On 5 April 2017, the European Union adopted the new Prospectus Regulation (‘PR3’).[1] PR3 replaces the previous EU Directive 2003/71/EC (the ‘Prospectus Directive’). The crowdfunding industry warmly welcomed the increase of the thresholds for small fundraisings under PR3 after having lobbied extensively on issues that arose under the previous PR3 draft proposal.[2] This is understandable since the European Commission indicated last year in its working document ‘Crowdfunding in the EU Capital Markets Union’ that ‘there is no strong case for EU level policy intervention’. PR3 seems, however, not to be the adequate solution for overcoming the legal hurdles for cross-border (equity) crowdfunding offerings that the industry is currently hoping for.
Quick Read
- Lex specialis national crowdfunding laws have already addressed the problem PSR3 seeks to adress
- PSR3 increases the threshold for small offerings, allows more discretion to national regulatory to regulate these offerings and, thus, aggrevates the problems related to cross-border crowdfunding
- A harmonized EU-wide regulatory regime for crowdfunding is the only viable solution for overcoming problems related to cross-border crowdfunding offerings
1. Crowdfunding Offerings under the current Prospectus Directive
Crowdfunding offerings are publicly promoted and are, therefore, required to publish a prospectus under the Prospectus Directive.[3] Publishing a prospectus for the typical crowdfunding offering are, typically, too costly. Under its exemption regime, the Prospectus Directive, however, required that no EEA-Member State were allowed to require a prospectus to be prepared for offerings of less than €100,000. However, many crowdfunding campaigns exceeded the €100,000 threshold. The problem under the Prospectus Directive was acerbated by the fact that for offerings between €100,000 and €5,000,000 the choice was left to the individual Member States whether they granted an exemption on offerings up to €5,000,000 or not.[4] This has resulted in many different national regimes ranging from full prospectus regimes to complete exemptions.[5] Companies faced considerable problems in structuring an offer of securities so as to fall within one of the exemptions from the requirement to produce a prospectus. The variety of national implementations of the Prospectus Directive thus deprived start-ups from raising funds on a cross-border basis.
2. The Response: National Crowdfunding Laws
In solving, amongst others, the problem of crowdfunding offerings within their domiciles, various Member States adopted domestic crowdfunding laws. These laws, typically, widened the threshold under the national Prospectus Directive implementations for crowdfunding offerings. Albeit widening these thresholds, another problem popped-up. For offerings exempted under the Prospectus Directives, national Member States have developed their own national investor disclosure regimes for crowdfunding. These national regimes vary from Member State to Member State. In France, for example, a ‘light-prospectus’[6] of a few pages, instead of a full-prospectus, is required for transactions up to €2,500,000.[7] Similarly, Germany exempts certain equity crowdfunding offerings from publishing a prospectus[8] and requires a small information leaflet to be published that contains key information on the offerer and offering in not more than just a few pages. On the contrary, Spanish crowdfunding platforms are obliged to publish on their website extensive information on the project,[9] the issuer[10] and the particular offering of securities.[11] The large variety of different national investor disclosure regimes has led to a fragmented regime that hinders an internal market for crowdfunding offerings in which entrepreneurs are able to offer their projects in multiple European Member States simultaneously.
3. The Prospectus Regulation Solution: Increasing the Threshold for Smaller Fundraisings
PR3 has increased the threshold for smaller fundraisings. The obligation to draw up a prospectus under PR3 does not apply to offers with a total consideration in the EU of less than €1,000,000.[12] Similar as under the Prospectus Directives, Member States may, however, increase this threshold to €8,000,000 but can require other disclosure requirements at national level for issues not exceeding the threshold to the extent that those requirements do not constitute a disproportionate or unnecessary burden.[13] PR3, thus, offers a solution for offerings in those Member States that over the past years do not have yet amended the thresholds of the Prospectus Directive under their national implementations to accommodate crowdfunding offerings. Many Member States, however, have already recently lifted their thresholds under the Prospectus Directives to sometimes even up to €5,000,000. PR3, however, allows the current investor disclosure regime under national crowdfunding legislation to remain in place. The fragmented landscape of investor disclosure regimes in Europe hampering cross-border crowdfunding offerings is, thus, not resolved by PR3.
