000
103
This assumes that ESMA would need 2-3
FTE in order supervise and monitor for
EUR 1 000 – 2
compliance with organisational
and
000
conduct rules
KIIS
Direct
costs
-
-
The estimated one-off administrative burden of a KIIS
Ongoing estimated costs of a KIIS (for updating
are
104
, given the online technology and the foreseen
documents) are EUR 1 600 (EUR 1 000 for preparation and -
regulatory regime, EUR 3 000 of which EUR 1 000
dissemination and EUR 600 for regulatory costs).
regulatory cost.
EUR 520 000 – 650
000
105
This assumes that
ESMA would need 4-5
FTE in order check
new KIIS
106
Indirect
costs
-
-
-
-
-
-
Translation
for
authorisation
and
communication with
ECPs EUR 350 000
Mission expenses and
other
operational
costs EUR 100 000
Recurrent IT costs EUR
50 000
EUR 2 320 000 – 2 840
000
Additional
Costs
Supervisory fees EUR 10 000
107
TOTAL
COSTS
EUR 19 500 - 24 EUR 19 500 – 24 500
109
EUR 500 000
108
500
Plus EUR 1 600 per updated KIIS (i.e. depends on number
101
Based on one-off cost estimate for previously MiFID exempt firms under Art. 3 and assuming that costs would be lower given more proportionate / less stringent requirements in ECP
regime
102
Same assumptions as for investment-based but adding a further EUR 1 000 – 2 000 to account for less stringent conduct rules for lending based platforms under national regimes /
consumer credit licenses (as platforms are only seen as credit intermediaries, requirements are generally less stringent)
103
Based on salary calculations provided by ESMA and DG FISMA estimations
104
The estimated cost is extrapolated from the estimated burden as stated in SWD(2012) 187 "Key information documents for investment products" Final (p95).
105
Based on salary calculations for FTE in the ESA Review Impact Assessment
106
This figure assumes that there will be approximately 12,000 projects annually with half an hour spent on each KIIS and 200 working days per year, leaving spare capacity for future
increase in the number of projects
107
It is foreseen that supervisory fees will be capped at 0.5% of revenues of respectively supervised ECPs. Assuming an average revenue of EUR 2 000 000 this would imply supervisory fees
of 10 000
108
Depending on revenue of the respective ECP and supervisory fees incurred
74
kom (2018) 0113 - Ingen titel
1865157_0076.png
(per firm)
Plus EUR 1 600 per of KIIS to be updated as well as possible costs division
updated KIIS (i.e. between platform and fundraiser)
depends
on
number of KIIS to
be updated as well
as possible costs
division between
platform
and
fundraiser)
109
Depending on revenue of the respective ECP and supervisory fees incurred
75
kom (2018) 0113 - Ingen titel
1865157_0077.png
Annex 4: Overview of Crowdfunding regulatory Frameworks
110
in a selection of EU Member States
Austria
Belgium
Spain
France
UK
Italy
Germany
Portugal
Finland
Lithuania
Bespoke regime
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Scope
Shares, bonds,
business shares
in
limited
companies and
cooperatives,
participation
rights,
silent
partnerships
and
subordinated
Securities
lending
businesses)
and
(to
In Belgian law
terms:
“Investment
instruments
issued
by
companies or by
investment
vehicles (“one-to-
one” vehicles)”
Securities
lending
and
Bespoke
regime:
ordinary shares
and
plain
vanilla
fixed
rate bonds.
Securities
lending
and
Equity
Profit-
participating
loans,
subordinated
loans, or other
investment
products (which
grant the right to
interest
and
repayment, or in
exchange for the
temporary
provision
of
funds, grant a
claim for cash
settlement).
Financial
Instruments granting
rights
to