The new European Crowdfunding regulations are an attempt to find common ground between implementing sound regulatory structures without stifling innovation through requirements.
To date, the ad-hoc implementation of existing European directives by member states applying different rules and crowdfunding regimes have led to the fragmentation of the European crowdfunding market. Some countries have a thriving crowdfunding industry, while others, like Malta, have stifled its growth and burdened the sector with not-fit-for-purpose regulations.
Initially, the proposal by the European Commission was to have a European regime available that would be separate from the national regimes; however, this was changed to include one set of European regulations that will be transposed directly into national laws – as opposed to directives that can be gold-plated differently by different member states. This proposal will supposedly offer a level playing field for platforms in the EU and open the market for more cross border transactions for issues up to €5 million.
The first pillar of the regulation is, of course, investor protection. The regulations aim to improve the quality of the information given to investors with a simplified Key Investor Information Sheet (KIIS), as opposed to the current prospectus that is costly, lengthy, and unreadable by the retail investor. Furthermore, a version of the appropriateness test concept from MiFID has also been adopted by these regulations as they set thresholds and limits for retail investors. The objective here is to minimise the costs for the issuer, since we are dealing with startups and SMEs, while addressing the issue of information asymmetry inherent within all the financial markets. So far, the initial draft template by ESMA has already met criticism from the industry due to ESMA proposing a very detailed and complicated KIIS, countering the original objectives of simplifying and reducing the costs of drafting it.
The second pillar is transparency – both in terms of the services provided by the platforms, as well as their risk management and fees. The regulations consider the fact that the platforms do not really undertake risk on their balance sheet, so the capital requirements on the platforms are not substantial, thus reducing the cost of entering the market. Hopefully, this will help the platform to be established in Malta. The focus is on the procedures and policies that the crowdfunding service providers need to adopt to minimise risk and ensure a fair and transparent process to all parties involved. The regulations also govern issues like investment advice, robo-advisors, or automatic investment procedures. The regulations do allow service providers to outsource functions to third parties, but the obligations will still apply to the outsourced party.
Another important aspect of the regulations are the guidelines with respect to conflict of interest and marketing obligations. Although the latter will remain under the jurisdiction of the local authorities, crowdfunding service providers shall not participate in any of the issues on their platform and cannot accept issuers who are employees and/or shareholders holding 20 per cent or more of the share capital or voting rights.
Although there are details that need to be clarified, there is consensus that the spirit of these regulations is good, and it should evoke a better crowdfunding environment throughout Europe. This now needs to be carefully implemented by ESMA and the member states to ensure this principle is adhered to. The eventual ease of cross border investing is good news for both the startup ecosystem and investors.
Malta now has the opportunity to tap into this market – so far, we have not yet benefited from this alternative source of financing. Investors in Malta have limited options locally; savings and liquidity are high, and other investment options are crowding out investors. Therefore, we could establish this new investment mechanism to promote innovative, environmental, and socially conscious ideas to be developed in Malta. Tapping into local investors’ resources to fund startups, scale ups and local ideas is critical – now more than ever.
It is now time for a local investment-based crowdfunding platform to be set up. We have been active in this space for a while now and we are actively seeking collaboration and interested parties to make sure this is done for the sake of the local startups and scaleups. If this market failure continues to exist, government and public entities should actively intervene to close this gap.
Once established, this crowd-investing mechanism can be used to encourage and introduce people to innovative ideas within the startup scene; it will attract new investment and unlock new financing rounds to companies. Lastly, one should not overlook the potential to blend this investment mechanism with EU funds, both from ESF and EIB. All the building blocks are being put into place, Malta now needs to tap into them to avoid startups and innovators feeling disheartened and giving up on the island.
Are you interested in knowing more? Would you be keen to explore investment through crowd-investing? Do you see potential in getting involved in this new concept? Get in touch on [email protected] – I’d love to hear your comments.
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