Bridging Entrepreneurial Finance in the EU: The New Crowd Funding Regulation
DOI:
https://doi.org/10.6000/2817-2302.2023.02.16Keywords:
Financial innovation, European Crowdfunding Service Provider Regulation (ECSPR), authorization, ESMA's supervision, passporting rights, Key Investor Information Sheet (KIIS), regulatory arbitrageAbstract
Bridging finance to small and medium enterprises (SMEs) is a must in the sustainable economic development of any country. Access to finance is an essential determinant for business start-ups, development and growth for SMEs. In these years, crowd funding digital platforms have flourished fast as an innovative form of financing for SMEs. Their characteristics allow them to perform SME credit risk assessment better and quicker than traditional financial intermediaries. Compared to banks, for instance, crowd funding digital platforms benefit from minimal capital requirements and a flexible organizational structure that, thanks to the new digital technology, can collect and process information and big data much more quickly. To foster the growth of the crowd funding industry in the EU and ensure investor protection, the legislator introduced the European Crowd funding Service Provider Regulation (ECSPR). The new regulation aims to create a standardized regulatory framework by harmonizing the crowd funding services in the common market and facilitating cross-border operations, enhancing investor protection, promoting transparency and ensuring compliance with the regulatory requirements to increase investor confidence. This article discusses the ECSPR's objectives, requirements and critical provisions. Furthermore, it evaluates the ECSPR's results against the EU legislator's initial intents of fostering the growth of the crowd funding industry and enhancing investors' trust and confidence with protection measures. A balance between these two would be optimal.
References
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In 2008, the EC and the European Central Bank decided to collaborate on a survey on the access to finance of SMEs in the EU. The survey conducted across 38 countries was undertaken in June-July 2009 and again in August-October 2011, see the Communication from The Commission ‘Small Business, Big World — a new partnership to help SMEs seize global opportunities’ COM (2011) 702 final; EC Enterprise and Industry, “SMEs’ Access to finance, Survey December 2011; ECB, “Survey on the access to finance of SMEs in the Euro Area” April 2012. In the UK, various surveys have been conducted to investigate SMEs’ experiences when accessing finance. Barriers to access to finance have been cited as an important problem in recent and less recent surveys by governments and associations of professional categories, see the Report of the Department for Business Innovation & Skills, Economic Paper “SME Access to external finance” January 2012; The Scottish Government “SMEs Access to finance” 2012 Report; Institute for Small Business & Entrepreneurship (ISBE) “SMEs’ access to finance: Is there still a debt finance gap? Nov. 2008; ISBE “Barriers faced by SMEs in raising finance from banks” 2006. See also ICAEW, SME Access to Finance Report 2011 (although in their survey, they only interviewed 25 SMEs).
See the definition of crowd funding included in the EU Directive 2020/1504: “financial technology solution that provides small and medium-sized enterprises (SMEs) and, in particular, start-ups and scale-ups, with alternative access to finance in order to promote innovative entrepreneurship in the Union, thereby strengthening the Capital Markets Union”.
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See the EU Directive 2020/1504 in the recitals.
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The EU Crowdfunding Service Provider Regulation n. 2020/1503 of 7 October 2020, amending EU Regulation 2017/1129 and EU Directive 2019/1937, accompanied by the Directive (EU) 2020/1504, amending Directive 2014/65/EU on markets in financial instruments and published on 20 October 2020.
The limit of 5 million euros was chosen given that it represents the threshold used by the majority of Member States to exempt public offers of securities from the obligation to publish a prospectus under Regulation (EU) 2017/1129.
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Digital platforms are the new instruments for financial disintermediation (or new forms of intermediation), for they offer their services directly to existing and potential clients on the web. See Fenwick, M, McCahery, JA, & Vermeulen, EPM, ‘Fintech and the financing of SMEs and entrepreneurs: From crowd funding to marketplace lending’, in Douglas Cumming, Lars Hornuf (eds), The Economics of Crowd funding Startups, Portals and Investor Behavior (2018 Palgrave Macmillan), pp. 103-129. DOI: https://doi.org/10.1007/978-3-319-66119-3_6
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Art. 12(1) of the ECSPR.
Art. 12(2) of the ECSPR.
Art. 12(3) of the ECSPR.
Art. 14 of the ECSPR.
Art. 15(1) of the ECSPR.
Art. 15(2) of the ECSPR.
On the relationship between ESMA and NCAs) see, Pala G, M Lamandini and R D’Ambrosio ESMA and NCAs: cooperation in supervision (Art 32) in Macchiavello ‘Regulation’ (n 19) pp. 409-418.
See Art. 17 of the ECSPR.
Art. 14 of the ECSPR.
