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The Regulation of Crowdfunding in Europe

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The Economics of Crowdfunding

Abstract

This chapter aims to give an overview of the regulation of crowdinvesting in Europe. It also tries to assess whether there is need for further regulation. To these ends, it outlines the general regulatory framework on the supranational EU level. With regard to the Member State level, the chapter discusses the laws of the UK and Germany, two almost antagonistic approaches to the regulation of crowdinvesting. Finally, it sheds light on the contractual terms under which crowdinvesting is taking place in Europe and discusses investor protection mechanisms crowdinvesting platforms have developed in the absence of regulatory requirements.

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Notes

  1. 1.

    European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Action Plan on Building a Capital Markets Union, COM (2015) 468 final, 30.9.2015.

  2. 2.

    http://ec.europa.eu/finance/general-policy/crowdfunding/index_en.htm.

  3. 3.

    Agendas, minutes, and meeting documents are available at: http://ec.europa.eu/finance/general-policy/crowdfunding/index_en.htm.

  4. 4.

    European Commission, Green Paper, Long Term Financing of the European Economy, COM (2013) 150 final, 25.3.2013.

  5. 5.

    European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Unleashing the potential of Crowdfunding in the European Union, COM (2014) 172 final, 27.3.2014 (for a discussion of the Directives mentioned in the Communication as having potential impact on crowdfunding, see Gabison 2015 at pp. 376 et seq.). The European Supervisory Authorities (ESAs) have also analyzed the crowdfunding market and its regulation and issued opinions and advices within their respective areas of responsibility. In the field of crowdinvesting the European Securities Markets Authority (ESMA) published an opinion and an advice on December 18, 2014 (ESMA, Opinion on Investment-based crowdfunding of 18.12.2014, https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1378_opinion_on_investment-based_crowdfunding.pdf; ESMA, Advice on Investment-based crowdfunding of 18.12.2014, https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1560_advice_on_investment-based_crowdfunding.pdf.). The European Banking Authority (EBA) published an opinion on crowdlending EBA, Opinion of the European Banking Authority on lending-based crowdfunding, 26.02.2015, EBA/Op/2015/03, https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-03+(EBA+Opinion+on+lending+based+Crowdfunding).pdf.

  6. 6.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016.

  7. 7.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016, at p. 30.

  8. 8.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016, at p. 31.

  9. 9.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016, at p. 31.

  10. 10.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016, at p. 31.

  11. 11.

    European Parliament resolution of July 9, 2015 on Building a Capital Markets Union (2015/2634(RSP)), para. 47.

  12. 12.

    European Parliament resolution of January 19, 2016 on stocktaking and challenges of the EU Financial Services Regulation: impact and the way forward towards a more efficient and effective EU framework for Financial Regulation and a Capital Markets Union (2015/2106(INI)), para. 22.

  13. 13.

    For an overview of the regulation of crowdfunding in a global context, see Pekmezovic/Walker 2016 at pp. 397–445.

  14. 14.

    For an overview of the “major”, “emerging”, and “frontier” markets of crowdinvesting outside the US, see Dehner and Kong (2014), p. 420 et seq.

  15. 15.

    Directive 2011/83/EU of the European Parliament and of the Council of October 25, 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council, and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council (Consumer Rights Directive), OJ (EU) No. L 304 of 22.11.2011, pp. 64–88.

  16. 16.

    http://eurocrowd.org/about-us/code-of-conduct-2/.

  17. 17.

    Directive 2003/71/EC of the European Parliament and of the Council of November 4, 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ (EU) No. L 345 of 31.12.2003, p. 64.

  18. 18.

    Commission regulation (EC) No 809/2004 of April 29, 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference, and publication of such prospectuses and dissemination of advertisements, OJ (EU) No L 149 of 30.4.2004, p. 3.

  19. 19.

    As amended by Directive 2010/73/EU of the European Parliament and of the Council of November 24, 2010 amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, OJ (EU) No. L 327 of 11.12.2010, pp. 1–12.

  20. 20.

    For the US concept see SEC v. Howey Co. 328 U.S. 293 (1946), compare, with regard to crowdfunding, e.g. Hurt (2015), p. 235 et seq.

  21. 21.

    Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ No L 173 of 12.6.2014, p. 39.

  22. 22.

    The terminology refers to the Lamfalussy Process, a legislative procedure under which EU securities regulation is passed. For an overview see Walla (2013), pp. 27–36.

  23. 23.

    For the obligations of crowdfunding portals regarding the provision of information and their liability under US law, see Bradford (2015a).

  24. 24.

    Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ No 176 of 27.6.2013, p. 338.

  25. 25.

    Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ (EU) No L 176 of 27.6.2013, p. 1.

  26. 26.

    Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, OJ (EU) No L 309 of 25.11.2005, p. 15.

  27. 27.

    Directive 2015/2366 of the European Parliament and of the Council of November 25, 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC, OJ (EU) No L 337 of 23.12.2015, p. 35.

