EU to test public on crowdfunding

THE European Commission is to regulate crowdfunding amid a huge rise in public appeals for microfinancing for companies with products they are trying to bring to the market.

If the proposal comes into effect, members of the public will have to undertake an online ‘knowledge test’ to see if they understand that they could lose their investment.

It follows concerns that some companies are ripping off the public by promising big returns on their investment in new inventions and products.

The proposal only applies to crowdfunding appeals that offer financial return for investments.

Typically, the company says that it is developing a new product, such as a toy, a drug or a novel invention and promises shares or a large return on the investment for people willing to transfer money to the company via crowdfunding websites.

Charity crowdfunding falls outside the scope of the proposal as they cannot be regarded as financial services. Consumer lending falls outside the scope as well, given this service is covered by other EU legislation such as the Consumer Credit Directive.

Under the proposals investors will be ‘informed about the risks associated with crowdfunding and will be warned about the inadequacy of these instruments as saving products. Crowdfunding web pages will need to display a series of disclaimers and recommendations to that end,’ the commission said in an outline of its proposals.