Financial crowdfunding, crowdfunding that raises debt or equity investment, has grown considerably since its onset in Europe, U.S., and Asia in
First, regulations could stifle investment if regulations prove too burdensome for investors, portals, or campaigns. Regulations can fail in several ways. They could be too ambiguous to attract sustained institutional investors, or they could prevent support industries from forming such as a robust press, advisory services, and collaborative funding vehicles, i.e. the industry’s version of mutual funds.
Bruegel analyzed crowdfunding raises taking place between 2011 and 2017 and found that a very small percentage of successful European raises were cross-border. Most raises received investors only from their home country.
This poses a challenge to the European single market as well as the crowdfunding industry. The report highlights that the current MiFID framework, designed for larger financial services firms, is too burdensome for crowdfunding portals. National governments have less burdensome requirements than MiFID. For example, the UK and France place virtually no disclosure limits on individual investors. In other words, an investor can invest an unlimited sum into a campaign without disclosing personal income.
The Bruegel report identifies three findings. First, crowdfunding must have a clear definition across the European single market to encourage cross-border investment. Second, Europe should design a similar MiFID framework specifically for crowdfunding. The MiFID passport allows crowdfunding platforms to operate across countries, but it is designed for more established investment groups. Finally, the report encourages urgency as nations are diverging in their regulatory frameworks.
Recommendations from the report include similar recommendations seen in the US to lower the barrier of what constitutes an accredited investor. Historically, accredited investors were high net-worth individuals. New regulations could verify a potential investor’s training or wherewithal to make equity investments instead of net-worth. Bruegel also recommends increasing the individual exemption to 10,000 EUR per project and increasing the minimum fundraising amount to 5 Million EUR limit that requires campaigns to file a prospectus.
Could the Next Decade See a Surge of Crowdfunding Activity?
We’ve argued in previous articles that in addition to coherent regulation, financial crowdfunding needs a robust support industry of writers, analysts, and institutional investors to offer consistent price signaling to the marketplace. We also spoke about the importance of the venture exchange or secondary markets. The development of secondary exchanges for small business could add 20-30% value to small businesses quite literally overnight.
After years of testing equity and debt crowdfunding, a combination of coherent regulation, robust support service providers, and secondary markets arethe necessary ingredients for an explosion of crowdfunding across the world.