European Crowdfunding Legislation: What’s Taking So Long?

While the U.S. are making major efforts to implement the JOBS Act, the European Union seems to be only capable of analyzing the developments, as J.D. Alois’ article “EC Releases Communication on Long Term Financing Including Crowdfunding” shows.

The most important conclusion was that the European Union should monitor, rather than develop and implement legislation. This apparently passive attitude can be seen as a sign of a broken and incoherent view on crowdfunding, but the opposite is true. There are several reasons why developing European legislation requires monitoring as a first, valuable step.

Implementing legislation can actually break up crowdfunding growth

Map of Europe

Europe is a diversified continent in terms of legislation. Some countries, such as Belgium and the Netherlands, work with a Twin-Peaks model meaning one party supervises the stability of the financial system (DNB) and the other party (AFM) supervises financial behavior (saving, investing, insuring, lending, etc.).

In some countries however, each financial product belongs to a sector (pensions, accountants, etc.) that has its own regulator. In such countries it is often hard to decide where crowdfunding belongs. Should lending via the crowd be regulated differently from equity-crowdfunding, for example, or is all crowdfunding equal?

As result, it is difficult for the European Union to develop and implement one set of rules that affects all European countries and systems. The risk exists that if Europe would force its countries to implement crowdfunding rules on a micro-scale, crowdfunding growth would actually be damaged, or worse, fully destroyed.

European Union Flag

The reason for this scattered legal landscape is of course that all the separate countries already came into existence before the current European Union did. Though legislation could break crowdfunding development in the European Union, European directives are preparing to set standards that all the members will have to meet while at the same time, leaving them free to implement legislation to their own understanding.

Local legislation in place poses a problem however..

Implementing European legislation at a local scale sounds like a great solution. However, in most cases legislation is already in place in order to regulate financial markets and products. Adjusting these in order to suffice European crowdfunding standards might create a stir across a country’s entire financial system.

It would not just be a case of setting up crowdfunding regulations: it would mean that countries might have to restructure their entire financial system. Countries are not willing to do that as long as crowdfunding does not yet contribute as much to the economy as most industries do, because the investment might possibly not pay off or be wrong due to unforeseen developments.

Differing legal entities across Europe

Different countries work with different legal entities for their companies. As a campaign manager at Symbid I know we often get requests from entrepreneurs across borders, who we can’t help if they do not establish a Dutch Limited Liability company first. A very strange fact if you consider the entrepreneur might only be some 60 miles away.

Crowd in Airport

In many cases, crowdfunding platforms can only service companies from their own country. Why? If the platform would want to extend the structure across Europe, they would face an increased risk of fraud. Even if they would be able to counter act this possible threat with a solid due diligence process, like some platforms already have in place, they would be liable for European legislation, while the entire legal structure was based on their homeland’s legislation in the first place. European legislation in this case might either have some holes as there is no regulation available for the structure, or might work against the platform. That is not a risk a crowdfunding platform wants to take for its investors or its entrepreneurs.

European Union Growth

Next step to actually developing legislation

The overall goal of course is to have European legislation work for all 28 countries, which is a challenging task to complete. A first step is indeed to monitor the crowdfunding developments across Europe in different countries. It will soon become clearer what structures work and which do not work. Rather than risking a downfall of the entire would-be pan-European crowdfunding legislative system, the European Union is avoiding the “all eggs in one basket”- strategy; something every good investor understands!

This article was earlier published on CrowdfundInsider.com

Figuring Out Crowdfunding: Should We Support Open or Closed Markets?

As the European Union continues to monitor crowdfunding developments, countries in Europe, like France and the U.K., are already developing legislation in an attempt to establish a cohesive government approach. These developments make an interesting case study that can help to decide whether or not to strictly guide and possibly slow down crowdfunding expansion, or to unleash a host of crowdfunding platforms that might leave investors disillusioned. France and the U.K. have taken two different approaches (almost opposites), which give us a great opportunity to study the pros and cons of open and closed markets.

