The European Commission launched a consultation programme until December 31 to explore the costs and benefits of ‘crowdfunding’ as an alternative form of finance. Contributions are sought from competent authorities, crowdfunding platforms, entrepreneurs and individuals who launched crowdfunding campaigns.

Crowdfunding entails the collection of funds through small contributions from many parties to raise capital for a particular project. This alternative source of financing has the potential to bridge the equity gap many start-ups face.

Evidently, the European Commission is delving through extant national legal frameworks to understand better how businesses can raise their capital through such open forms of financing. Whereas some crowdfunding campaigns are local in nature, there may be others benefiting from easier access to financing within the single European market.

Certain safeguards may be necessary to maintain the stakeholders’ trust and engagement. The ultimate objective of the European Commission’s consultation is to gather data about the needs of market participants and to identify the areas where there is opportunity for the sustainable growth of enterprises though debt-based or equity-based crowdfunding. The consultation covers all forms of crowdfunding, ranging from donations and rewards to financial investments. Everyone is invited to share their opinions and perceptions, including citizens who might contribute to crowdfunding campaigns and entrepreneurs who may launch such campaigns.

If crowdfunding proposals are implemented, more capital will be unlocked for start-ups

In a similar vein, the United States’ Securities and Exchange Commission (SEC) is currently considering crowdfunding as it was featured in Jumpstart Our Business Start-ups Act (JOBS Act). It is very likely that the proposal for crowdfunding will bring a major shift in how small US companies can raise their money in the private securities market. Alternative sources of finance which are already secured via the internet include monetary contributions in exchange for rewards, product pre-ordering, lending and/or investment. With crowdfunding, there’s now the possibility that smaller businesses will be able to raise up to $1 million a year by tapping unaccredited investors. Any type of project with a promising ROI may soon opt for crowdfunding, including micro entrepreneurs and researchers.

These plans can be successful only if the regulatory costs are kept as low as possible to keep them within the reach of small enterprises. Probably, one of the main concerns will be reporting requirements for small companies. For instance, SEC’s crowdfunding proposals might suggest certain disclosures, such as “information about officers and directors, how proceeds from the offering will be used, and financial statements”. The crowdfunding proposals would also limit how much money an unaccredited investor can contribute each year. The proposal says that investors with a net worth and income of less than $100,000 can contribute only $2,000 or five per cent of their net worth or income, whichever is greater. Those with a net worth or income of more than $100,000 can contribute more.

In an effort to reduce burdens on companies and portals, SEC’s plan would not explicitly force them to take steps to verify income levels and the net worth of investors in crowdfunding. At the same time, SEC would require companies using crowdfunding to release financial statements and other information that could prove costly.

No doubt that the most experienced entrepreneurs and their intermediaries will have no difficulty in meeting such crowdfunding rules and regulations, although first-time entrepreneurs may require further support. At present, the smaller businesses earning revenues (and profits) below a certain threshold are not legally obliged to provide audited financial statements. Moreover, small enterprises may not always have historical financials.

This means that financial services authorities will find it quite difficult to determine how small companies are true and fair in their financial reports. According to the US proposals, the businesses who consider crowdfunding as a source of finance will have to audit their accounts.

It is hoped that the EU consultation will translate into facilitative, soft-law measures leading to legislative action.

If crowdfunding proposals are implemented, more capital will be unlocked for start-ups, investments and projects. This capital finance will surely help to spur economic growth and competitiveness.

Mark Anthony Camilleri lectures at the University of Malta.

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