Crowdfunding platforms in europe

Crowdfunding platforms in europe

Crowdfunding platforms are platforms that support collective financing, that is, through the contribution of small amounts of money by a large number of people. These projects can be of any type, from creating a new company to producing a music album.

In Europe, crowdfunding has developed significantly in recent years, and there are a large number of platforms that allow users to contribute to all kinds of projects. These platforms usually charge a commission for their services, which can vary depending on the platform and the project.

There are several types of crowdfunding practiced in Europe, including:

1. Donation-based crowdfunding: in this modality, participants make a donation without expecting a reward in return. This type of crowdfunding is generally used for non-profit projects, such as charity campaigns or social projects.
2. Reward-based crowdfunding: in this modality, participants receive a reward based on the amount they contribute to the project. For example, if it is a project to produce a new product, sponsors could receive a unit of the product once it is finished, a special or limited edition, or any other type of incentive that is agreed upon beforehand.
3. Loan-based crowdfunding: in this modality, participants lend money in exchange for interest. The borrower repays the money to the lenders with the agreed-upon interest within a specified period.
4. Investment-based crowdfunding: in this modality, participants invest their money in the project in exchange for a stake in the company or business and can receive a share of the profits. This type of crowdfunding is subject to stricter regulations than other models, as it involves the sale of securities and shares.

Overall, crowdfunding is an increasingly popular way of financing projects in Europe, and it is expected to continue to grow in the coming years. This is why regulators have made efforts to provide legal coverage for these platforms, so that the actors of the same can continue to use them to benefit from the advantages they offer, but with legal guarantees that in some cases, depending on the type of crowdfunding and the amounts invested, are key for such platforms to function properly and even transmit confidence to many investors who might be hesitant to invest due to the possible risks that this type of platform and investment can entail in certain situations.

In Spain, crowdfunding is regulated by the National Securities Market Commission (CNMV) and the Law on Promotion of Business Financing (Law 5/2015, of April 27, on promotion of business financing). Since 2015, this law has been responsible for regulating the activity of these platforms, specifically, the crowdfunding modality focused on investment and loans, including limits on the maximum amounts that can be requested, with the limit set at 5 million euros (if you want to know more, we have an article about this that you can read here).

Among the requirements demanded by Law 5/2015 are the mandatory registration of crowdfunding platforms with regulatory agencies, the obligation to inform investors and borrowers about crowdfunding risks, the establishment of maximum limits for investor contributions, and the obligation to have a policy of transparency in the information provided to investors and borrowers.

In 2020, the European Union published Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for businesses, amending Regulation (EU) 2017/1129 and Directive (EU) 2019/193 and which also modified the Spanish regulations referred to in the previous paragraph. This Regulation unified the requirements and guidelines for creating and operating a crowdfunding platform dedicated to financing loans and investments in Europe, thus creating a passport to operate in Europe without the need for an independent registration and authorization procedure for each member state.

Some of the most important points to be taken into account as indicated by the Regulation are:

• Scope: the regulation applies to all crowdfunding platforms operating in the EU, regardless of their location.
• Crowdfunding categories: the regulation establishes four crowdfunding categories: donation, reward, loan, and equity (investment). Different legal requirements and obligations apply to each category.
• Investor protection: the regulation sets a series of measures to protect investors, such as the obligation for platforms to perform a risk assessment for each project and to clearly inform investors about associated risks. Maximum investment limits that an individual investor can make on a platform are also established.
• Platform obligations: crowdfunding platforms must register and obtain authorization from regulatory authorities. They must also provide clear and transparent information about the projects offered on their platform and take measures to prevent money laundering and terrorism financing.
• Transparency standards: the regulation establishes transparency standards that require crowdfunding platforms to provide clear and complete information about the projects offered on their platform, including information about the promoter, the intended use of funds, and associated risks.
• All platforms that were registered in Spain and other countries must adapt to the new regulation by a deadline (November 2023).

In summary, this Regulation establishes a clear and uniform legal framework for crowdfunding in the EU, with the aim of protecting investors and promoters, promoting transparency and trust in crowdfunding platforms, and supporting innovation and economic growth. At Letslaw by RSM, we are familiar with the regulations and can help with the registration, adaptation, and management of procedures with regulatory bodies.