Art. 18 of the ECSPR.
A sophisticated investor is either: a legal person owning at least EUR 100.000 or has a turnover of at least EUR 2.000.000 or a total balance sheet of at least EUR 1.000.000; or a natural person meeting at least two of these three criteria: personal gross income of at least EUR 60.000; has covered an executive position for at least 12 months in a legal person and has knowledge of large financial markets’ transactions; is used to carry out at least ten significant transactions per quarter, over the previous four quarters.
See Art. 23 and Appendix I of the ECSPR.
Regulation No 1286/2014 on packaged retail and insurance-based investment products.
The original EC Commission proposal did not require correctness. The term correctness constitutes an additional liability for the service providers, which are considered not mere intermediaries but also gatekeepers for investor protection. See Macchiavello E, ‘Disintermediation in fund-raising’, (n 11) 303 f.
Art. 19(2); Art. 21(4); Art. 23(6) comma (c) of the ECSPR.
See from Art. 21(1) to Art. 21(4) of the ECSPR.
Art. 21(5) of the ECSPR.
See Art. 21(7) and Art. 22 of the ECSPR.
Art. 5 of the ECSPR.
Art. 4 of the ECSPR.
Art. 8 of the ECSPR.
Art. 20 of the ECSPR.
Articles 6 and 24 of the ECSPR.
Art. 7 of the ECSPR.
Art. 10(1) of the ECSPR.
Art. 10(2) of the ECSPR.
Art. 10(3) of the ECSPR.
Art. 10(4) of the ECSPR.
Art. 11(1) and (2) of the ECSPR.
Art. 11(6) and (7) of the ECSPR.
Where a crowd funding service provider has been in operation for less than 12 months, it may use forward-looking business estimates in calculating the fixed overheads. See Art. 11(5) of the ECSPR.
Art. 11(8) and (9) of the ECSPR. See De Smet J and V Colaert, ‘Between investor protection and access to crowdfunding: the entry knowledge test and the simulation of the ability to bear loss (Art 21 and Annex II)’ in Macchiavello ‘Regulation’ (n 19), pp. 280-299.
Art. 11(3) and (4) of the ECSPR.
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However, the EC Commission stated that the notion of ‘business activity’ includes public entities and not-for-profit entities, which can be project owners under the ECSPR ‘as long as they raise funds for an activity that generates some economic benefit’ even just for the ‘ultimate beneficiaries (whether monetary or nonmonetary)’, not only for its owners or members. See ESMA, ‘Questions and Answers on the European Crowd funding Services Providers for Business Regulation’, (20 May 2022) 12, para 3.1.
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Art. 1(2)(a) of the ECSPR.
See EU Commission, ‘Proposal for a Directive of the European Parliament and of the Council on consumer credits’ COM (2021) 347 final. However, the Directive does not introduce a comprehensive and harmonized framework for consumer crowd-lending services and operators, which will probably remain fragmented. See E Macchiavello, ‘The Challenges Awaiting the European Crowd funding Services Providers Regulation: Ready for Launch?’ NJCL 2022/2, pp. 96-97.
In this logic, the MiFID II and the Prospectus Regulation have been changed to include among the transferable securities also those ‘issued by means of distributed ledger technology’, see Art. 18 of the Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU (“The EU Pilot Regime”) OJ L 151, p. 1–33. See also the recently introduced Regulation (EU) 2023/1114 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (“MiCA”), OJ L 150, p. 40–205, which lays down uniform requirements for the offer to the public and admission to trading on a trading platform of crypto-assets. For a comment, see F. Annunziata and T. de Arruda, ‘Crowdfunding and DLTs: the imperative need for more clarity’, in Macchiavello ‘Regulation’ (n 19), pp. 565-577; Hacker P, Thomale C (2018) Crypto-securities regulation: ICOs, token sales and crypto currencies under EU financial law. ECFR 15:645–696.
See ESMA, ‘European Crowd funding Service Providers for Business Regulation (2020/1503) - Miscellaneous reporting to ESMA’ (10 November 2021) ESMA35-42- 1305, 3, .
For instance, these are differently categorized and treated in Italy and Portugal.
See Gargantini M, Secondary markets for crowdfunding: bulletin boards (Art 25) in Macchiavello ‘Regulation’ (n 19), pp. 350-366; Hakvoort A, ‘Secondary Trading of Crowd funding Investments’, in Ortolani and Louisse (n 19) 281. DOI: https://doi.org/10.4337/9781802209945.00034
Macchiavello E, The Challenges Awaiting the ECSPR (n 58), pp. 100 ff.
Annunziata F, 2023 Retail Investment Strategy How to boost retail investors’ participation in financial markets, Publication for the Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg.
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