Out-Law / Your Daily Need-To-Know

European Commission backs away from regulating crowdfunding

Out-Law News | 28 Mar 2014 | 5:18 pm | 1 min. read

The European Commission has decided against drafting new laws to govern crowdfunding in the EU.

It said, though, that it would conduct a study into "market developments and the potential of crowdfunding to finance research and innovation" and undertake a number of other initiatives aimed at "promoting, raising awareness and building confidence in crowdfunding". The Commission also said it would "encourage exchange of industry best practices and standards, and facilitate the development of a European 'quality label' to build trust with users".

The initiatives are detailed in a new communication on crowdfunding (12-page / 119KB PDF) the Commission has published following a public consultation (13-page / 83KB PDF) it held previously on the subject.

"At the moment the European Commission does not intend to come up with legislative measures [on crowdfunding]," the Commission said in a statement. "In the first place it plans to further explore the market developments around crowdfunding and get a better overview on how this form of financing fits in the wider financial environment."

"The Communication proposes a number of actions aimed at promoting, raising awareness and building confidence in crowdfunding. At the same time the Commission will continue monitoring developments in this market and, if justified, it will consider whether further EU action is necessary. The Communication aims to develop, in cooperation with stakeholders, a common understanding at EU level and prepare the ground for possible future actions. The objective of this Communication is to accompany the development of crowdfunding in Europe, not to regulate donations, including to charities or political parties," it said.

Crowdfunding is a way in which some people and businesses raise capital. There are a number of online funding platforms that link those businesses with individuals or groups willing to invest in their project. In return for that investment, individuals are generally presented with specified rewards, such as a share in the profits of projects or a stake in the business.

Another form of financing similar to and sometimes labelled crowdfunding involves peer-to-peer lending which encompasses simple loan agreements between two or more parties facilitated by an online platform.

The Financial Conduct Authority (FCA) announced a new regulatory regime in the UK for both investment-based and loan-based crowdfunding has been finalised. The new rules are scheduled to come into force on 1 April, although a range of transitional arrangements have been put in place for some existing crowdfunding platforms.

Included under the new regulatory regime is a requirement for loan-based crowdfunding platforms to hold a certain amount of capital in reserve to mitigate against the risk of their business failing and leaving lenders out of pocket.