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Risk management and clear rules: Crucial factors for a viable EU crowdfunding framework

Crowdfunding

The EU crowdfunding framework proposed by the European Commission will help to build a capital markets union, foster innovation and support entrepreneurs and SMEs across the EU, says the European Economic and Social Committee (EESC) in a recently adopted opinion, which strongly supports the Commission's proposals. The proposed regulatory framework – a 29th regime, to exist in parallel with the 28 national regimes – will allow small, young and innovative enterprises in particular to strive for financing in all EU Member States.

While the EESC agrees with most of the rules proposed by the Commission, it calls for additional measures to make them fit for the market. Risk management, and clarity and certainty of rules for all market participants, would be crucial for the viability and success of the proposals.

As regards risk management, the EESC suggests introducing additional measures – at least in the initial stage – to further identify, mitigate and manage financial and non-financial risk aspects associated with crowdfunding operations and markets: transparency and, above all, protection of investors are of the utmost importance, and the status of providers and their services and the role of national supervisory bodies should be better defined. Additional measures should by no means create new obstacles.

"Risk assessment of specific projects on crowdfunding platforms is left too much to markets and investors. The limited protection of investors under the current proposals could create an uneven playing field between crowdfunding and traditional financial service providers," said Daniel Mareels, rapporteur of the EESC opinion. This must be avoided, as it could lead to uncertainty and regulatory arbitrage and impair confidence in certain market participants and the EU's financial stability.

Further measures must also ensure that providers act first and foremost as neutral intermediaries. The Committee is of the view that this is jeopardised by providers' ability to enter into contracts with investors under which they may "exercise discretion" to obtain the best result for their clients. There is also a need to clarify the role of national supervisory bodies.

"National supervisors are closer to national markets and can better assess local circumstances. The Commission should thus consider allocating them a substantial supervisory role," said Daniel Mareels. Close cooperation between EU and national supervisors would in any case be desirable. 

The coexistence of European and national regimes could create confusion for market participants. It would be useful for the EU regulatory framework to create more clarity and certainty about the terms of use of crowdfunding platforms. This would be crucial for the success of crowdfunding platforms in general and the EU framework in particular. European and national authorities and supervisors should provide accurate, easily accessible and detailed information. In addition to listing crowdfunding platforms with a European authorisation on the website of the European Securities and Markets Authority (ESMA), national supervisors and other relevant authorities should also inform about platforms with a European authorisation and the platforms themselves must be obliged to make their status clear in any communication to the public.  

The Committee also believes that the Commission's proposals on the fight against money laundering and terrorism financing remain too limited and queries the limited scope for subjecting crowdfunding platforms to these rules. This option should exist at all times and should not be the sole competence of the Commission. In addition, conditions and criteria in this respect should be made clear. Moreover, the tax treatment of crowdfunding income and tax obligations on debtors should be part of the discussion, as taxation could be another decisive factor for the success of the proposed framework.

Finally, companies and investors should make effective and extensive use of the crowdfunding regime in order to establish a true market and to make it a success. In the Committee's view, the restriction on financing projects – only up to a maximum amount of EUR 1 million over a period of 12 months – could be another obstacle to the viability of the proposed EU regime. A higher threshold should be considered.

In general, the EESC considers that the overall goal should be to create a single harmonised market in the EU with the same rules for entrepreneurs and investors. The proposed regime would lay the groundwork for its creation. All stakeholders and interested parties should be involved moving forward.

Background:

By means of the new regime, crowdfunding services will be able to carry out their activities across the EU on the basis of a single authorisation. This adds a new dimension to the capital markets. Additional opportunities for financing are created. This is particularly important for small, young and innovative enterprises, which often struggle with access to traditional financing, particularly when they move from a start-up to an expansion phase. At the same time, there will be more and better opportunities for investors. The framework proposed by the European Commission could contribute to the strengthening and deepening of the capital markets union, the economic and monetary union, and the digital single market, priorities that are strongly championed by the EESC.