UK: from unregulated to regulated

big-ben-uk

The UK has had a relatively open marked compared to other European countries, allowing the crowdfunding industry to raise £ 76 million or well over USD 127 million, (equity) crowdfunding and peer-to-peer (P2P) lending combined. Now, the Financial Conduct Authority (FCA) has implemented rules that will regulate the crowdfunding industry to a great extent, evoking mixed reactions. On Startups.co.uk Barry James, founder of The Crowdfunding Centre, said that the FCA appears to be “inflexible, stubborn and unimaginative”. Others like Luke Lang, co-founder of Crowdcube, welcomed the regulations: “these changes will help build market confidence”.

What are the new regulations?

Luke Lang Co-Founder of Crowdcube

The most important changes in regulations are a limit on the amount inexperienced investors can invest: a maximum of 10% of their portfolio has been introduced. Second, equity platforms are limited in their advertising opportunities as they’re no longer allowed to address inexperienced investors. Lending platforms must have a minimum of 0.2% in financial resources for any £ 50,000 (USD 83,700) of outstanding loans, with a minimum of £ 20,000 (USD 33,500). Further, the FCA requires platforms to present information in a “fair, clear and not misleading” way, reports Out-Law.com.

The good

What do these regulations mean for UK crowdfunding development? Though the responses have been mixed, the general tone of the discussion seems to be positive: some form of supervision is welcomed, even the much discussed 10% rule. As crowdfunding is growing, more people will make bigger investments, increasing the potential losses these investors might experience. It’s an illusion there won’t be a big mistake that blows a hole in the trust people currently have in crowdfunding. Being presented as the holy grail in startup funding, it’s time to get down to earth and protect both investors and entrepreneurs for funding gone awry.

At Symbid, we’ve been long supporting initiatives like the US CAPS accreditation program and we want to be involved in the development of legislation so we’re involved in the European Advisory Board. These are activities any serious platform should aim to conduct.

Luke Lang recognises the importance of market confidence. I don’t think I need to explain why banks and related financial institutions are being monitored after the financial crises. Crowdfunding is far from a minefield, but managing expectations and portfolios of people who have the ability to spend their money in ways they had not before, requires decent information and safety.

The bad

 

Chris Woolard

The 10%  rule is too rigid as it declines the potential of non-accredited investors to one tenth of the entire potential market. Chris Woolard of the FCA onBBC News says that:

“What we are saying [with the 10% rule] is, if you have never had experience with this before, we want you to gain experience before you make a large investment.”

But investor experience is not directly related to the amount of money or income one has, making the 10% rule an awkward attempt to limit risk as an affluent person might loose more money or a larger percentage if he is not well educated.

France: from over-regulated to less regulated

France Liberte Egalite Fraternite

Though crowdfunding is the fasted growing market in France, the unlocking of this industry has been hold back by stringent rules, like the requirement € 5 million (USD 6.9 million) in financial resources for lenders, or the maximum amount of 149 investors per offer before the company needs to create a rigid prospectus in cooperation with a lawyer. In contrary to the U.K. market, the French market is very risk averse, says Joachim Dupont of crowdfunding platform Anaxago on The Local.

What are the new regulations?

Fleur_Pellerin_Forum_Mondial_du_Libre_2012_09_cropped

Fleur Pellerin, the French vice-minister of Economics, hit the French media headlines as she presented the new regulations applying to crowdfunding. France will be the first to develop a separate status for crowdfunding platforms across the country, CIP (conseiller en investissement participatif or “equity investment advisor”) and IFP (intermédiaire en financement participatif or “crowdfunding intermediary”) respectively.

In addition, the crowdfunding limit for equity has been expanded from € 100,000 (USD 138,000) to € 300.000 (USD 414,000) per year. Investors are allowed to fund up to € 1,000 (USD 1,400) per project in order to apply risk diversification. The obligatory prospectus has been reduced from an entire document to 4-5 page brochure, saving time and legal costs for entrepreneurs. In general, Pellerin suggested the government should develop a quality label for platforms and enforce information concerning the risk and related data about an investment.

The good

Back Camera

Of course, opening up the the markets and loosening the reins must be a breather for the French alternative capital market. But the most outstanding development for the crowdfunding industry is the separate status crowdfunding would get. Whereas most governments are not quite sure how to handle crowdfunding, the French government has clearly named and thus placed crowdfunding within the financial industry. Legislation and structure concerning crowdfunding in France a now much less fuzzy compared to the U.K. market.

