FRANÇAIS

Equity Crowdfunding in the European Union

Equity Crowdfunding in the European Union

Disclaimer: The following content is intended to provide general information regarding crowdfunding legislation and does not constitute legal advice of any kind.

According to the 2013 Massolution report, the European market for crowdfunding generated some US$945 million in 2012, which is a 65% increase over 2011. This level of activity makes Europe the second most active market for crowdfunding in the world, accounting for roughly 35% of the world’s crowdfunding (by funds raised). While the vast majority of the crowdfunding that occurs in Europe is based on the Donation Model, some European jurisdictions (notably Germany, France and the United Kingdom) have taken steps to adjust securities regulation to adapt to equity-based crowdfunding models. Some of these steps – whether they encourage crowdfunding or not – may be instructive to Canadian audiences.

Overview: Crowdfunding in the EU

  • Crowdfunding in the European Union (EU) is regulated by the same sets of laws that govern financial institutions, notably lenders (e.g. banks) and investment entities (e.g. venture capital firms, angel investors, etc.)

  • Crowdfunding platforms are able to collect and retain funds ahead of the realization of the Deal. As a consequence, platforms must comply with the European Directives relating to the “the taking up, pursuit and prudential supervision of the business of electronic money institutions,” and the national versions of those directives.

  • The Prospectus European Directive specifies the information that has to be transmitted to investors for funding targets over €5 million. Funding targets of less than €100,000 are exempted throughout the EU, while national authorities are allowed to specify rules governing amounts between €100,000 and €5 million. The United Kingdom has exempted all funding below the €5 million mark (per issuer in a 12 month period), while Germany and France both currently use the minimum (€100,000) fund ceiling.

  • The donation model across the EU (and also in Canada) seems to follow the same format pioneered by American platforms like Kickstarter and Indiegogo. As such, this model of crowdfunding falls outside of EU financial services regulation (as it does in Canada). For this reason, the remainder of this article will discuss the lending forms of project-based and equity-based crowdfunding models.

  • Ratified in 2011, the Alternative Investment Fund Manager’s Directive (AIFMD) came into effect in July 2013. This complex piece of legislation is designed to regulate all alternative sources of investment across the EU – including crowdfunding. It will have wide repercussions across much of the EU’s funding ecosystem. The effects for crowdfunding depend on whether crowdfunding platforms and the companies they seek to fund will be exempted from this regulatory regime. 

For more information, please see the European Crowdfunding Network's A Framework for European Crowdfunding

GERMANY:

  • Project-based (lending): Lending in Germany mainly takes the form of subordinated loans (i.e. those with lower priority than other bonds). To allow investors to participate in the success of the funded venture (i.e. the project), interest rates are linked to the profit made by the venture. Investors do not, however, share any liability for losses incurred by the project or company. Such loans are counted as ‘debt’ rather than equity, and so do not qualify as investment products, exempting them from German financial services regulation.

  • Equity-based: Regulation governing the sale and solicitation of securities is quite complex in Germany. To avoid onerous prospectus requirements, most equity crowdfunding platforms in Germany take advantage of an exemption to these requirements that permits silent partnerships, provided these partnerships only offer investment and contract-broking services. Crowdfunding in this manner has some potential disadvantages: ownership of a company cannot be acquired in this way, and the resultant investment products are rarely tradable.

  • AIFMD Impact: The Directive may have a significant impact for German crowdfunding equity. Companies are divided under this legislation into operating and project companies. Project companies are those which are set up to promote a single project, which may be a movie, a game, or a piece of infrastructure (e.g., a solar plant), and where the company does not operate the facility of production themselves. For simplicity’s sake, most other companies will count as ‘operating’ companies. If such project companies fall under the AIFMD regime, obtaining an attractive cost-reward ratio may be impossible. And projects like movies or games might be completely prohibited, since they do not qualify as ‘material assets’ within the meaning of the Capital Investment Act. It has yet to be determined whether crowdfunding platforms should be considered AIFs.

​For more information, you can access this document.

UNITED KINGDOM (UK):

  • Project-based (lending): Though most lending platforms are not currently regulated as financial service providers, the UK has published a proposal to make ‘operating an electronic system in relation to lending’ a regulated activity, which would require such platforms to seek authorization from the UK’s Financial Conduct Authority (FCA), starting in April 2014.

  • Equity-based: While equity-based crowdfunding is currently not legal per se in the UK, there are a number of exemptions that allow it to occur. For example, though the contents of many crowdfunding platforms’ websites constitute “financial promotion” (which requires authorization from the FCA), the platforms commonly engage an approved firm to handle investor communications for them. At the same time, as equity crowdfunding campaigns rarely involve the day-to-day operation of the company in question, equity crowdfunding in the UK can run afoul of regulations pertaining to “collective investment schemes” which are subject to a higher degree of legal restriction. Despite these challenges, individual exemptions from various regulations are meted out by the FCA on a case-by-case basis.

  • AIFMD Impact: Requirements under the AIFMD are unlikely to be as prohibitive in the UK due to an exemption for fund managers with assets under €100 million. Platforms and associated offerings are generally exempt from providing a prospectus as long as the funding remains under €5 million in a 12-month period.

​For more information, you can access this document.

FRANCE:

  • Crowdfunding platforms in France must comply with requirements set by banking authorities to obtain a payment agency agreement. The compliance cost to be agreed in this way is quite onerous, and so most crowdfunding platforms in France will be backed by a traditional bank, which processes payments on behalf of the platform.
  • Project-based (Lending): In France, only banks are permitted to lend to companies. French lending platforms must therefore comply with specifications to be agreed as a credit institution (i.e. a bank). This includes a minimum capital threshold of up to €5 million, and many French lending-based platforms argue that this threshold is unrealistic, given their limited resources and the (relatively) small size of the deals they wish to promote.

  • Equity-based: France has several requirements for equity-based crowdfunding, above and beyond those imposed by the Prospectus European Directive (see above). France also requires equity-based crowdfunding platforms to maintain a minimum capital requirement of €730,000. In addition, the Autorité des marchés financiers (AMF) have introduced another threshold: a normalized prospectus must be approved by the AMF for any equity funding project involving more than 99 investors. These restrictions combine to produce an environment in which the costs of compliance usually outweigh the value of seeking equity crowdfunding in France, given that these companies are usually start-ups with little data (with which to meet any prospectus requirements) and financial needs that likely exceed the €100,000 level.

  • AIFMD Impact: The requirements already in place for French equity-based crowdfunding (see above) are sufficiently strict that it is unlikely that things will change much under the AIFMD regime – it is currently not possible for CF platforms to offer a reliable, transparent, cost-effective service to companies seeking funds from the Crowd.

​For more information, you can access this document.

Published on November 8, 2013