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Call for ambitious reforms of the Prospectus Directive

European crowdfunding platforms, represented by the European Crowdfunding Network, the UK Crowdfunding Association, Financement Participatif France and Nederland Crowdfunding welcome the current EU debates in Brussels regarding the Prospectus Directive, aimed at making it easier for Small and Medium Sized Enterprises (SME) across Europe to raise finance.

The crowdfunding industry supports the goals of both the Capital Markets Union and the Digital Single Market. Crowdfunding enables anyone to invest in SMEs via their mobile, tablet and PC irrespectively of geographic location, so it is a key way of bringing together investors from across Europe by facilitating cross-border investment. To achieve this, the crowdfunding industry has called on the European Parliament and European Council to be more ambitious with the amendments to the Prospectus Regulation proposal proposed by the European Commission to ensure the EU framework enables regulated cross-border investment in crowdfunding, in line with best practices in consumer protection, and without the need for a Prospectus where appropriate. Most industry practitioners acknowledge that a modern day prospectus is designed for the legal advisers of professional investment firms not the needs of the retail investor. The focus is on disclosure but often at the expense of clarity and transparency of information. However, this should not be a barrier to investment. A prospectus is also designed for communicating the investment offers of large and complex businesses whereas the majority of crowdfunding investments involve straightforward corporate or project structures at a scale which is understandable to the retail investor. Crowdfunding platforms can present investment opportunities and risks in a responsible, transparent and accessible manner, taking special care of the information needs of retail investors. Investment Crowdfunding platforms provide proportionate investor protections to ensure people fully understand the risks of the investments and are given proper recourse if rules are not properly followed.

The European Commission’s Prospectus Regulation proposal, published in December 2015, included at Article 3, an increase in the Prospectus exemption threshold set by Member States from €5 million to €10 million but limited such fundraising to ‘domestic offers’. The crowdfunding sector support the increase of the exemption threshold given the growing size of crowdfunding rounds. However, stakeholders strongly believe that any kind of ‘domestic offer’ requirement could be contrary to the aims of Capital Markets Union with its focus on cross-border investment. It is also unclear how a ‘Domestic offer’ is defined, given the digital nature of most crowdfunding platforms which operate via the Internet across the EU. The industry associations produced a position paper (here) proposing the removal of the ‘domestic offer’ requirement from the Article 3 exemption and greater clarity that companies raising finance are only subject to the Prospectus requirements (or exemptions) of their own EU Member State. Our position paper has been well received by the European Commission, Parliament and Finance Ministries around Europe.

The European Parliament’s draft amendment to the Regulation recognises the input from the crowdfunding sector and has removed the ‘domestic offer’ limitation while increasing the exemption set by Member States to €20m. The crowdfunding industry welcomes the Parliament draft and is now calling on the European Council to adopt a similar position. It would also be helpful to clarify that where a fundraising company is exempt from producing a Prospectus under its own country’s laws, that a lower Prospectus threshold in another EU member state will not apply to cross-border investment. The crowdfunding sector especially welcomes the proposed simplified SME prospectus, which should reduce costs and make information easier to understand for retail investors.

The legislative process is ongoing.

Paul Massey, Crowdcube’s General Counsel and chair of the European Crowdfunding Network’s Prospectus Directive Task force stated:
“The crowdfunding industry welcomes this timely reform of the EU Prospectus regime. There is free movement of people around Europe but free movement of capital is harder to identify. The cost and time of producing a Prospectus is one of the factors that can hold back cross-border investment. The EU’s Capital Markets Union project recognises these challenges and the crowdfunding sector is therefore calling for an increase in the amount of investment that can be raised across Europe without a Prospectus. Crowdfunding remains subject to many other laws that protect investors and the sector plays a vital role in the funding escalator that Europe needs to create globally competitive companies. We have had positive discussions with EU and national officials and many recognise that crowdfunding platforms play a vital role in this ecosystem. I am therefore optimistic that a positive outcome will be reached for the proposed Prospectus Regulations.”

Oliver Gajda, Executive Director of ECN stated:
“The Prospectus Directive has been a vital instrument in harmonising the formal equity markets for larger transactions across Europe, but has failed to foster investment into SME at large. The detailed legal requirements have added significant cost to the creation of such prospectus, which has excluded smaller businesses from the benefits. Existing exceptions have benefited both Business Angels and Venture Capital funds, which are an important part of the funding escalator for highly specialised and high growth businesses, but have had no impact on the majority of Europe’s innovative and job creating SMEs. Today, in elongated economic uncertainty, crowdfunding provides unique opportunities to formalise retail investors direct investment into Europe’s real economy. This should be recognised in the adaption of the amendment of the Prospectus Directive in order to create a truly European investment market for value creation and economic impact through retail investors.“

Industry data compiled as part of the crowdfunding industry response, demonstrated that the average size of equity crowdfunding rounds was €450,161 in 2015 and on current growth rates the average size could reach €1,244,245 by 2020. The 2015 Nesta Alternative crowdfunding report found that in the UK alone, £425 million (approx. €535 million) was raised via equity and debt securities crowdfunding. An independent 2015 study by the Association for Financial Markets in Europe and the Boston Consulting Group also shows that currently unregulated retail investments (the so called Family, Friends and Fools) into SME are at €84bn (new investments in 2013) multiple times higher than that of Private Equity (€9bn), Venture Capital (€5bn) or Business Angels (€6bn) and more than half of the estimated total new investment into SME in 2013 of €112bn. We believe that the European Institutions have a unique opportunity to finally acknowledge the real value of retail investing via crowdfunding and offer relevant customer protection and incentives within the adapted Prospectus Directive.