Small and medium-sized enterprises (SMEs) play a major role in the Greek, as well as the other EU economies, and are significant contributors of income and employment, as well as innovation and growth.
However, they often face difficulties gaining access to the required funds. This has become more obvious in Greece during the financial crisis years, where bank financing has notably been tightened. Alternative funding sources that complement the banking sector, such as microfinance or crowdfunding, may constitute the required solution for many SMEs. Such financing tools can enhance entrepreneurship by contributing towards the creation and growth of new businesses and start-ups, by deviating from the rigid procedure of the traditional financing provided by traditional credit institutions.
Crowdfunding, whereby an organisation operates an online platform that brings together businesses and potential investors, represents globally an increasingly important alternative financing source across products, services and markets.
In addition to providing access to finance, crowdfunding can also offer other benefits to businesses, such as its utilisation as a marketing tool, as investors may become the future users of the products offered by the businesses and have an incentive to disseminate information about said products.
Growth of the crowdfunding sector
Several member states, including Greece, have put in place national frameworks to support the growth of the crowdfunding sector and ensure that potential investors are appropriately protected.
However, the EU’s crowdfunding market is lagging compared to the ones of other major world economies (such as the US’s or the UK’s crowdfunding markets). Specifically, the existing national regimes are rather diverse and non-unified, therefore discouraging investors from cross-border investing through crowdfunding platforms, as they often face a hard time determining and gaining insights to the applicable framework of other member states.
This lack of common rules also prevents crowdfunding platforms from scaling the provision of their services, as they have to deal with high compliance and operational costs. Crowdfunding services consequently remain principally national and deprive businesses of access to such services, especially in cases when those businesses are established in small national markets.
The European Commission has placed emphasis on strengthening alternative and entrepreneurial finance in the EU. In its March 2018 FinTech Action Plan, it highlighted the need for a harmonised EU-wide regulatory regime for crowdfunding.
As a result, Regulation (EU) 2020/1053 of October 7 2020 on European Crowdfunding Service Providers for business (Crowdfunding Regulation) was adopted, and will apply from November 10 2021 across the EU.
The Crowdfunding Regulation is accompanied by Directive (EU) 2020/1504, which amends the scope of MiFID II by adding Crowdfunding Service Providers (CSPs) authorised under the Crowdfunding Regulation to the list of exempted entities, to which MiFID II does not apply.
CSPs already engaged in activities that will need authorisation, are allowed until November 10 2022 to continue to operate on a transitional basis, in line with their national law.
The Crowdfunding Regulation harmonises the EU legal framework for CSPs operating digital platforms, which facilitate the matching of prospective investors with businesses (project owners). Authorised CSPs, in accordance with the Crowdfunding Regulation, will be able to passport their services to other member states.
The Crowdfunding Regulation applies to providers of investment-based crowdfunding (in respect to transferable securities) and lending-based crowdfunding (the so-called ‘peer-to-peer lending’). However, the Crowdfunding Regulation does not apply to other types of crowdfunding, such as donation/reward-based crowdfunding and peer-to-peer consumer lending, or offers with a consideration of more than €5 million over a period of 12 months.
CSPs falling within the scope of the Crowdfunding Regulation will need to be authorised by the national competent authorities (NCAs) of the EU member state in which they are established.
The new framework sets out a number of operational and organisational requirements for prospective CSPs. In particular, they shall, inter alia, establish adequate policies and procedures to ensure effective and prudent management, implement risk management systems and controls related to the loans intermediated on their platform, carry out minimum levels of due diligence on project owners and implement transparent complaints handling procedures, as well as effective business continuity policies.
The Crowdfunding Regulation establishes stringent new rules on investor protection, which vary depending on whether the investor would qualify as ‘sophisticated’ or ‘non-sophisticated’. This distinction is based on the similar segmentation introduced by MiFID II, between professional clients and retail clients, taking into account the special characteristics of the crowdfunding market.
Among investor protection duties, CSPs should provide to all prospective investors a key investor information sheet (KIIS) for each offer, which does not require a prior approval from the relevant NCA. KIIS shall be drawn up by the relevant project owners who shall also be responsible for the information they contain and for keeping them up to date with any changes. CSPs, however, must have procedures in place to verify the completeness, correctness and clarity of the information.
Authorised CSPs will benefit from the ‘passport’ procedure (available for many regulated services in the banking and capital markets domain), namely the ability to render their crowdfunding services on a cross-border basis without the need of establishment or additional approval, by simply applying to their NCAs.
The NCAs will operate as the ‘single point of contact’ and notify the respective NCAs of the member states in which CSPs intend to offer their services. The CSPs will be able to start providing their services 15 days at the latest after the submission of the relevant information to their NCAs.
By granting a European ‘passport’, the Crowdfunding Regulation will allow CSPs to overcome many of the barriers of the fragmented national frameworks and penetrate different EU markets. Moreover, individual investors from different member states will be able to invest on a pan-European basis, without having to navigate through different rules and levels of protection.
Harmonised tax approach
At this point, it should be noted that a harmonised taxation approach across the EU with limited room for national variations would surely constitute another contributing factor to the growth of cross-border crowdfunding.
In addition, the provision of tax incentives to those investing in young businesses and start-ups could compensate for the inherently higher risk involved and at the same time play a part in boosting the relevant market.
Opportunities created
The creation of such a competitive and favourable environment for the emergence and development of crowdfunding platforms and the facilitation of cross-border financing, constitutes an opportunity for Greek and other EU-based SMEs and start-ups.
In particular, businesses will be able to seek funding through platforms and investors based anywhere in the EU, without being limited to their national markets – which in many cases remain underdeveloped. It becomes evident that the introduction of the Crowdfunding Regulation can have positive effects to all three basic players (CSPs, project owners and investors) of a crowdfunding project. What is left to be seen is how these stakeholders will play along.
Alexandra Balta
Manager, EY Greece
