Small firms, especially young and innovative ones that are sometimes not so well suited to traditional bank financing, often have a hard time getting the funding they need to invest in their growth and create new jobs. This is why the European Commission's Capital Market Union plan places particular emphasis on strengthening alternative finance, including crowdfunding. On 3 May, the Commission published a report that explains the market and regulatory landscape in this dynamic field.

What is crowdfunding?

Crowdfunding is a way of raising finance through an open call to the public, with the aim of getting a large number of people to each contribute a small amount of money. Crowdfunding platforms are websites that make it possible for fundraisers, be they individuals or businesses, to interact with investors and donors. These platforms will collect the invested money, ensure it reaches its intended destination, and provide any necessary follow-up.

Through crowdfunding, people can donate to a charitable project, or contribute to a business in the hope of getting a product or service in return. Crowdfunding platforms also allow people to invest in a company by taking an ownership stake in it, or lend directly to a business or to another individual.

For entrepreneurs, crowdfunding makes it possible to get endorsement for their ideas at an early stage. This in turn may attract further funding from other investors, such as business angels and venture capital providers. Furthermore, crowdfunding can serve as a marketing tool if a campaign is successful, and introduce a business to potential customers.

A dynamic field

Crowdfunding is a small but fast-growing field in Europe. There are over 500 platforms across the EU, and approximately € 4.2 billion was raised through them in 2015. Crowdfunding projects can be found in all Member States, although some countries are much more active in the area than others.  

So far, the failure rates of companies that financed themselves through crowdfunding are not very different to the failure rates in the SME sector in general. But risks for investors may emerge as crowdfunding becomes more widespread; for example, there could be the risk that platforms pick weak projects or that there is outright fraud. These risks will need to be monitored, and suitable measures will have to be taken to address them, as with any other type of investment.

Enabling crowdfunding to develop

Some Member States have introduced (or are planning) bespoke regulatory frameworks for crowdfunding. These regimes share the same overall approach, in that they aim to facilitate the development of crowdfunding while addressing any potential risks. However, they are tailored to the specific needs of local markets and investors and there are consequently certain differences in how the rules are designed and implemented.

The Commission has proposed increasing to € 500,000 the threshold under which companies are not obliged to produce an EU prospectus when they raise money. Member States would even be able to set the threshold for requiring a prospectus as high as € 10 million. This would ensure that a significant share of fundraising through crowdfunding will not require the publication an EU prospectus, and provide breathing space for the development of the sector.

As crowdfunding remains largely local and the sector is changing rapidly, there is no strong case for an EU level framework at this point. The Commission will keep developments in the sector under review, and meet regularly with regulators and the sector. This way, it will be able to respond in a timely manner if further steps to support regulatory convergence are needed, both to promote the development of the sector and to ensure appropriate investor protection.

Read more on Crowdfunding

Links to the survey on crowdfunding from the user's perspective: equity crowdfunding questionnaire and lending crowdfunding questionnaire.