Several years back, the European Union approved the European Crowdfunding Service Providers Regulation (ECSPR), which enabled issuers to raise funds across all EU member states. Under the rules, an issuer could raise up to €5 million for an offering listed on a regulated securities crowdfunding provider. EuroCrowd, an advocacy group supporting online capital formation in Europe, led the charge from the industry perspective to get pan-European rules approved.
Recently, EuroCrowd posted an update noting that ECSPR will soon be up for review. EuroCrowd pointed out that the regulation has been a success, but of course, everything can be improved. Qualities of the rules that may receive an update include funding limits, more asset classes, and “balancing the needs of retail and institutional money.”
As for new asset classes, blockchain-based digital securities are mentioned – as they should be. Digital securities are the future both for private and public firms.
EuroCrowd says this will be an opportunity for the EU to “align crowdfunding more closely with Europe’s broader economic goals, including sustainability and innovation.”
Regarding stakeholders, like platforms, this will be a chance to adapt to the evolving environment while fueling economic growth.
EuroCrowd bullets out the following:
- For Platforms: Scaling operations, enhancing cross-border activity, and catering to both retail and institutional investors will be key. Compliance, transparency, and governance will grow in importance as regulatory expectations increase. A very big ask for most license holders. Add to this additional compliance to EU laws as they take effect, such as DORA.
- For Retail Investors: Platforms must focus on education and engagement as regulatory shifts could introduce stricter participation requirements if they are to gain traction. Retail investors will be approached from all sides, with new opportunities to invest with institutional players, for example via ETFs, competition for crowdfunding will increase – despite the significant higher return promises.
- For Institutional Investors: The sector will need to provide high-quality, scalable investment options to attract and retain institutional capital. Down scaling by larger instituional players has not materialised beyond a smaller number of strategic acquisitions over the past years. The difficulty of engaging retail investors on a deal-by-deal basis is likely going to keep larger investors at bay, as long as the crowdfunding market cannot offer opportunities for larger asset allocations.
- For Entrepreneurs and SMEs: Success will depend on aligning funding strategies with market demands and maintaining compliance with regulatory standards. As investment and finance for SME and startups remains scarce, Venture Capital and Business Angels merely offering a drop of water on the hot stone within a select few sectors, crowdfunding platforms may not be ready to deliver good returns to their investors when venturing into under invested sectors.
- For Regulators: The ECSPR review offers a chance to refine the framework, ensuring it drives growth while safeguarding investors and fostering innovation. However, the failure to create regulatory convergence over the past two years is already indication enough, that a potential review would likely neither achieve satisfactory results. Already now, regulators and national policymakers have sufficient tools to create a better and more harmonized implementation but have not been able to make progress.
Beyond the need to accommodate digital securities, enabling institutional money to participate in online capital formation can become a win for all parties. Professional investors are more sophisticated, and their involvement can help the securities crowdfunding industry scale. Institutional participation can also raise the quality of issuers – something that will benefit retail investors.
Regarding fueling innovation, startups, and early-stage firms need access to risk capital. If you want to create the next Google, Meta, Apple, etc., smaller firms must have access to funding for investments that may go to zero – as many startups fail. Policymakers need to find a better way to encourage risk taking by the investing public, improving ECSPR is an excellent opportunity. The most obvious fix is the funding cap, which should be raised substantially from its current amount to make it more appealing to promising young firms. If the funding camp remains at a relatively anemic €5 million, prospects may otherwise seek out traditional venture funding – perhaps in the United States.