CrowdfundingHub teamed up with FG Laywers to launch a pan-European research to identify liability risk in respect to various forms of crowdfunding with the assistance of partners in 11 different European countries.

“Crowdfunding is here to stay. Its exponential growth (in Europe doubling every year) shows that the market is seriously looking into new financing alternatives. Crowdfunding platforms pop up like daisies and are expanding rapidly. Inherently, the platforms, as well as the investors and the project owners, become confronted with other jurisdictions. Other national laws and regulations, another regulator, but most importantly another (claims) culture.”

Crowdfunding Crossing Borders
Due to the absence of a pan-European legal framework or a uniform European legal approach by all Member States applicable to crowdfunding, each of the relevant actors (investors, platforms and project owners) will be confronted with local, unknown, laws when considering crowdfunding crossing borders.

Investors
An investor who contemplates to invest in a cross border project listed on a foreign platform and/or related to a foreign project owner, should take into account that generally the underlying legal and/or contractual relationship with the platform and/or project owner will be governed by other laws than the laws of his own Member State because a choice of law clause will generally be included in the underlying contractual terms. Typically, also a choice of forum clause shall be included in the applicable terms referring to another court than the local courts of the Member State of the investor. Subject to not being deprived of mandatory provisions applicable pursuant to the laws of his own Member State, an investor is warned that from a European international private law perspective, a choice of law clause and a choice of forum clause are generally held to be valid. As a consequence, the investor should make himself aware of the relevant laws that apply to his investment.

Platform
A platform that contemplates to expand its business into other Member States, at all times, needs to obtain legal advice in the Member State where it wishes to provide its services. Other than mandatory local civil law provisions that the platform should take into account, the platform, in particular crowdinvesting and crowdlending platforms, will need to take into account the local regulatory framework.

Project owner
If a project owner wishes to raise funds through a foreign platform and/or from foreign investors, it needs to take notice of the relevant applicable foreign rules and regulations of the host Member States in addition to the legislative framework in his own Member State. In particular, in case of fundraising by means of the offering of securities via a crowdinvesting platform, the project owner not only needs to take into account the laws in relation to a public offering of securities in his own Member State, but also the local laws of the Member States where offerings to the public are contemplated. Pursuant to any of these laws, the project owner may be confronted with the obligation to publish a prospectus. Irrespective of such prospectus obligation, in each Member State, the project owner is held to be the main responsible party for providing any material information to enable an investor to make an informed investment decision. The project owner needs to provide such information on the website of the platform or on its own website in an accurate, complete, comprehensible and not misleading (nor misleading by omission) manner.

Conclusion
As mentioned in the introduction of this article, crowdfunding platforms need scalability in order to become profitable. The main means to become scalable is to expand and grow the business on a cross border basis. It is currently still relatively burdensome, inefficient and costly to expand a platform’s business in other Member States. The expanding platform will generally be confronted with a considerable part of new and/or additional local rules to be applicable to it in each host Member State.

If the exponential growth of crowdfunding as an alternative means of financing is continuing in its current pace, this fragmented regulatory approach in the respective Member States will presumably result in multi-jurisdictional takeovers of local platforms by foreign platforms or in the entering into of other sorts of cross border cooperation or corporate structures like joint ventures in which platforms will team up and cooperate with each other on a cross border basis. After all, why would a foreign platform reinvent the wheel in each Member State where it prefers to become operational while local platforms already have in place all what is needed and have knowledge of the relevant local laws in their Member States?

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CrowdfundingHub, as a knowledge centre, is dedicated to develop a sustainable ecosystem supporting the growth of crowdfunding and alternative finance. As part of this ambition CrowdfundingHub encourages knowledge sharing and extensive training programs for crowdfunding professionals. In collaboration with the HAN University of Applied Sciences, CrowdfundingHub started a research in the field of quality improvement of these professionals by investigating the need for certification.

The crowdfunding industry is a young and fast growing industry. Different types of professionals are entering the industry with the aim of advising entrepreneurs on their crowdfunding strategy from a legal, financial and/or marketing perspective. Their knowledge may vary widely depending on their specific background. Advisors can have a long track record in the financial services industry, like e.g. accountants, but still lack specific knowledge about the marketing aspects of a crowdfunding campaign and the long term added value of building a network of investors around the company.

Several issues arise from this wide variety in background of professionals. E.g. what sort and level of knowledge is best suitable? It is obvious that entrepreneurs benefit from training and certification of crowdfunding professionals. But professionals can also feel the need for certification because it enables them to distinguish themselves. For regulators certification can be an addition to their regulatory requirements.

