Maximizing the Capabilities of Crowdfunding
Crowdfunding is the main source of financing for half a million European projects that otherwise may not raise the necessary capital to be fulfilled. A March 2014 European Commission communication to the European Parliament – entitled “Unleashing the potential of Crowdfunding in the European Union” – discloses key challenges of crowdfunding within the current market climate. The objective of this valuable document is to highlight the aspects that need fine-tuning before European crowdfunding will be utilized at its full capabilities and attain steadiness. As popular as crowdfunding may already be among European countries, it still has many more untapped benefits to be unleashed. Let’s peek into our neighbors’ back yard and see why they think crowdfunding is still virgin territory.
From €1 billion to €6 trillion – Spotting the True Potential of Crowdfunding
According to a 2013 Finance Access Survey, one of the biggest limitations of the European SMEs (Small and Medium Enterprises) is access to finance, especially in early stages of business. “There is great potential in crowdfunding to complement traditional sources of finance and contribute to the real economy,” states the communication in its introductory part. Per the Commission’s report, €735 million was raised through all forms of crowdfunding in Europe in 2012 and an expected €1 billion in 2013. These figures are relatively small compared to the €6 trillion figure summed up by retail bank lending to non-financial institutions. Thus, the communication amassed all available data to propose action for supporting the emergence of crowdfunding activities and balance the €1 billion to €6 trillion gap with crowd traction.
Key Challenges for Equity Crowdfunding in Europe
There is a significant amount of legal uncertainty dominating the European financial returns crowdfunding landscape. Equity crowdfunding platforms and campaigns are, much like in the US, subject to further EU and national regulation. Although equity crowdfunding is successfully functioning in some states, a significant speed reducer is the lack of transparency on the applicable rules. Germany, the Netherlands and Belgium have established guidelines to operate in compliance with the EU’s regulatory framework, while others countries (Italy, the UK, France and Spain) have taken regulatory action to simplify this new form of financing and to protect investors. Europe’s crowd investing statistics show that only 38% of financial return platforms operate cross-border and almost half of them would like to expand to other EU Member States. As many as 44% of the European equity crowdfunding platforms motivate their decision to not extend their business to other countries based on lack of information about the applicable rules.
The prevalent challenge for European countries is to adapt their crowdfunding regulations to the needs of users – specifically SMEs. The Commission’s proposed solutions for striking the right balance are monitoring the market, assessing the needs for regulatory action and information sharing about national regulatory practices in order to detect discrepancies among national approaches.
Raising Crowdfunding Awareness
“Sustainable growth in crowdfunding is only possible if users have confidence in it. Running successful crowdfunding campaigns also depend on campaigners having the necessary skills and training, as well as support offered by platforms and other actors” (extract from the communication). The Commission’s document brings out the general lack of awareness about crowdfunding in Europe. Increasing the knowledge on the subject is a key factor in maximizing the potential of crowdfunding, as it has the capability to establish trust between contributors and campaigners. A proposed solution by the Commission is to enhance recognition of the platforms, establish a quality label that signals compliance with certain standards and uphold a low risk of fraud.
Market access and investor protection is as critical to the European countries as it is to American states. With this in mind, the slow approach taken by the United States to open the door to equity crowdfunding is strongly justified by the elaborated fine-tuning of the regulatory framework. The communication issued by the European Commission reveals lacunas that keep crowdfunding from reaching its true potential in Europe and serves as a great reference point for maximizing the potential of our own crowdfunding.
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