Crowdfunding: the European Commission seizes the initiative

The introduction of EU action on crowdfunding has been on the agenda for some time.

In particular, responses to a green paper published by the Commission on the long-term financing of the EU economy confirmed that crowdfunding has a real role to play in promoting access to finance and encouraging sustainable growth (www.practicallaw.com/5-526-6153).

The European Council has also highlighted the need to develop alternative sources of financing in its June 2013 conclusions, and the Commission held a crowdfunding workshop in the same month to discuss how EU policy moves could support crowdfunding as a form of financing.

Some EU member states have already started to move forward on crowdfunding. For example, the Italian Security and Exchange Commission has passed a legislative decree, the DecretoCrescita, which includes provisions for equity-based crowdfunding.

The proposals set out in the consultation aim to identify a variety of soft law measures that might be introduced to encourage crowdfunding. The key proposals include:

The number of crowdfunding platforms using securities-based investment is much smaller than the number of platforms in the artistic and creative domain, which usually seek donations or provide rewards (see box "Different forms of crowdfunding"). However, it is this type of crowdfunding platform that is creating particular interest among regulatory authorities.

Two relevant pieces of EU legislation are the Prospectus Directive (2003/71/EC) (PD) and the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The PD applies to fundraisers that issue securities through a public offering. Offers below €5 million are out of scope of the PD and are left to regulation at the national level. The PD also contains several exemptions from the obligation to publish a prospectus where offers are, in total, less than €100,000. The consultation seeks to gather information on the rules that member states have in place for offerings between €100,000 and €5 million, and to assess whether these rules are appropriate for crowdfunding campaigns that have a cross-border element.

There has been some debate in the media as to whether crowdfunding platforms provide "investment services and activities" as defined in section A of Annex 1 to MiFID. The applicability of MiFID is ultimately dependent on the role and scope of the services being offered by the crowdfunding platform. When crowdfunding platforms host securities campaigns, the consultation states that MiFID requires entities that are acting as financial intermediaries to be authorised.

However, it also draws attention to the exemption in Article 3 of MiFID for "certain entities advising or receiving orders from investors and transmitting them to platforms and other specified entities". National authorities are asked to indicate whether, and how, they will use this exemption in the context of crowdfunding.

In addition, in instances where trading of purchased equity is allowed among investors on the crowdfunding platform, that platform may qualify as a multilateral trading facility and require authorisation. Further consideration should also be given to the amendments to MiFID that are currently being negotiated in trialogue. In particular, the introduction of a new regulated trading venue, the Organised Trading Facility, and whether crowdfunding platforms will fall into this category.

The consultation addresses the need for legislative action on a national level and explores the adequacy of national measures already in place to regulate the financial forms of crowdfunding.

The consultation closes for comments on 20 December 2013. The Commission will then review the responses and decide how to take the issue forward.

Assuming that the responses are positive, this may pave the way for positive discussion around crowdfunding and represents a move in the right direction if crowdfunding is to be regulated at the EU level. However, any real changes in legislation are unlikely to be seen before 2015.

When, or if, legislation is introduced, certain safeguards will also need to be put in place to gain the contributors' trust and to ensure an adequate level of protection for all.