Tuesday, October 08, 2013

E.U. Consults on Crowdfunding as SEC Set to Implement JOBS Act Crowdfunding Mandate

With the SEC poised to implement the JOBS Act crowdfunding title, the European Commission has begun a consultation on the potential benefits and risks of this new and exciting form of capital-raising in a quest for the optimal policy framework to untap the potential this broad form of financing. The consultation covers all forms of crowdfunding, ranging from donations and rewards to financial investments.

Commissioner for Internal Market and Services Michel Barnier said that crowdfunding is an increasingly important alternative form of fundraising that is collective, participatory and interactive. It has the potential to bridge the financing gap many start-ups face and to stimulate entrepreneurship. Considering the development of crowdfunding and the diversity of regulatory, supervisory, fiscal and social frameworks for it across the EU, noted Commissioner Barnier, there is a compelling need for a single European framework to support both those who develop crowdfunding platforms and to reduce the risks to those who make use of such platforms to finance projects.

Crowdfunding is an emerging alternative form of financing that connects directly those who can give, lend or invest money with those who need financing for a specific project. It usually refers to open calls through the Internet to the wider public to finance specific projects. Promoters of an initiative can collect funds directly, said the Commission, but often a web-based intermediary, a so-called crowdfunding platform, will often assist in publishing campaigns and collecting funds.

While calls for funds to the public are not new, added the Commission, the phenomenon of using the Internet to directly connect with funders has emerged recently. Crowdfunding can take many forms, ranging from simple donations or rewards-based schemes through to pre-sales, peer-to-peer lending and investments in equity.

To be sure the Commission recognizes that crowdfunding has risks. For example, and perhaps most problematic, there is the risk of fraud when the money collected is not used for stated purposes. The Commission cautioned that Internet-based communication easily lends itself to fraudulent representation and false statements.

Relatedly, there is the risk that advertising and advice by promoters or platforms may be misleading. Another risk involves how crowdfunding platforms treat payments, such as whether reclaimable contributions are returned.

Financial forms of crowdfunding fall under sector-specific EU legislation on financial services. Due to the complexity and risks inherent in financial services, access to markets is tied to higher requirements, mainly to ensure investor protection. But this legal framework contains exemptions for transactions below a certain threshold. Since crowdfunding campaigns typically have relatively low target amounts, noted the Commission, they often fall out of the scope of EU legislation.

While targeted measures have been introduced in a number of Member States to regulate financial forms of crowdfunding ranging from minimum limits on individual contributions to various duties on platforms to safeguard investors' interests, it must be remembered that Commissioner Barnier has emphasized that a single E.U. crowdfunding framework is becoming a compelling necessity.

With regard to crowdfunding platforms that host securities campaigns, the Commission pointed out that the Markets in Directive (MiFID) requires entities performing financial intermediation to be registered and comply with MiFID investor protection rules. These entities benefit from a passport to other EU Member States. At the same time, Member States have the option to apply an exemption pursuant to Article 3 of MiFID for certain well defined entities advising or receiving orders from investors and transmitting them to platforms. The consultation will examine the question of whether MiFID offers the optimal legal environment to allow the growth of crowdfunding at the European level, while ensuring adequate investor protection.

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