An interview of Marije Louisse, senior associate, FinTech Team, Loyens & Loeff N.V. by Holland FinTech.
The state of crowdfunding
Crowdfunding is a broad term. What are the different types of crowdfunding today?
Two different forms of crowdfunding are generally referred to as the prominent categories: investment-based and lending-based crowdfunding. With lending-based crowdfunding, the project owner enters into a loan agreement with the crowdfunder or the crowdfunding platform. In case of investment-based crowdfunding the project owner issues either equity or debt instruments to the crowdfunder/crowdfunding platform.
The way in which the crowdfunding activities are structured, either investment-based or lending-based, is not only relevant for the financial regulatory aspects (such as license requirements, prospectus obligations, etc.) but may also have contractual and fiscal implications. Crowdfunding entails the involvement of three parties: the crowdfunder, the project owner and the crowdfunding platform. Other services providers may be involved such as banks, payment service providers or electronic money institutions. The involvement of multiple parties requires a good understanding of the different tasks and responsibilities. It is for example important that the contractual documentation that is used by the crowdfunding platforms genuinely caters for the activities that it intends to conduct.
Most notably, crowdfunding can be used to target SMEs and support other financing tools into filling the SME funding gap. In addition, it can be used as a way to diversify the finance mix. Alternatively, crowdfunding is also used as a means of providing credit to consumers.
What are the key developments to be seen in relation to crowdfunding in 2018?
The developments which can be seen in 2018 are twofold and both tie into the maturation of the crowdfunding sector. First, crowdfunding platforms professionalize. This development is partly motivated by the ongoing scrutiny by supervisors of crowdfunding activities. For example, in April of this year the Dutch AFM (Autoriteit Financiële Markten) published a set of good practices for the provision of information to crowdfunders in relation to available projects for crowdfunding.
Secondly, as there is currently no specific licence to conduct crowdfunding activities within the whole European Union, crowdfunding is still a very local phenomenon. Few platforms have initial licences that they can passport (this would, for example, be possible if the crowdfunding platform holds a MiFID II license). Some Member States issue local crowdfunding licenses that cannot be passported. This compels internationally expanding platforms to deal with local regulators each time they plan to become active in a local market.
What is the state of crowdfunding in the Netherlands compared to its European peers, or other economies?
The crowdfunding sector in the Netherlands is still relatively small compared to neighbouring countries such as Germany, France and the UK, although its size is increasing. Last year, the Dutch crowdfunding generated EUR 182.5 million (EUR 134.5 million in 2016), according to a report published by Crowdfundmarkt. The loans retrieved are generally smaller than what you can find within the mainstream channels, with the average size of a loan fluctuating around EUR 125,000.
The competent authorities have an essential role to play here to help scaling the sector. The AFM is increasingly turning its eye towards crowdfunding, to ensure a healthy development of what is seen to be, if not a replacement of traditional bank loans, a good complement to the SME funding mix.
Crowdfunding within the lending landscape
We saw recently Nordea integrating with crowdfunding platform Invesdor, after cancelling its own. How do you believe that banks can benefit from these partnerships?
I believe it is a valid opportunity for financial institutions to be able to provide this service. The adoption of such practices can also be seen in the Netherlands. ING, for example, recently announced its partnership with UK finance platform Funding Options to create a SME financing marketplace together, but we have also seen other forms of partnership e.g. where incumbents take a minority interest in platforms to help them to grow further.
Partnering with crowdfunding platforms may be attractive for banks, because they address a particular stratum of the lending sphere: small businesses. To lend to this kind of parties is usually not too attractive for banks, as it is expensive to generate a number of small loans at a relatively high-risk level: an issue that crowdfunding platforms address well and have gained specific knowledge and experience in.
Crowdfunding and regulations
The European Commission presented this year its Fintech Action Plan. A section regards crowdfunding, what is the goal the EC is aiming for here?
The European Commission is working to create a single pan-European licence for crowdfunding platforms that will be granted by the European Securities and Markets Authority (ESMA). The European regulators want to harmonize the market, so that such platforms would not have to obtain licenses in each Member State in order to be able to internationalise their services.
Once this licence will be effective, platforms will be able to choose between staying active under their local licence or apply for the European one. Since this legislation is still at a proposal state, it is difficult to say exactly when it will be available.
How do you think this measure will be impacting crowdfunding in the Netherlands and at a European scale?
It will create the possibility to bring together crowdfunders from multiple Member States with project owners from multiple Member States, thereby broadening the scope of available funding and investment opportunities. It will still be possible for Member States to maintain their own licence regime, however, as soon as a crowdfunding platform applies for the European licence, all the Member States will have to allow access to their local markets.
The importance of such European crowdfunding platform’s licence is the warranty of trust provided by such license. Indeed, such licensing gives Member States the assurance that once someone is licensed by the ESMA, this can be a trusted party, as the access to the licence demands certain requirements to be respected, notably in terms of corporate governance, trustworthiness of policymakers, sound business operations, data possession and business continuity arrangements.
The development of a European crowdfunding platform’s license is part of the development of the capital market union (CMU). The CMU’s aim is to make sure there is enough funding for SME and to ensure that banks are not the sole parties responsible for providing funds. In order to create the CMU also other steps are taken, such as the adoption of the Prospectus Regulation which caters for the possibility to issue securities without a prospectus as long as limited funding is attracted up to EUR 8 million. This makes it easier and cheaper for small companies to attract money from capital markets.
Is there, in Europe or elsewhere, an exemplary regulatory landscape where crowdfunding practices can thrive? Why?
Currently, I would cite the UK, based on the amount of platforms active there. They can count on experienced supervisors to provide the right regulatory landscape for such organisations to flourish. For parties which are active or focus on the European continent, Brexit may however have an impact in that respect. In the Netherlands, the AFM is quite active and approachable, and provides a lot of guidance (for example, through the Innovation Hub). In addition, steps are taken and have been taken by the Dutch legislator towards a more favourable environment for crowdfunding.