Crowdfunding Should Surge as New EU Regulations Reduce the Risks

Passports May Make Crowdfunding More Attractive

Crowdfunding platforms such as Funding Circle, Seedrs and Zopa may find it easier to scale up and do business across borders as EU plans to centrally regulate this activity come to fruition. Platforms may avail of a so-called passports, which would give them bloc-wide access via compliance with just one rulebook. This would increase and diversify the potential investor base for these fintech startups, reducing compliance risk and cost. Plynk, Bud and iZettle are among fintechs that would have access to alternative, cheaper sources of finance.

More for Investors, Less for the Banks

As crowdfunding grows, investors may see more opportunities. Their investments would be better protected under the new regime, making crowdfunding less risky. Among other things, crowdfunding service providers would have a duty to obtain the “best possible result.” Meanwhile, bank lending may wane if crowdfunding becomes a popular alternative to unsecured bank financing, currently the main source of funding for small businesses. HSBC, ING and BBVA are among EU banks with the largest volume of commercial loans at the end of last year.

U.K. May Rain on Crowdfunding Party

Crowdfunding could slow in the U.K. if the Financial Conduct Authority acts on its pledge to more strictly regulate the sector. The watchdog is concerned about weak investor protection. Regulatory controls to increase transparency may also raise costs for startups and hamper flexibility for investors. The FCA, due to publish proposals in 2017, has yet to release them, probably because of Brexit. Claims-management company Reubus Group went bankrupt after raising over 800,000 pounds via crowdfunding in 2016. 

Chaotic Crowdfunding Regime Ripe for Change

Europe’s crowdfunding lags behind the U.S. and Asia, mainly because of regulatory divergence within the 28-country bloc. Crowdfunding platforms can’t easily scale up and reap the benefits of the EU single market if they have to comply with myriad local laws, which can conflict. So investors have limited access to crowdfunding projects and can’t easily diversify risks. Platforms must now obtain a local license for each country in which they want to do business.
Companies Impacted: About 60% of platforms focus on finance. In 2017, Monzo raised 2.5 million pounds from 6,500 investors through a campaign on Crowdcube. Germany’s Companisto and Seedmatch, Sweden’s FundedByMe, Finland’s Invesdor, France’s WiSEED and Spain’s Startupxplore are among the bloc’s biggest platforms. (04/11/18)

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