4. An Adequate Solution: The Harmonization of Crowdfunding Legislation on the EU Level
This leaves us with the question what would the solution for this problem be? The answer is short: a harmonized EU-wide regulatory regime for crowdfunding.
In its resolution of 9 July 2015 on building a capital markets union, the European Parliament noted that ‘CMU should create an appropriate regulatory environment that enhances cross-border access to information on the companies looking for credit, quasi-equity and equity structures, in order to promote growth of non-bank financing models, including crowdfunding and peer-to-peer lending’, underlining that ‘investor protection rules should apply to all financing models to the same extent, irrespective of whether they are part of bank or non-bank financing models’.
Furthermore, in its resolution of 19 January 2016 on stocktaking and challenges of EU financial services regulation, the European Parliament underlined the potential of ‘innovative market-based funding, in particular the opportunities of financial technologies, including crowdfunding and peer-to-peer loans and…the need to streamline the respective regulatory requirements’.
Finally, in its resolution of 26 May 2016 on the single market strategy, the European Parliament noted ‘the difficulties faced by business, and in particular SMEs and start-ups, in securing funding’, and called on the European Commission ‘to make sure that crowdfunding can be done seamlessly across borders’.
These calls for action by the European Parliament together with academic research in this domain, thus, strongly question the position taken by the European Commission that ‘there is no strong case for EU level policy intervention’.
PR3, thus, seems not to be the adequate solution for overcoming the current hurdles posed to cross-border (equity) crowdfunding offerings that the industry hoped for. The only answer to this and other legal hurdles in the crowdfunding domain is that, regardless of the type of investor disclosure for (equity) crowdfunding chosen, an EU level regime is introduced for European (equity) crowdfunding to fully unleash its potential.
Sebastiaan Niels Hooghiemstra is a PhD candidate at Utrecht University.
[1] See for the adopted text: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2017-0110+0+DOC+XML+V0//EN&language=EN#BKMD-14 (accessed 28 April 2017).
[2]http://eur-lex.europa.eu/resource.html?uri=cellar:036c16c7-9763-11e5-983e-01aa75ed71a1.0006.02/DOC_1&format=PDF (accessed 28 April 2017).
[3] A prospectus contains key financial and non-financial information that a company makes available to potential investors when it is issuing securities to raise capital. See for the information that a prospectus needs to contain: Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OB L 345/64) as amended by Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010, OJ L 327, 31 December 2003, 1 (hereafter: “Prospectus Directive”); Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements, OJ L 149, 30 April 2004, 1 (hereafter: “Prospectus Regulation”).
[4] Some countries, like the UK, even had a country-specific regime for financial promotions to which the Prospectus Directive does not apply. See: Section 21 Financial Services and Markets Act 2000.
[5] In Estonia, Germany, Latvia and Lithuania a prospectus under the national prospectus rules needed to be prepared when the offered amount is €100,000 or more (Estonia; § 12(5) Securities Market Act; Germany: § 3(2) sub-paragraph 1 Nr. 5 Securities Prospectus Act; Latvia: Art. 16(2) sub-paragraph 5 Law on the Financial Instruments Market; Lithuania: Art. 5(5) Law on Securities); In Norway the amount was €1,000,000 (Section 7-2 Securities Trading Act); In Finland €1,500,000 or more (Section 3(4), chapter 4 Securities Markets Act)); In the Netherlands and Sweden €2,500,000 million (Netherlands: Art. 53 Exemption Regulation FSMA; Sweden: §4 Financial Instruments Trading Act); In Denmark, Spain and the UK €5,000, 000 or more (Denmark: Art. 43(1) Securities Trading Act; Spain: Art. 30 Securities Market Act; UK: Section 85, 86 FSMA 2000)).
[6] Art. 325-38, 314-106 AMF Regulation.
[7] See Arts L.411.2 CMF, D.411-2 CMF.
[8] The national prospectus regime under the Investment Products Act. See for the proposed § 2a(3) Investment Products Act: German Crowdfunding Draft Law, p. 8, 9.
[9] Art. 70 Spanish Crowdfunding Law.
[10] Art. 78 Spanish Crowdfunding Law.
[11] Art. 79 Spanish Crowdfunding Law.
[12] Recital 12, Art. 1(3) PR 3.
[13] Recital 13, Art. 3(2)(b) PR 3
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