Giving crowdfunding a well defined status allows it to be accountable when thing go awry compared to existing capital providers. At the same time it also adds weight to the potential of this type of funding. It shows that opening markets consists of more than simple deregulation and that some extent of supervision actually acknowledges and supports the sustainable growth of a new sector. It might even allow easier cooperation with “official” financial institutions like banks, as both operate within a clear area of jurisdiction.

The bad

The Crowd Woman Waving

The market in France has already been lagging in comparison to the other countries in Europe, such as Germany, the UK, Finland or the Netherlands. It’s an illusion that opening the markets will immediately decrease this lag. It might take years to reach the level some other countries have already acquired and it might even slow down European legislation on a larger scale. Though the current limits might be stretched further, even that will not have the impact an unlimited market might offer.

Conclusion

Regulation should aim to healthily let the industry grow, reducing both negative proliferation and the risk of choking prosperity. Investors and entrepreneurs should be both be well aware of the risks involved, and unlimited lending and investing has led us into trouble before. Regulation lets us manage expectations and cut out the bad weeds, creating an environment where quality funding and good investors relationships can thrive and create real, economic value.

This article was previously published on CrowdfundInsider, where it received much social media appreciation

Legislating Crowdfunding & Industry Accreditation

The recent commotion concerning crowdfunding legislation is easy to understand considering Europe’s seemingly passive attitude concerning crowdfunding (J.D. Alois) and the discussion on open or closed crowdfunding markets. Accreditation can help to speed up the development of industry-fit regulation, but it requires companies to play ball and be vulnerable. A difficult requirement in a fiercely competitive market.

The situation calls for accreditation

What situation has created the cut-throat environment that crowdfundingplatforms face? Alex Feldman, initiator of CrowdsUnite (a great crowdfunding-filtering database), says on CrowdCrux that approximately over a 1,000 crowdfunding platforms exist. In addition, the success rate of crowdfunding campaigns leaves room for major improvements. On top of that, crowdfunding guides are ringing the alarm about crowdfunding scams, the most well- know probably being Kobe Red Beef Jerky. It’s clear the industry is in need of guidance, which is most likely to be found within the industry itself, and implemented via accreditation.

watching searching  industry

Accreditation in itself is a valuable tool in order to prevent fear, scams and the proliferation of low-quality sites which could lower the value of crowdfunding for the economically valuably ventures that we need to rebuild our economies. Fear from the side of governments, traditional funding institutes, investors and entrepreneurs can be reduced as a crowdfunding platform is publicly accountable via accreditation. Being accredited also shows stakeholders that a crowdfunding platform is involved in continuous improvement and reviews its quality to independent quality supervisors on a regular basis.

In relation to actual governmental legislation, there are several reasons why accreditation can serve as a pre-assessment of the regulations that will be implemented later on. Creating accreditation helps to create a forum where the industry can voice their expectations, needs and demands in combination with a sense of what are reasonable requirements. They have a chance to shape legislation instead of being fully dependent. Accreditation can also relieve local and international governments if they don’t feel the need to develop full scale regulations. When full scale regulations are a next step, accreditation is good way to test the practicality of possible supervisions. Finally, it might be faster than waiting for (international) regulation to be developed, giving the crowdfunding industry a chance to quickly increase the overall quality of the industry.

What should be in an Accreditation Program

scam

At Symbid, we’ve helped to develop the only accreditation program for crowdfunding in existence, the CAPS program. Yes, there is already accreditation in place. What’s in there? Crowdsourcing.org’s CAPS program focuses on Operational Transparency (a clear outline of the platform’s activities); Security of Information and Payments (personal and payment data are secured); Platform Functionality (the platform should work properly); and Operational Procedures (working with standard processes).

But that’s not enough. It’s to easy to meet these requirements as the scams show. Currently, the program is meant for the entire crowdfunding industry, mixing donation models and equity models as they are apples and oranges. If a platform meets all these requirements, there is still no guarantee that the project is real, the person behind it is really who (s)he says (s)he is, the money is used for it’s intended goal, what the chances of success are for a campaign and what the risk is that an investor will loose his money. A guarantee will never be provided, but accreditation allows to streamline the conformity of platforms to a certain set of standards.

