“What to expect when you are expecting" a European Crowdfunding Regulation
Eugenia Macchiavello - University of Genoa
-- Marketplace lending and investing have been recently attracting increasing regulatory attention. However, regulatory responses to such phenomenon have been extremely varied, even in Europe, characterized by maximum harmonization in the field of financial regulation, continuous efforts in creating a single market and in centralizing supervision. Such fragmented framework poses the risk of different levels of investor protection in Europe, regulatory arbitrage, competition distortions, obstacles to cross-border activity and to existing EU passports. The European Commission, after an initial “wait-and-see” approach, adopted in March 2018 a proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses. Such proposal, nonetheless, has undergone a number of significant revisions during the trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union, underlying the ambiguous nature of crowdfunding and the complexity in reaching a common view on the same. On December 18th, 2019, a provisional political agreement seemed finally reached (as declared the following day by the Commission) but the final text of the Regulation is not available yet, although the Regulation is expected to be approved early in 2020 and to enter into force in 2021 (see what declared by the European Crowdfunding Network).
While waiting for the final version of the Regulation, it is interesting to analyze the alternatives on the table and its implications, without ignoring the context (Brexit, nationalisms, current reforms in financial regulation, etc.) and different economic functions of financial services providers. In my recent EBI working paper (No. 55) “What to expect when you are expecting" an European crowdfunding Regulation: the current ‘Bermuda Triangle’ and future scenarios for marketplace lending and investing in Europe, after briefly describing crowdfunding's main features and regulatory trends in Member States, I critically analyze the ECSPs Regulation Proposal, with respect to all of the three different versions available (and adopted by each of the three EU institutions), inferring from each text a different vision (and consequent envisioned regulation) of crowdfunding and of financial regulation in general, underlying their pros and cons. In fact, the European Commission had in fact originally designed a light and hybrid regime for ECSPs, focused on disclosure (of key and simple information) and simple conduct and organizational requirements, under the assumption of execution-only services or almost market-like systems and small offers (up to €1 million as total consideration in 12 months) as well as investor self-responsibility, with the objective of containing ESCPs’ costs at the benefit of SMEs’ access to finance. The Commission had also decided for an optional regime and for the ESMA’s direct supervision over the ECSPs.
The European Parliament, instead, looks at crowdfunding as a more varied range of services (including investment advice, portfolio management and co-investing) worth subjecting to differentiated requirements depending on the type of activity (although the differentiation appears insufficient) but, in general, characterized by a more significant role played by the platform and, consequently, by increased platform’s liability (e.g. for the information in the KIIS and in evaluating the suitability of the services) and obligations closer to MiFID II ones. It also reflects Member States’ concerns over progressively giving up supervisory powers in the financial sector, therefore entrusting NCAs with the task of supervising ECSPs.
Finally, the Council appears to be willing to limit crowdfunding to execution-only types of services (e.g. prohibiting more complex services, auto-bid and bulletin boards similar to markets) but then inconsistently designs a stricter and rigid regime, closer to other and more complex types of services and incumbents’ regulations (prudential requirements and more detailed and strict organizational rules), despite the reference to the proportionality principle and anyway positively filling some gaps in the original proposal (e.g. introducing the distinction between sophisticated and non-sophisticated investors, linked to differentiated protective measures). It also confirms and better defines NCAs’ supervisory powers and cooperation, following MiFID’s lines, but, at the same time, opens up for increased national discretions and differentiations (e.g. about the maximum threshold for offers and investment limits for retail investors), without caring about the consequent increase in ECSPs’ costs (see also the new language rules for the KIIS) and relative effects on the market itself.
The paper concludes trying to forecast the direction of the trilateral negotiations and the possible impact of the European Regulation on national crowdfunding laws and the sector, proposing adjustments to reach a functional, tiered and proportional regulation.