EU Crowdfunding Regulation

On October 7, 2020, the European Parliament and the Council of the European Union approved the European Regulation on Crowdfunding (ECSP), which has long been felt as a strong need by many quarters.

Why are we talking about this now, more than two years later? Because between the saying and the doing is the bureaucratic machinery of all the member states.

The official entry into force of the Regulation on European crowdfunding service providers for businesses was to be November 10, 2021. Compared to that date, there was a transition period of one additional year for all countries and operators to comply, expiring in November 2022.

Some member states, including Italy, in 2022 had not yet designated the competent authority for implementing the regulation and issuing the necessary new licenses for crowdfunding service providers. For this reason, the European Union granted an extension of one more year to the transitional period, which will then end in November 2023.

Finally, Italy has designated both Consob and the Bank of Italy as competent authorities, which will have authorization and supervisory duties.

Let's see, then, what changes will be introduced starting from the end of this year under the regulation.

Why a European regulation on crowdfunding?

Consultations for a common crowdfunding regulation in Europe began as early as 2018. The main need is to foster the development of crowdfunding as a tool for businesses, allowing regulatory boundaries between member countries to be crossed while increasing protections for investors.

Until now, in fact, crowdfunding has spread unevenly across European countries, leading to the creation of different and even contradictory systems of rules. This prevented cross-border crowdfunding opportunities from being realized: platforms could not offer services in countries other than their own and companies could not find investors across borders.

Creating a single mandatory regulation for all crowdfunding platforms expands the crowdfunding market to the European dimension.

At the same time, the new rules aim to strengthen investor protection., which until now was left to the initiative of individual platforms and states, and was often insufficient. Strengthening protection also serves to increase investor confidence and thus encourage investment, which will further benefit economic development.

The main new features of the European Crowdfunding Regulation

The object of the regulation is "uniform requirements for the provision of crowdfunding services, for the organization, authorization and supervision of crowdfunding service providers, for the operation of crowdfunding platforms, and for transparency and marketing communications in connection with the provision of crowdfunding services in the Union."

These requirements will apply to equity crowdfunding and lending crowdfunding, while donation and reward crowdfunding, as well as loans requested through lending from individuals, remain excluded.

• Authorization to operate: crowdfunding platforms must apply for authorization to the competent authority identified by their state. To obtain authorization, they must demonstrate that they have adapted to the new regulations for management and control of the business and investor protection.

• Provision of portfolio management services: lending crowdfunding platforms will be able to offer their users individual portfolio management services by submitting investment proposals that must be explicitly accepted.

• Transparency requirement: platforms must provide complete and clear information about proposed projects, selection methods and risks.

• Introduction of the European passport: authorized platforms will receive a certificate allowing them to operate in any member state.

• Extension of equity crowdfunding: equity capital raising is also made available to companies other than startups and SMEs.

• Maximum collection: 5 million within one year.

• Extension of debt crowdfunding: minibonds may also be placed with retail investors, defined by the regulation as "unsophisticated."

• Introduction of electronic bulletin boards: to facilitate investment exit, users will be able to access portals for buying and selling crowdfunded financial instruments.

• Differentiated levels of investor safeguards: platforms will have to submit questionnaires to users that allow them to be divided into "sophisticated," i.e., experts, and "unsophisticated." The latter are to be better protected with various tools prepared by the regulation.

• Conflict of interest rule: platforms cannot participate in any campaign launched on their own portal.

• Marketing requirements: platforms may not conduct specific marketing operations for individual ongoing or planned campaigns.

What changes for enterprises?

Much of the changes introduced by the European regulation mainly affect crowdfunding platforms, which will have to make some structural changes and put in place new processes.

However, there are also important implications for businesses that want to raise capital by crowdfunding.

Thanks to the European passport, in fact, a business will be able to launch a crowdfunding campaign in any member state: it is a potential key to facilitated access to new markets and new audiences, which for some businesses may be even more favorable than domestic ones.

Not only that: by launching a campaign in Italy, it will be possible to raise investors throughout Europe without bureaucratic hassles.

Finally, in general, the increased investor protections and greater liquidity of the instruments can be additional leverage available to fuel one's crowdfunding campaigns.

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