Crowdfunding in the EU boosted by new rules

European Parliament adopts new regulations for crowdfunding platforms in all member states, while Malta government announces plans for new framework for start-ups

The European Parliament has taken the final vote on EU rules for crowdfunding, approving a set of common rules that promise to boost crowdfunding platforms and protect investors.

In an official procedure in Brussels on 5 October, the EP adopted the latest text for the European Crowdfunding Service Provider for Business Regulation, as well as related changes to Markets in Financial Instruments Directive (MiFid).

The new set of rules will apply to all crowdfunding services, or European Crowdfunding Service Providers (ECSP), across the EU. The strict regulations aim to protect investors from financial losses through clear information and transparency, provided by each project owner via a detailed key investment information sheet (KIIS).

“The new EU rules will allow European crowdfunding platforms like ZAAR to provide more opportunities for start-ups and investors,” explains Matthew Caruana, manager of Malta’s online donation-based crowdfunding platform, ZAAR. “The European Crowdfunding Network, of which we are members, wholeheartedly welcomes the new regulation. We believe it has the potential to make pan-European crowdfunding a reality, unlocking further capital for European start-ups and SMEs and to European investors.”

Since the new rules will enable crowdfunding platforms to operate more smoothly and provide services across borders, this will widen the pool of potential investors for start-ups and small and medium enterprises (SMEs) – while also giving investors a larger choice of projects to support. Meanwhile, in contrast to the €1m funding cap previously proposed by the European Commission, under the new legislation, projects may raise up to €5m over a period of 12 months per project owner.

Ever-growing in popularity globally, crowdfunding is an alternative financing tool that is ideal for start-ups and SMEs seeking early capital and who may have difficulty accessing funds from traditional sources such as bank loans. Crowdfunding service providers such as ZAAR connect these companies with prospective investors, usually via online platforms.

“The crowdfunding industry continues to grow, with partnerships with institutional investors and investment funds, but the lack of uniform crowdfunding rules across the EU results in legal uncertainty and discourages investment in projects in a different country,” shares Caruana. “To-date, most members states had introduced their own national regimes, such as the MiFid Directive for crowdfunding applied in Malta that proved to be not fit for purpose. This new harmonised EU regime depends on the cooperation between the ESMA [European Security and Markets Authorities] and the national regulators, but we hope that for Malta this framework will mean fewer barriers for crowdfunding platforms to operate locally.”

The new rules for European crowdfunding service providers (ECSP) will apply from October 2021. Each member state will then have responsibility for authorising and supervising crowdfunding providers according to the new regulation.

“We also hope that this will open the door to the creation of a new financing route for Maltese entrepreneurs, which we are certainly looking into at the moment,” Caruana adds. “There is potential for investmentbased crowdfunding locally due to the high level of liquidity, but this needs to be coupled with appropriate tax incentives such as the Seed Investment Scheme, so that the money is used to stimulate growth and jobs through start-ups and scale-ups.

“We are also pleased to note that government announced that a framework is being drawn up that will make Malta a natural home for start-ups, however, the budget speech did not give any details about this. We hope that alternative finance, including crowdfunding, will be a strong pillar of this framework. Focusing only on trying to attract institutional venture capital is not enough. In fact, we also aim to set up an Investor Club to serve as an educational and awareness-raising platform for investors and would-be investors. This has the capacity to raise awareness in Malta about early stage investing and instilling the concept of equity finance to reduce dependency on bank loans.