A practical requirement would be make a list of cooperating partners obligatory. For example, making sure there is always a third, platform independent party involved that holds the money in its bank account. Another useful addition would require platforms to set up a step-by-step plan in case something goes wrong. Creating standard procedures allows customers to compare service and security levels of a platform. The platform should also be held accountable in the case of a scam and to do everything to prevent it, like arranging personal meetings or make identification via passports or governmental identification numbers obligatory.

In order to create an accreditation program that can be used as a first draft for possible legislation, the industry should openly discuss topics like platform operations, user privacy concerns, money transaction safety, separate legal status for crowdfunding platforms, the amount of risk involved in losing money, the chances of success for a campaign, etcetera. Understandably, platforms are being fuzzy about this type of information, but right now, other authors, media, institutes and crowdfunding information platforms such as CrowdsUnite are drawing their own conclusions. Information that might help shape the ideas that policy makers have about crowdfunding.

industry quality award trophy

It would be stupid not to create an accreditation program

CAPS is a great program, already in place, but no one is talking about it. How come? There has not yet been an industry full (media) debate that has created international attention concerning accreditation. Platforms should clearly mention their CAPS accreditation and express the need for qualification. In addition, there should be more types of accreditation for different types of platform, in order to prevent e.g. donation based platform to also easily offer loans or equity once they have the pass. It also protects donation based platform from having to meet heavy requirements not tailored for their business.

Accreditation should be treated as the next step for legislation: serious and open discussion within the industry is necessary if crowdfunding wants to be a real playing in the capital raising market. Demands for the entire financial sector just went up, but crowdfunding platforms are still playing by their own rules. Crowdfunding is no longer about “cute” initiatives but about real businesses and substantial amounts of capital. Reason enough for crowdfunding platforms to act like a real industry players and create a substantial first step in legislation: accreditation.

This article was previously published on CrowdfundInsider

Legislating Crowdfunding & Industry Accreditation

The recent commotion concerning crowdfunding legislation is easy to understand considering Europe’s seemingly passive attitude concerning crowdfunding (J.D. Alois) and the discussion on open or closed crowdfunding markets. Accreditation can help to speed up the development of industry-fit regulation, but it requires companies to play ball and be vulnerable. A difficult requirement in a fiercely competitive market.

The situation calls for accreditation

What situation has created the cut-throat environment that crowdfundingplatforms face? Alex Feldman, initiator of CrowdsUnite (a great crowdfunding-filtering database), says on CrowdCrux that approximately over a 1,000 crowdfunding platforms exist. In addition, the success rate of crowdfunding campaigns leaves room for major improvements. On top of that, crowdfunding guides are ringing the alarm about crowdfunding scams, the most well- know probably being Kobe Red Beef Jerky. It’s clear the industry is in need of guidance, which is most likely to be found within the industry itself, and implemented via accreditation.

watching searching  industry

Accreditation in itself is a valuable tool in order to prevent fear, scams and the proliferation of low-quality sites which could lower the value of crowdfunding for the economically valuably ventures that we need to rebuild our economies. Fear from the side of governments, traditional funding institutes, investors and entrepreneurs can be reduced as a crowdfunding platform is publicly accountable via accreditation. Being accredited also shows stakeholders that a crowdfunding platform is involved in continuous improvement and reviews its quality to independent quality supervisors on a regular basis.

In relation to actual governmental legislation, there are several reasons why accreditation can serve as a pre-assessment of the regulations that will be implemented later on. Creating accreditation helps to create a forum where the industry can voice their expectations, needs and demands in combination with a sense of what are reasonable requirements. They have a chance to shape legislation instead of being fully dependent. Accreditation can also relieve local and international governments if they don’t feel the need to develop full scale regulations. When full scale regulations are a next step, accreditation is good way to test the practicality of possible supervisions. Finally, it might be faster than waiting for (international) regulation to be developed, giving the crowdfunding industry a chance to quickly increase the overall quality of the industry.