  28. 28.

    Directive 2002/65/EC of the European Parliament and of the Council of September 23, 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, OJ (EU) No L 271 of 9.10.2002, p. 16.

  29. 29.

    Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ (EU) No. L 119 of 4.5.2016, p. 1.

  30. 30.

    European Commission, Commission Staff Working Document, Crowdfunding in the Capital Market Union, SWD(2016) 154 final, 3.5.2016.

  31. 31.

    Section 85(5)(a), Schedule 11A, para 9 FSMA 2000.

  32. 32.

    Section 21 FSMA 2000.

  33. 33.

    Section 19 FSMA 2000.

  34. 34.

    FCA, The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media, PS14/4, March 2014. For an overview of the FCA’s regulation, see Ridley (2016) at p. 65 et seq.

  35. 35.

    FCA, A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media, February 2015.

  36. 36.

    FCA, Call for input to the post-implementation review of the FCA’s crowdfunding rules, July 2016; FCA, Feedback Statement, Interim feedback to the call for the post-implementation review of the FCA’s crowdfunding rules, FS 16/13, December 2016.

  37. 37.

    FCA, Conduct of Business Sourcebook, 4.2.1R.

  38. 38.

    FCA, Conduct of Business Sourcebook, 4.7.7(3), 4.7.8(2), 10.2.

  39. 39.

    FCA, A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media, February 2015, para. 50 (emphasis added).

  40. 40.

    FCA, Conduct of Business Sourcebook, 4.7.7(2), 4.7.9–4.7.10.; see also FCA, The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media, PS14/4, March 2014, at p. 35 et seq.

  41. 41.

    FCA, Conduct of Business Sourcebook, 4.7.10.

  42. 42.

    § 3(1)(1) No. 5 Wertpapierprospektgesetz.

  43. 43.

    § 2(3) No. 3 lit. b) Vermögensanlagengesetz.

  44. 44.

    Small Investor Protection Act (Kleinanlegerschutzgesetz, KASG) of July 3, 2015, BGBl. I 2015, p. 1114 ff.

  45. 45.

    § 2a Vermögensanlagengesetz.

  46. 46.

    §§ 13, 14 Vermögensanlagengesetz.

  47. 47.

    § 13(6) Vermögensanlagengesetz.

  48. 48.

    § 15(3) Vermögensanlagengesetz.

  49. 49.

    § 34f(2) No. 3 Gewerbeordnung.

  50. 50.

    § 2a(3) Vermögensanlagengesetz. There is an exception from this requirement for investors who are corporate entities.

  51. 51.

    See § 16(4) Finanzanlagenvermittlungsverordnung, FinVermV and § 31(6) Wertpapierhandelsgesetz.

  52. 52.

    On regulatory competition on the level of national regulators and potential regulatory options, see Pekmezovic and Walker (2016), p. 446 et seq.

  53. 53.

    The two market leaders—measured by the amounts of funds raised—are the crowdinvesting platforms Companisto and Seedmatch.

  54. 54.

    Along the same line Armour and Enriques (2017), p. 42: (1) mechanisms that try to leverage more effectively the collective wisdom of the crowd, by reducing the possibility of inappropriate herding, (2) adaptation of contractual protection devices used by VCs and angel investors, (3) attempts to make more use of customized versions of investor protection mechanisms used in traditional IPO markets.

  55. 55.

    For first evidence on the wisdom of the crowd with regard to funding decisions, see Mollick and Nanda (2016).

  56. 56.

    FCA, A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media, February 2015, para. 51.

  57. 57.

    https://www.syndicateroom.com/about-us/about-syndicateroom.aspx.

  58. 58.

    https://www.seedrs.com/learn/blog/investors/trends-insights/small-investors-equity-crowdfunding.

  59. 59.

    https://www.seedrs.com/learn/blog/investors/trends-insights/small-investors-equity-crowdfunding.

  60. 60.

    For empirical data on the crowdfunding campaigns on CrowdCube in 2014, see Gabison (2015), p. 403 et seq.

  61. 61.

    Council of the European Union, Regulation of the European Parliament and the Council on the prospectus to be published when securities are offered to the public or admitted to trading, Confirmation of the final compromise text with a view to agreement, 2015/0268 /COD), 16.12.2016.

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Authors and Affiliations

  1. Faculty of Law, Humboldt University of Berlin, Berlin, Germany

    Lars Klöhn

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  1. Schulich School of Business, York University, Toronto, Canada

    Douglas Cumming

  2. Faculty of Business Studies and Economics, University of Bremen, Bremen, Germany

    Lars Hornuf

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Klöhn, L. (2018). The Regulation of Crowdfunding in Europe. In: Cumming, D., Hornuf, L. (eds) The Economics of Crowdfunding. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-66119-3_10

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  • DOI: https://doi.org/10.1007/978-3-319-66119-3_10

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