Equity crowdfunding needs to build greater trust

Regulation that clearly establishes the rules of the game for equity crowdfunding is needed if the sector is to take off as a credible source of investment for early stage companies.

“Investors need assurances if they are to use this innovative financing,” said Josina Kamerling, head of regulatory outreach at the CFA Institute, a body representing investment professionals, speaking to an event organised by the European Crowdfunding Network in Brussels.

Equity crowdfunding, where investors buy stakes in companies online, mostly in start-ups, carries high risks and has high expected failure rates.

Because it is so new, lawmakers are playing catch-up in a scene rife with complaints alleging poor investor protection.

Kamerling is part of the European Crowdfunding Stakeholders Forum, an expert group set up by the EU to investigate how to regulate the market, both to help investors and to increase cross-border investment, while not to strangle the fledgling sector.

The Forum held its third meeting on Wednesday and is tip-toeing towards a set of recommendations for the sector by the summer.

The push on crowdfunding is also part of the EU’s broader plan, outlined last month, to create a capital markets union, which is a set of initiatives with a central aim of reducing small business (SME) dependence on bank lending. 

Fast growing – but not for everyone

Most crowdfunding today is in the form of donations for philanthropic projects, but there have been significant forays into equity crowdfunding, also referred to as crowdinvesting.

It is increasingly being used by small businesses and start-ups which struggle to access loans from banks. When UK-based Triodos Renewables needed to raise €5 million, it approached Trillion Fund, a crowdfunding platform for clean energy. A Welsh biotech company, Cell Therapy, recently raised around £700,000 towards the development of a new cardiovascular drug.

For the entrepreneurs and businesses that have used it, crowdfunding is not just another way to access finance, but a market testing and marketing tool.

However, there are misconceptions. “It’s the Wild West; everyone thinks there’s gold,” said David Mellett, founder of Economy2dot0, which advises SMEs on crowdfunding campaigns in Belgium. “Everyone’s building train tracks to get to it, and then they realise it’s not so easy to get the gold out of the ground.”

Crowdfunding is not an obvious road for all companies. There are still entrepreneurs who see it as too complex or just risky. By putting business proposals online, they expose their ideas to competitors.

Part of the problem is that the rules of the game vary between European countries. Italy was an early mover and opted for a tightly regulated market. In other countries, like the Netherlands and the UK, laws on equity crowdfunding are more relaxed.

As a result of these differences, there is virtually no money moving across borders. Today, a Spanish person who wants to invest into a Dutch renewable energy project through a crowdfunding platform will find it is not very easy, said Kamerling.

In the US, there’s been a lot of opposition to crowdfunding. Currently, only friends, family, and accredited, meaning wealthy, investors can invest for shares in a company, though a new law is in the works to loosen these requirements.