What should be in an Accreditation Program

scam

At Symbid, we’ve helped to develop the only accreditation program for crowdfunding in existence, the CAPS program. Yes, there is already accreditation in place. What’s in there? Crowdsourcing.org’s CAPS program focuses on Operational Transparency (a clear outline of the platform’s activities); Security of Information and Payments (personal and payment data are secured); Platform Functionality (the platform should work properly); and Operational Procedures (working with standard processes).

But that’s not enough. It’s to easy to meet these requirements as the scams show. Currently, the program is meant for the entire crowdfunding industry, mixing donation models and equity models as they are apples and oranges. If a platform meets all these requirements, there is still no guarantee that the project is real, the person behind it is really who (s)he says (s)he is, the money is used for it’s intended goal, what the chances of success are for a campaign and what the risk is that an investor will loose his money. A guarantee will never be provided, but accreditation allows to streamline the conformity of platforms to a certain set of standards.

A practical requirement would be make a list of cooperating partners obligatory. For example, making sure there is always a third, platform independent party involved that holds the money in its bank account. Another useful addition would require platforms to set up a step-by-step plan in case something goes wrong. Creating standard procedures allows customers to compare service and security levels of a platform. The platform should also be held accountable in the case of a scam and to do everything to prevent it, like arranging personal meetings or make identification via passports or governmental identification numbers obligatory.

In order to create an accreditation program that can be used as a first draft for possible legislation, the industry should openly discuss topics like platform operations, user privacy concerns, money transaction safety, separate legal status for crowdfunding platforms, the amount of risk involved in losing money, the chances of success for a campaign, etcetera. Understandably, platforms are being fuzzy about this type of information, but right now, other authors, media, institutes and crowdfunding information platforms such as CrowdsUnite are drawing their own conclusions. Information that might help shape the ideas that policy makers have about crowdfunding.

industry quality award trophy

It would be stupid not to create an accreditation program

CAPS is a great program, already in place, but no one is talking about it. How come? There has not yet been an industry full (media) debate that has created international attention concerning accreditation. Platforms should clearly mention their CAPS accreditation and express the need for qualification. In addition, there should be more types of accreditation for different types of platform, in order to prevent e.g. donation based platform to also easily offer loans or equity once they have the pass. It also protects donation based platform from having to meet heavy requirements not tailored for their business.

Accreditation should be treated as the next step for legislation: serious and open discussion within the industry is necessary if crowdfunding wants to be a real playing in the capital raising market. Demands for the entire financial sector just went up, but crowdfunding platforms are still playing by their own rules. Crowdfunding is no longer about “cute” initiatives but about real businesses and substantial amounts of capital. Reason enough for crowdfunding platforms to act like a real industry players and create a substantial first step in legislation: accreditation.

 

This article was previously published on CrowdfundInsider

Figuring Out Crowdfunding: Should We Support Open or Closed Markets?

As the European Union continues to monitor crowdfunding developments, countries in Europe, like France and the U.K., are already developing legislation in an attempt to establish a cohesive government approach. These developments make an interesting case study that can help to decide whether or not to strictly guide and possibly slow down crowdfunding expansion, or to unleash a host of crowdfunding platforms that might leave investors disillusioned. France and the U.K. have taken two different approaches (almost opposites), which give us a great opportunity to study the pros and cons of open and closed markets.

UK: from unregulated to regulated

big-ben-uk

The UK has had a relatively open marked compared to other European countries, allowing the crowdfunding industry to raise £ 76 million or well over USD 127 million, (equity) crowdfunding and peer-to-peer (P2P) lending combined. Now, the Financial Conduct Authority (FCA) has implemented rules that will regulate the crowdfunding industry to a great extent, evoking mixed reactions. On Startups.co.uk Barry James, founder of The Crowdfunding Centre, said that the FCA appears to be “inflexible, stubborn and unimaginative”. Others like Luke Lang, co-founder of Crowdcube, welcomed the regulations: “these changes will help build market confidence”.

What are the new regulations?

