Great News for Protection of Crowdfunding Investors in the EU

By November 24, 2020 No Comments

Crowdfunding is a form of alternative financing for start-ups and early-stage SMEs that usually rely
on small investments. In addition to an alternative source of funding, a crowdfunding project or
company can give confirmation of a concept or idea, provide access to a large number of people who
can provide the entrepreneur with certain knowledge and information, and can serve as a marketing
tool. This definition of a widely used term crowdfunding can be found in European Parliament
legislative resolution of 27th March 2019 on the Proposal for a Regulation of the European
Parliament and of the Council on European providers of group financing services for enterprises.
European legislator has decided to regulate one of the increasingly common forms of investing, in
order to make sure that process is transparent, harmonized in whole EU and with main focus on
investors legal protection.
The new Regulation on European providers of group financing services for companies (COM (2018)
0113 – C8-0103 / 2018 – 2018/0048 (COD)) should ensure that crowdfunding services function
between Member States and also encourage the further development of this type of cooperation
between countries. At EU level, the regulation is the legal basis for regulating the crowdfunding
market and removing cross-border obstacles to its functioning, and for further encouraging this
alternative tool for financing the development of startups in their early stages. The Regulation
provides a single set of rules on the provision of co-financing services that allow service providers
cross-border co-financing activities and thus improve the functioning of the single market.
Crowdfunding has three parties participating in group funding:

1. the author or initiator of the campaign;

2. an online platform through which the necessary capital is sought;

3. individuals who finance a particular project, product or service, or support the author’s idea.

The main objectives of the new regulations are to protect investors, to whom project owners will
have to provide transparent data and information about their projects and also the additional costs
and risks that may occur in business. Crowdfunding service providers will also be required to conduct
an entrance knowledge test among potential investors to determine their understanding of the
investment, and to warn them if they feel that this type of investment is not for them. On the other
hand, in order for investors to have all the information to make a quality investment decision,
service providers will have to provide them with a unique form (template document) with key
information, which will be compiled by the initiator of the crowdfunding campaign.

Also, providers of co-financing services will have to obtain licenses to carry out this activity in the EU
in the countries in which they are established, and once registered, they will be able to offer their
services without restrictions in all Member States. A public register of all authorized co-financing
service providers and active co-financing platforms in the EU will also be launched.

In conclusion, harmonized regulatory framework for co-financing provides a simple and
comprehensive method for expanding cross-border business in the EU. Crowdfunding can ensure
that small, medium and micro enterprises have access to additional sources of financing as an alternative to traditional financing measures, such as bank loans, overdrafts and credit card debt,
which are initially financially exhaustive for enterprises.

Leave a Reply