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

Abstract

Crowdfunding has experienced rapid growth in some EU Member States. However, home bias by investors and regulatory barriers prevent the crowd and the project from moving freely across borders. Crowdfunding has, 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 a mainly national issue, prompting the European Commission to conclude that there is no need for a harmonization of crowdfunding rules in Europe.

In contrast to the European Commission’s Capital Market Action Plan, this paper takes the view that 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 Member States, European law hinders the development of cross-border crowdfunding within the region. This is particularly true for smaller Member States whose populations are too small to constitute ‘a crowd’. This 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. In light of the regulatory experience with other financial products and the segregating effect of product-based approaches, many of which exist in the EU/EEA Member States, we believe existing product regulation is insufficient to enable a European cross-border crowdfunding market. Instead, regulation based on the ‘MiFID light’ framework could function as basis for a cross-border crowdfunding manager passport, given the minimum protection it affords both investors and the financial system, and the low costs it imposes on the platform. Following the (1) too-small-to-care, (2) too-large-to-ignore, and (3) too-big-to-fail development path of 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.

Keywords: Financial Regulation, Crowdfunding, FinTech, Crowdlending, Equity Based Crowdfunding, Crowdinvesting, RegTech, CRD IV, CRR, MiFID, MiFIR, UCITSD, AIFMD

JEL Classification: G23, G24, G28