Luke Lang Co-Founder of Crowdcube

The most important changes in regulations are a limit on the amount inexperienced investors can invest: a maximum of 10% of their portfolio has been introduced. Second, equity platforms are limited in their advertising opportunities as they’re no longer allowed to address inexperienced investors. Lending platforms must have a minimum of 0.2% in financial resources for any £ 50,000 (USD 83,700) of outstanding loans, with a minimum of £ 20,000 (USD 33,500). Further, the FCA requires platforms to present information in a “fair, clear and not misleading” way, reports Out-Law.com.

The good

What do these regulations mean for UK crowdfunding development? Though the responses have been mixed, the general tone of the discussion seems to be positive: some form of supervision is welcomed, even the much discussed 10% rule. As crowdfunding is growing, more people will make bigger investments, increasing the potential losses these investors might experience. It’s an illusion there won’t be a big mistake that blows a hole in the trust people currently have in crowdfunding. Being presented as the holy grail in startup funding, it’s time to get down to earth and protect both investors and entrepreneurs for funding gone awry.

At Symbid, we’ve been long supporting initiatives like the US CAPS accreditation program and we want to be involved in the development of legislation so we’re involved in the European Advisory Board. These are activities any serious platform should aim to conduct.

Luke Lang recognises the importance of market confidence. I don’t think I need to explain why banks and related financial institutions are being monitored after the financial crises. Crowdfunding is far from a minefield, but managing expectations and portfolios of people who have the ability to spend their money in ways they had not before, requires decent information and safety.

The bad

 

Chris Woolard

The 10%  rule is too rigid as it declines the potential of non-accredited investors to one tenth of the entire potential market. Chris Woolard of the FCA onBBC News says that:

“What we are saying [with the 10% rule] is, if you have never had experience with this before, we want you to gain experience before you make a large investment.”

But investor experience is not directly related to the amount of money or income one has, making the 10% rule an awkward attempt to limit risk as an affluent person might loose more money or a larger percentage if he is not well educated.

France: from over-regulated to less regulated

France Liberte Egalite Fraternite

Though crowdfunding is the fasted growing market in France, the unlocking of this industry has been hold back by stringent rules, like the requirement € 5 million (USD 6.9 million) in financial resources for lenders, or the maximum amount of 149 investors per offer before the company needs to create a rigid prospectus in cooperation with a lawyer. In contrary to the U.K. market, the French market is very risk averse, says Joachim Dupont of crowdfunding platform Anaxago on The Local.

What are the new regulations?

Fleur_Pellerin_Forum_Mondial_du_Libre_2012_09_cropped

Fleur Pellerin, the French vice-minister of Economics, hit the French media headlines as she presented the new regulations applying to crowdfunding. France will be the first to develop a separate status for crowdfunding platforms across the country, CIP (conseiller en investissement participatif or “equity investment advisor”) and IFP (intermédiaire en financement participatif or “crowdfunding intermediary”) respectively.

In addition, the crowdfunding limit for equity has been expanded from € 100,000 (USD 138,000) to € 300.000 (USD 414,000) per year. Investors are allowed to fund up to € 1,000 (USD 1,400) per project in order to apply risk diversification. The obligatory prospectus has been reduced from an entire document to 4-5 page brochure, saving time and legal costs for entrepreneurs. In general, Pellerin suggested the government should develop a quality label for platforms and enforce information concerning the risk and related data about an investment.

The good

Back Camera

Of course, opening up the the markets and loosening the reins must be a breather for the French alternative capital market. But the most outstanding development for the crowdfunding industry is the separate status crowdfunding would get. Whereas most governments are not quite sure how to handle crowdfunding, the French government has clearly named and thus placed crowdfunding within the financial industry. Legislation and structure concerning crowdfunding in France a now much less fuzzy compared to the U.K. market.

Giving crowdfunding a well defined status allows it to be accountable when thing go awry compared to existing capital providers. At the same time it also adds weight to the potential of this type of funding. It shows that opening markets consists of more than simple deregulation and that some extent of supervision actually acknowledges and supports the sustainable growth of a new sector. It might even allow easier cooperation with “official” financial institutions like banks, as both operate within a clear area of jurisdiction.

