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Broadening access to finance for innovative companies, start-ups and other unlisted firms, including SMEs, is at the heart of the Capital Markets Union Action Plan.

However, in today’s economic environment securing investment finance is challenging for these firms, particularly when they move from start-up into the expansion phase.

Access to finance for young, innovative firms is a problem even in countries where access to bank finance has remained stable throughout the crisis.

Crowdfunding refers to an open call to the public to raise funds for a specific project. Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. Financial pledges can be made and collected through the platform.

In addition to providing an alternative source of financing directly, crowdfunding can offer other benefits to firms: it can give a proof of concept and idea validation to the project seeker; it can help attract other sources of funding, such as venture capital and business angels; it can give access to a large number of people providing the entrepreneur with insights and information; and it can be a marketing tool if a campaign is successful.

The European Parliament has also taken an active interest in crowdfunding. The European Parliament resolution of 9 July 2015 on Building a Capital Markets Union states that “the CMU should create an appropriate regulatory environment that enhances cross-border access to information on the companies looking for credit, quasi-equity and equity structures, in order to promote growth of non-bank financing models, including crowdfunding and peer-to-peer lending”.

Given the predominantly local nature of crowdfunding, there is no strong case for EU level policy intervention at this juncture. Crowdfunding is still relatively small and needs space to innovate and develop. Given the dynamism of crowdfunding and the potential for future cross border expansion, it will be important to monitor the development of the sector and the effectiveness, and degree of convergence of, national regulatory frameworks.

A growing trend that is expected to become more prominent in the future is the institutionalisation of crowdfunding, notably in terms of the investors. Institutional involvement is particularly strong in consumer loans crowdfunding, while in equity-based crowdfunding a growing number of venture capital and angel investors are co-investing alongside or in parallel with ‘crowd investors’. The ‘institutional investor’ category is quite broad and includes banks, mutual funds, hedge funds, pension funds, asset management companies, but also local authorities and national development banks.

The internationalisation of crowdfunding platforms is another emerging trend, which is driven by the need to increase economies of scale and thus expand both the investor base and the pipeline of projects seeking funding. Cross-border crowdfunding activities are more likely to take place where the platform or project are based in smaller Member States, whose markets may not be large enough to ensure the sustainability of platforms’ activities.

Another trend is the emergence of organised secondary markets for securities or loans in crowdfunding projects, although this service is not provided systematically. There are some examples of different models and forms to provide such secondary marketplaces.

One model entails the direct involvement of the crowdfunding platform. For instance, a platform may provide an online bulletin board connecting investors who intend to sell their investments with potential buyers who are looking to invest in previously funded projects. Investors can offer or bid on securities and negotiate a price directly; once the sale is agreed, the security is transferred from investor account to another. In another example, a crowdfunding platform itself may operate a marketplace for its securities (although such marketplace may be extended to other unlisted securities and not limited those financed through the crowdfunding platform). In some cases these venues are multilateral trading facilities (MTFs). Unlike a bulletin board connecting sellers and buyers, this type of secondary market would bring together multiple buying and selling interests, in a system with non-discretionary rules, in a way that resulted in a contract.

In another model, crowdfunding platforms may team up with existing marketplaces for unlisted companies and thus enable investors to buy and sell securities that had been offered through crowdfunding platforms.

Another important trend to be observed concerns the awareness of the opportunities and risks of crowdfunding among potential investors.

Being interested or excited about a specific company or project is the most important reason to invest for equity crowdfunding. Respondents who consider ‘taking advantage of a new form of investment/increased diversification’ to be important tend to consider ‘higher expected financial returns’ and ‘disappointment / mistrust of traditional finance’ to be important as well.

Concerns about the reliability of this form of investment, as well as the lack of regulation of platforms, are rated as the most important reasons not to invest for both forms of crowdfunding. Respondents seem mostly concerned that the fundraiser/borrower might be fraudulent. For both equity crowdfunding and P2P lending, the second most highly rated source of concern is that the platform might be fraudulent.

Certainly the segregation between operating crowdfunding platforms and transactions’ risk management is needed. Consequently the platforms owners / operators should not ensure the risk management, too. For avoiding the conflict of interest, the involvement of independent risk management providers is necessary.

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