Thu. Nov 14th, 2019

Planet Compliance

Innovation & Regulation in Finance

What happened to the EU Crowdfunding Regulation?

7 min read

Now, that we have agreed on another extension to Brexit and the UK has not exploded despite great concerns, focus returns firmly on the upcoming changes among senior staff in the European Union. Christine Lagarde is to take over the ship at the European Central Bank. The European Commission’s president-elect Ursula von der Leyen has put forward the nominees for her new team of commissioners and the new Commission is due to take office soon. Valdis Dombrovskis, of course, will keep his post as European Commissioner for Financial Stability, Financial Services and Capital Markets Union and if you wondered what this all means for the more or less imminent future of finance in the EU, the Commission actually provided a few updates today as part of its monthly finance newsletter.
Talk is about the Sustainable Europe Investment Plan that will be drawn up to unlock €1 trillion of sustainable investment over the next decade. It mentions FinTech as another key policy area for the upcoming mandate and the move to a digital economy. Crypto-assets, including stablecoins, are a part of the EU’s strategy, too, that analyses opportunities and the challenges that come with it, namely cybersecurity, unfair competition, money laundering and terrorist financing, privacy, consumer protection and possible threats to financial stability.
The Commission promises a new, comprehensive approach to fighting money laundering and the financing of terrorist activities with its focus primarily on strengthening supervision and enforcement of legislation without borders.

And it highlights that “EU companies are still overly reliant on bank financing and too often small and medium-sized firms (SMEs) have to move abroad to get the funding they need.” A genuine capital markets union appears the solution to the problem and to achieve this, the update cites the creation of a private-public fund to facilitate SMEs’ access to public equity or exploring ways to make cross-border investments easier, in particular with a view to a greater harmonisation of insolvency laws and tax proceedings. The Commission “will also look at ways to improve the supervisory system”, sure, but what actually happened to another initiative that focused on the access to financing for SME’s? You know, the one that is very deer to us? The title, of course, already gave it away, we are talking about the European Crowdfunding rules that were supposed to create a level playing field and finally help this form of financing to fulfil its potential. One of the key aspects FinTech firms (and other companies) in light of Brexit, is the potential loss of access to the EU’s common market. Financial Institutions in London have thrived because they can operate across the other 27 member states from the UK. Crowdfunding, so far, does not benefit from this setup as it is regulated nationally, which has created distinct differences in regulatory obligations, but more so means that Equity Crowdfunding campaigns in Europe are often limited to single jurisdiction, significantly reducing market exposure and opportunity. In practice, this often means that, for example, a project may be very promising but is reduced to its national market because the platform running the project only allows investors from the particular country, where the platform is registered, to participate. No matter where in the EU that is, it is always drastically smaller than the market of all 28 members.

With this in mind and to keep Europe at the peak of global innovation and competition, the Commission published its Action Plans on Sustainable Finance, FinTech and, you may recall, a proposal for a Regulation on Crowdfunding last year. Therein, the Commission stressed that the EU market for crowdfunding is underdeveloped as compared to other major world economies and that one of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders is the lack of common rules across the EU. This results in an increase in compliance and operational costs and prevents crowdfunding platforms from expanding, the Commission said.

And then the squabbling began, which we summarized in an update in July:
The members of the European Parliament responded to the proposal by asking for various amendments that would change the scope of the new rules by, for example, include ICOs, raise the application to crowdfunding offers of up to 8 million Euros (as opposed to the Commission proposal of one million), the introduction of a requirement for crowdfunding service providers to disclose annually the default rates of the crowdfunding projects offered on their platforms, or specify that all marketing communications to clients must provide information about the financial risks and charges related to crowdfunding services. The final position the Parliament adopted on 27 March 2019, i.e. a year after the Commission’s original proposal, was then sent to the Council.
On 26 June, the Council set out its own position with regard to the different proposals and it is sort of a compromise: While it goes with the Parliament’s suggestion to raise the bar to €8m but not beyond (“Larger operations are regulated by MiFID and the prospectus regulation”), it is more coy on the on the disclosure obligation regarding default rates and suggests a softer approach in the form that platforms ought to make available and periodically update default rates of loans granted through their crowdfunding platform.
Further, the Council is not supportive of the idea to force platforms to include information about their own insolvency risk in all marketing communications.

With the different positions set out, the different institutions will now have to start trilogue negotiations to agree upon a draft text though it is unclear how soon this will take place and when the new rules will become applicable.
We have emphasized the aspect of starting trilogue negotiations and this magic moment has finally arrived:

Is it realistic then that the representatives of the Council, Parliament and Commission find common ground before we all head for the Christmas trees? At first, you might think that considering the time it took to set out each party’s position (more than a year from the publication of the Commission proposal) and that several months have passed from the announcement of the need for such negotiations and the actual commencement of such (four to be precise), the chances are slim to none. With roughly seven weeks to sort this (and other matters) out before the holidays, it sounds tough, but on the other hand, there is always hope that the good people in Brussels might want to get the thing of their desk before they head for their well-deserved holidays and we have seen occasions where such things have happened. Eventually, we can only hope for a speedy conclusion of this matter, but in the end it might be worth waiting a little longer if it helps to find a framework that finally gets Crowdfunding in the EU of the ground.

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