The bad

The Crowd Woman Waving

The market in France has already been lagging in comparison to the other countries in Europe, such as Germany, the UK, Finland or the Netherlands. It’s an illusion that opening the markets will immediately decrease this lag. It might take years to reach the level some other countries have already acquired and it might even slow down European legislation on a larger scale. Though the current limits might be stretched further, even that will not have the impact an unlimited market might offer.

Conclusion

Regulation should aim to healthily let the industry grow, reducing both negative proliferation and the risk of choking prosperity. Investors and entrepreneurs should be both be well aware of the risks involved, and unlimited lending and investing has led us into trouble before. Regulation lets us manage expectations and cut out the bad weeds, creating an environment where quality funding and good investors relationships can thrive and create real, economic value.

This article was previously published on CrowdfundInsider, where it received much social media appreciation

European Crowdfunding Legislation: What’s Taking So Long?

While the U.S. are making major efforts to implement the JOBS Act, the European Union seems to be only capable of analyzing the developments, as J.D. Alois’ article “EC Releases Communication on Long Term Financing Including Crowdfunding” shows.

The most important conclusion was that the European Union should monitor, rather than develop and implement legislation. This apparently passive attitude can be seen as a sign of a broken and incoherent view on crowdfunding, but the opposite is true. There are several reasons why developing European legislation requires monitoring as a first, valuable step.

Implementing legislation can actually break up crowdfunding growth

Map of Europe

Europe is a diversified continent in terms of legislation. Some countries, such as Belgium and the Netherlands, work with a Twin-Peaks model meaning one party supervises the stability of the financial system (DNB) and the other party (AFM) supervises financial behavior (saving, investing, insuring, lending, etc.).

In some countries however, each financial product belongs to a sector (pensions, accountants, etc.) that has its own regulator. In such countries it is often hard to decide where crowdfunding belongs. Should lending via the crowd be regulated differently from equity-crowdfunding, for example, or is all crowdfunding equal?

As result, it is difficult for the European Union to develop and implement one set of rules that affects all European countries and systems. The risk exists that if Europe would force its countries to implement crowdfunding rules on a micro-scale, crowdfunding growth would actually be damaged, or worse, fully destroyed.

European Union Flag

The reason for this scattered legal landscape is of course that all the separate countries already came into existence before the current European Union did. Though legislation could break crowdfunding development in the European Union, European directives are preparing to set standards that all the members will have to meet while at the same time, leaving them free to implement legislation to their own understanding.

Local legislation in place poses a problem however..

Implementing European legislation at a local scale sounds like a great solution. However, in most cases legislation is already in place in order to regulate financial markets and products. Adjusting these in order to suffice European crowdfunding standards might create a stir across a country’s entire financial system.

It would not just be a case of setting up crowdfunding regulations: it would mean that countries might have to restructure their entire financial system. Countries are not willing to do that as long as crowdfunding does not yet contribute as much to the economy as most industries do, because the investment might possibly not pay off or be wrong due to unforeseen developments.

Differing legal entities across Europe

Different countries work with different legal entities for their companies. As a campaign manager at Symbid I know we often get requests from entrepreneurs across borders, who we can’t help if they do not establish a Dutch Limited Liability company first. A very strange fact if you consider the entrepreneur might only be some 60 miles away.

Crowd in Airport

In many cases, crowdfunding platforms can only service companies from their own country. Why? If the platform would want to extend the structure across Europe, they would face an increased risk of fraud. Even if they would be able to counter act this possible threat with a solid due diligence process, like some platforms already have in place, they would be liable for European legislation, while the entire legal structure was based on their homeland’s legislation in the first place. European legislation in this case might either have some holes as there is no regulation available for the structure, or might work against the platform. That is not a risk a crowdfunding platform wants to take for its investors or its entrepreneurs.

European Union Growth

Next step to actually developing legislation

The overall goal of course is to have European legislation work for all 28 countries, which is a challenging task to complete. A first step is indeed to monitor the crowdfunding developments across Europe in different countries. It will soon become clearer what structures work and which do not work. Rather than risking a downfall of the entire would-be pan-European crowdfunding legislative system, the European Union is avoiding the “all eggs in one basket”- strategy; something every good investor understands!

This article was earlier published on CrowdfundInsider.com