However, it is not enough to just focus on the benefits. At least as important Is how certification can be successful implemented. Obviously, acceptance and support from professionals is important, but also support from the crowdfunding platform owners who hire these professionals to help their entrepreneurs on their platform. Furthermore, it is essential that certification is not an imposed requirement by regulators. Many practical issues need to be addressed as well. E.g. what organisations are involved in the training and examination of professionals and in the issuance of certificates? Last not be least, who is monitoring those organisations?

With these questions in mind, our researcher Flip de Jonge, interviewed a lot of financial services professionals in the Netherlands. By preliminary data, it seems that there is definitely a need for certification, but there is no clear view yet under which conditions it should be implemented. Crowdfunding platforms have already indicated that they strongly encourage the idea of certification in the market. For them it is a way to stream their processes in working with the advisors that are independent professionals or preferred suppliers form accountancy firms.

There are no final recommendations yet. However one of the recommendations will most likely be to start with a pilot project of six months. The industry is very young and develops very fast, flexibility and agility are necessary in designing effective certification.

If you have any questions and/or comments on this research, please contact Flip de Jonge (flip@crowdfundinghub.eu)

CrowdfundingHub was one of the main contributors to the first European Alternative Finance Benchmarking Report (“Moving Mainstream“), published early 2015. The research, conducted by the University of Cambridge, provides a working taxonomy of online alternative finance across Europe. Furthermore, the report suggest that new forms of alternative finance are growing quickly, and this growth is beginning to attract institutional investors.

Since the global financial crisis, alternative finance – which includes financial instruments and distributive channels that emerge outside of the traditional financial system – has thrived in the US, the UK and continental Europe. In particular, online alternative finance, from equity-based crowdfunding to peer-to-peer business lending, and from reward-based crowdfunding to debt-based securities, is supplying credit to SMEs, providing venture capital to start-ups, offering more diverse and transparent ways for consumers to invest or borrow money, fostering innovation, generating jobs and funding worthwhile social causes.

Although a number of studies, including those carried out by the University of Cambridge and its research partners, have documented the rise of crowdfunding and peer-to-peer lending in the UK, we actually know very little about the size, growth and diversity of various online platform-based alternative finance markets in key European countries. There is no independent, systematic and reliable research to scientifically benchmark the European alternative finance market, nor to inform policy-makers, brief regulators, update the press and educate the public. It is in this context that the University of Cambridge has partnered with EY and 14 leading national/regional industry associations to collect industry data directly from 255 leading platforms in Europe through a web-based questionnaire, capturing an estimated 85-90% of the European online alternative finance market.

The first pan-European study of its kind, this benchmarking research reveals that the European alternative finance market as a whole grew by 144% last year – from €1,211m in 2013 to €2,957m in 2014. Excluding the UK, the alternative finance market for the rest of Europe increased from €137m in 2012 to €338m in 2013 and reached €620m in 2014, with an average growth rate of 115% over the three years. There are a number of ways to measure performance across the various markets. In terms of total volume by individual countries in 2014, France has the second-largest online alternative finance industry with €154m, following the UK, which is an undisputed leader with a sizeable €2,337m (or £1.78bn). Germany has the third-largest online alternative finance market in Europe overall with €140m, followed by Sweden (€107m), the Netherlands (€78m) and Spain (€62m). However, if ranked on volume per capita, Estonia takes second place in Europe after the UK (€36 per capita), with €22m in total and €16 per capita.

In terms of the alternative finance models, excluding the UK, peer-to-peer consumer lending is the largest market segment in Europe, with €274.62m in 2014; reward-based crowdfunding recorded €120.33m, followed by peer-to-peer business lending (€93.1m) and equity-based crowdfunding (€82.56m). The average growth rates are also high across Europe: peer-to-peer business lending grew by 272% between 2012 and 2014, reward-based crowdfunding grew by 127%, equity-based crowdfunding grew by 116% and peer-to-peer consumer lending grew by 113% in the same period.

Collectively, the European alternative finance market, excluding the UK, is estimated to have provided €385m worth of early-stage, growth and working capital financing to nearly 10,000 European start-ups and SMEs during the last three years, of which €201.43m was funded in 2014 alone. Based on the average growth rates between 2012 and 2014, excluding the UK, the European online alternative finance market is likely to exceed €1,300m in 2015. Including the UK, the overall European alternative industry is on track to grow beyond €7,000m in 2015 if the market fundamentals remain sound and growth continues apace.

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