European Commission: “Crowdfunding to complement existing models of finance”

What forms of crowdfunding is the Commission examining and what are its views on the various types of crowdfunding?

Barbara Gabor is policy officer at the European Commission

Barbara Gabor: The Communication “Unleashing the potential of Crowdfunding within the European Union” was adopted in March 2014, and considers a variety of crowdfunding models: donations, rewards, pre-sales, profit-sharing, lending and investments in securities. It views all these types of crowdfunding as important in meeting the needs of a variety of projects.

More broadly, the Commission is due to launch its consultation paper, its so-called Green Paper, on the Capital Markets Union on 18 February. The Capital Markets Union is a key priority of this Commission. It aims to remove the barriers that are currently preventing Europe’s businesses from getting access to finance, and as part of that, it will put forward measures designed to help small and medium-sized companies get investor support.

Why did the commission install an expert group for crowdfunding? Was it pushed for by the member states for direction or rather an initiative by the commission?

Gabor: The expert group was set up to help the Commission raise awareness, provide information and training modules for project owners, promote transparency, exchange best practices and identify issues that may need to be addressed. The Commission wanted to establish this expert group in order to gain valuable insights into crowdfunding, given that it is an emerging phenomenon where innovation is on-going and where markets are evolving differently in different Member States. The expert group, called the European Crowdfunding Stakeholder Forum, was set up in the autumn of 2014 and consists of 20 private and 20 public experts.

Is crowdfunding expected to become an important source of financing within the EU?

The Capital Markets Union aims to remove the barriers that are currently preventing Europe’s businesses from getting access to finance.

Gabor: There are no precise figures yet on the size of crowdfunding markets across the EU. The Commission will launch a study in the course of 2015 to gain a better overview of crowdfunding volumes and growth rates. In 2012, the estimated size of crowdfunding markets across the EU was 735 million euros, in 2013 this estimate surpassed one billion euros (read more about it here) and some Member States have reported exponential growth rates in 2014 (read more here). But even if crowdfunding stays small compared to bank lending, for example, it provides a valuable source of funding for many businesses, entrepreneurs, cultural or social projects and even for consumers who otherwise would not obtain the necessary funding for their projects. Crowdfunding is not expected to replace traditional models of finance, but it could complement them.

Funding by the crowd is seen as a smaller part of the challenge. How are aspects such as taxes, consumer/small investor protection, prospectus requirements recognised?

Gabor: In building contributors’ confidence to provide funding through a new form of finance such as crowdfunding, a variety of standards have come to play a fundamental role: standards on information disclosure, advertising and business conduct, to name a few. This stands true for all models of crowdfunding, but they are even more important where there is an investment element, such as profit-sharing, lending and investments in securities. There is already legislation on EU and national levels, which regulates payments, securities offers and investments in financial instruments, in order to ensure that investors can make informed decisions and transactions in a secure environment. These rules apply to those forms of crowdfunding that involve investment elements. Besides the very important issue of consumer confidence, the Communication also recognises that taxation, which remains a national competence, might influence people’s decisions as to where and how to invest or donate their money.

What makes currently the biggest part of your work?

The Commission will launch a study in the course of 2015 to gain a better overview of crowdfunding volumes and growth rates.

Gabor: We are currently assessing the stakeholders’ feedback we received over the course of 2014, and we are also analysing the  “Advice on investment-based crowdfunding” by the European Securities and Markets Authority (ESMA). The European Banking Authority (EBA) is expected to publish a similar document on lending-based crowdfunding in the coming weeks.

We are also finalising a users’ guide for SMEs, and three studies are under way: one will compile market data, while there will also be a consumer awareness study and a consumer survey on expectations and perceptions about crowdfunding. It is also foreseen in the Communication that the Commission will publish a report on crowdfunding in 2015 to summarise the results of its initiatives since the publication of the Communication.