The European Commission has unveiled an action plan detailing how Europe can harness the opportunities presented by technology-enabled innovation in financial services (FinTech). The objective is for Europe to become a global hub for FinTech, with EU businesses and investors becoming able to make the most of the advantages offered by the Single Market in this fast-moving sector. As a first major deliverable, the Commission has put forward new rules that will help crowdfunding platforms to grow across the EU's single market, thereby increasing the potential for start-ups and SMEs to attract funding from across the EU.
Starting from the very basics, crowdfunding is an innovative funding opportunity for small businesses and start-ups. Through an online platform, it brings together business projects in need of funding with investors. Start-ups benefit from crowdfunding as it gives them access to alternative and cheaper source of finance. It also gives their new products and services exposure while enabling them to get validation from investors and backers. Crowdfunding is also helpful for the growth of already-established businesses - helping them grow and reach the capital level which will then allow them to tap into further sources of funding, such as bank loans, business angels and venture capital.
What has the problem in Europe been so far?
As the table shows, Europe is lagging seriously behind the Asia-Pacific region and the Americas where it comes to crowd-funding. This is most probably due to the strict regulatory environments and to the multitude of different and sometimes conflicting rules between the different member states, crowdfunding platforms find it difficult to expand across the EU. This makes it difficult for start-ups and SMEs to benefit from attracting investment across the whole European Union rather than in individual states.
What is being proposed?
In a nutshell, the main major change in this proposal is the introduction of an EU-wide passport enabling European crowdfunding service providers – of both investment and loan based platforms - to operate under the same rules across Member States. Furthermore, the proposal also introduces a common investor protection regime. This will make it easier for ventures to attract funds from all Member States.
Another important aspect of the proposal is that it seeks to exempt crowdfunding service providers from the obligations of the EU's MiFID II regime, which sets rules for investment services. This exemption would be applicable to crowdfunding “campaigns” of up to €1m. Raising higher sums would come under the bloc’s existing prospectus and securities rules.
Other provisions include:
• Authorisation and ongoing supervision requirements
• Investor protection and transparency rules
• Guidelines on marketing communications
• Safeguards to reduce the risk of money laundering
What happens next?
The Commission’s proposal will now be discussed by the Council and the European Parliament. Given that there are EP elections next year, however. this proposal is, unfortunately, unlikely to come into force before 2022.
How will this affect Malta?
So far, Malta has not yet regulated the crowdfunding space, therefore Maltese start-ups and SMEs, to date, have significant barriers to accessing crowdfunding.
Therefore, start-ups seeking to use crowdfunding had to use foreign platforms, without the support a Maltese platform would offer, and in some cases, even move jurisdiction. Resulting in start-ups moving away from Malta rather than moving to Malta. This proposal will not only provide the clarity required for the crowdfunding market to operate effectively in Malta but it will also give Maltese start-ups and SMEs better access to funding, enabling them to tap into crowdfunding across all Member States.
At this stage, Maltese authorities, as late adopters to the world of crowdfunding, now have the benefit of hindsight from the experience of all the other Member States. This proposal is a result of various experience-based discussions and workshops which included the participation of the key experts in the field from across the EU.
This proposal and the discussions that led to this proposal highlight one key learning point. That a highly regulated crowdfunding legislative framework is not really fit for purpose and hinders the development of the industry and the development of the start-up ecosystem, hence, the exemption from MiFID regime for campaigns below €1m. Malta could take on this proposal and implement a two-tiered approach, adopting the provisions of this proposal for campaigns below €1m (or below the prospectus requirement limit) and then applying MiFID rules for platforms operating with higher amounts.