Cross-Border Crowdfunding – Towards a Single Crowdfunding Market for Europe

Crowdfunding - an outcome of the modern sharing economy - has experienced rapid growth in some EU Member States, notably the UK, France, Germany, Italy and the Netherlands. However, home bias by investors and regulatory barriers prevent the ‘crowd’ and the project from moving freely across borders. In particular, commercial approaches to crowdfunding as investment, reward or peer-to-peer lending schemes have, for the most part, remained a phenomenon of those larger Member States that ‘draw a crowd’, with a population large enough to make a crowdfunding website an economically feasible undertaking. In turn, crowdfunding has remained mainly a national issue, prompting the European Commission in its Capital Market Action Plan to conclude that there is no need for a harmonization of crowdfunding rules in Europe. 

In a recent paper, Christina Preiner and I argue that this view is premature. National limitations on crowd investing and crowd lending de facto are the result of limits de iure. Given that no European passport is tailor-made or fits crowdfunding, this source of financing is doomed to remain national. Moreover, with different legal requirements in the Member States, European law hinders the development of cross-border crowdfunding within the region. There is a valid concern that cross-border crowdfunding – already being low in volume – is going to decline even further, in line with increased national legislation being put into place. Regulatory attention has thus shifted from initial curiosity to ensuring that crowdfunding can be done seamlessly across borders. 

Drawing on the experience of other financial products, such as the early days of Undertakings for Collective Investment in Transferable Securities (UCITS), we take the view that crowdfunding can only reach its full potential if national regulatory regimes within the EU and EEA do not inhibit the use of crowdfunding platforms.
 
Our paper details how European regulators could facilitate a Single European Crowdfunding Market while limiting both the risks for investors and the regulatory burden for crowdfunding platforms and recipients. We argue that regulating the platform rather than the product or disclosure is most suited to facilitating a Crowdfunding Capital Markets Union as it retains an open approach to innovation while mitigating the agency risks imposed on investors and funded enterprises when using a crowdfunding platform. Taking into account that European financial law underwent a significant expansion over the last ten years, we propose a pan-European crowdfunding passport based on Article 4(1) No. 2(c) of the Capital Requirements Regulation (CRR), an often overlooked exemption for small financial intermediaries based on the MiFID framework. With small modifications, a European passport based on the ‘MiFiD light’ rules applicable in light of Article 4(1) No. 2(c) CRR could close the circle (or more precisely, the triangle) in furthering a single European capital market, protecting investors and keeping down costs for intermediaries, funded firms and investors.

Following the (1) too-small-to-care, (2) too-large-to-ignore, and (3) too-big-to-fail development path of all FinTech business models, we suggest adding a relevance threshold of EUR250,000 in transaction volume to the MiFID light framework and imposing regulation to address systemic risk concerns for very large crowdfunding platforms that may arise in the future.

Dirk A. Zetzsche is the ADA Chair in Financial Law (Inclusive Finance) at the University of Luxembourg.