ESMA: ‘crowdfunding would benefit from regulation’
The European Securities and Markets Authority says that crowdfunding platforms are incentivised to operate in a way that they fall outside existing regulations, which is holding back their growth and increasing risks for investors.
ESMA is hoping to provide national competent authorities clarity on how crowdfunding business models fit within the existing regulatory framework. In an opinion paper it outlines how existing EU rules are likely to apply to crowdfunding platforms, depending on the precise business model used. It also provides guidance to national regulators on the key risks inherent to crowdfunding and the key components of a regulatory regime to address them.
For the EU institutions – Commission, Parliament and Council – ESMA’s advice paper highlights the concern that strong incentives currently exist for crowdfunding platforms to structure their business models to fall outside the scope of regulation and asks them to consider policy options to reduce these incentives. Avoiding regulation presents risks to investor protection and makes it harder for platforms to grow their businesses.
“ESMA’s aim is to enable crowdfunding to reach its potential as a source of finance, while ensuring that risks to users of crowdfunding platforms are identified and addressed in a proportionate and convergent way across the EU,” said Steven Maijoor, ESMA chairman. “We believe that there are benefits both for investors as well as for platforms by operating inside rather than outside the regulated space.
Considering the diverse business models used within investment-based crowdfunding and depending on the precise structures used different EU legislation may apply. The opinion paper sets out an analysis of how the main business models map across existing EU rules, such as the Markets in Financial Instruments Directive, the Prospectus Directive, the Directive for Alternative Investment Fund Managers, and others financial and banking regulations. It also outlines what ESMA believes should be the key components of an appropriate regulatory regime for investment-based crowdfunding activities.
The advice to the EU institutions highlights gaps and issues in the current applicable regime where policymakers could consider taking action to ensure there is a regime protecting investors while also fit for purpose for crowdfunding platforms. These gaps and issues include:
- the impact of the Prospects Directive thresholds
- capital requirements and the use of the MiFID optional exemption
- the potential development of a specific EU crowdfunding regime, in particular for those platforms that currently operate outside of the scope of MiFID
The papers have been prepared in collaboration with and input from the European Banking Authority on the regulation that falls within its scope, such as the Payment Services Directive. The work will see an EBA-led paper on lending-based crowdfunding. To complement the ESMA-led papers which focus on investment-based crowdfunding.