Cross-Border Crowdfunding: Towards a Single Crowdlending and Crowdinvesting Market for Europe

Crowdlending and crowdinvesting have experienced rapid growth in some EU Member States. However, these types of crowdfunding have, for the most part, remained a phenomenon of those larger Member States that ‘draw a crowd’, with populations that are large enough to make crowdfunding systems economically feasible. In turn, crowdfunding has remained a mainly national issue, prompting the European Commission to conclude that there is no need for harmonization of crowdfunding rules in Europe. In contrast to the European Commission’s Capital Market Action Plan, this paper takes the view that national limitations on crowdinvesting and crowdlending de facto are the result of limits de iure. Given that no European passport is tailor made or fits crowdfunding, this source of financing is doomed to remain national. Moreover, with different legal requirements in Member States, European law hinders the development of cross-border crowdfunding within the region. This is particularly true for smaller Member States whose populations are too small to constitute ‘a crowd’. This paper details how European regulators could facilitate a Single European Crowdfunding Market. Regulation of the crowdfunding platform based on the ‘MiFID light’ framework could function as the basis for a cross-border crowdfunding manager passport, given the minimum protection it affords both investors and the financial system, and the low costs it imposes on the platform. Following the (1) too-small-to-care, (2) too-large-to-ignore, and (3) too-big-to-fail development path of FinTech business models, we suggest adding a relevance threshold of EUR250,000 in transaction volume to the MiFID light framework and imposing regulation to address systemic risk stemming from very large crowdfunding platforms.

1. See Hatzopoulos and Roma (2017), p 81.

2. See the summary of European Parliament (2017), Crowdfunding in Europe: Introduction and State of Play (January 2017); European Commission (2016b), Crowdfunding in the EU Capital Markets Union, SWD(2016) 154 final, p 9 (holding that ‘most platforms were located in the United Kingdom (143), followed by France (77) and Germany (65)’); Klöhn et al. (2016), p 57 (detailing growth for Germany).

3. The related concerns have been addressed by European and international policy bodies, see the review by the European Securities and Markets Authority (ESMA) (2014a), Opinion: Investment Based Crowdfunding, ESMA/2014/1378; European Commission (2016b); European Commission (2015c), Crowdfunding: Mapping EU Markets and Events Study on regulatory frameworks for CF; International Organization of Securities Commissions (IOSCO) (2015b), Statement on Addressing Regulation of Crowdfunding; IOSCO (2015a), Crowdfunding 2015 Survey Responses Report; European Commission (2017a), A more competitive and innovative financial sector; IOSCO (2017), Research Report on Financial Technologies (Fintech).

4. See the country-by-country comparison at Association for Financial Markets in Europe (AFME) (2017), pp 34–35.

5. See European Parliament (2017), p. 5. Amount raised cross-border in 2013 represented 8.5% and 7.3%, cross-border being defined as location of the platform being in a different Member State than location of the project. We are not aware of data with regard to cross-border funding raising, i.e. location of the platform being located in different Member States than location of investors.

6. See European Parliament (2016a), Resolution of 26 May 2016 on the Single Market Strategy (2015/2354(INI)), para. 21. In turn, the European Commission has initiated a study on cross-border crowdfunding in Europe. See also European Commission (2017b), pp 14–17; AFME (2017), pp 19–23, 34–36; European Commission, DG Research and Innovation (2017) (all stating that legal fragmentation erects a barrier to cross-border crowdfunding).

7. Other forms include donation-based crowdfunding, where people donate for a specific charitable project, rewards-based models, where investors provide funding in form of a donation and expect to receive non-financial rewards or goods in exchange.

8. Hornuf and Schwienbacher (2015), p 5; Ibrahim (2015), p 569; Tomboc (2013–2014), p 256; Hurt (2015), p 224; Agrawal et al. (2014), p 74; see Klöhn et al. (2016), pp 56–66; Bradford (2015), p 377; see also Bouncken et al. (2015), p 407.

9. Heminway (2014), p 831; Hazen (2011-2012), p 1737; Pesok (2014), pp 149 et seq.; Fink (2012-2013), p 31.

10. European Commission (2015a), Action Plan on Building a Capital Markets Union, p. 7. The capital markets union (CMU) action plan builds on the Commission’s previous work, in particular European Commission (2013), Consultation Document: Crowdfunding in the EU-Exploring the Added Value of Potential EU Action, leading to the European Commission (2014a), Communication: Unleashing the potential of crowdfunding in the European Union.

11. See for implementing measures proposed by the European Commission the recently published Proposal for a Regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business, COM(2018) 113 final. The details of this proposal cannot be discussed in this article.

12. Commission Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) [2013] OJ L176/1-337.

13. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU [2014] OJ L173/349-496.

14. European Commission (2016b), pp 8 et seq. (identifying 8 different categories); see also Baumann (2014), pp 8 et seq.

15. Fink (2012-2013), p 9; Yamen and Goldfeder (2015), p 57.

16. Baumann (2014), pp 21 et seq.

17. See most prominently Surowiecki (2005).

18. See Zetzsche (2015), pp 275–431.

19. For a discussion, see Zetzsche (2017); Zetzsche (2012), p 339.

20. See European Central Bank (ECB) (2016), p 6.

21. For 54%, see ECB (2016), p 13. See also European Commission (2016b), p 3 (‘Access to finance for young, innovative firms is a problem even in countries where access to bank finance has remained stable throughout the crisis. Thanks to their strong local networks and relationships, banks will continue to provide the majority of funding to SMEs. However, only 41% of all SMEs in the EU perceive no limitations in their access to future financing. To complement bank financing, the CMU Action Plan seeks to strengthen the different sources of alternative finance, including crowdfunding’); for 75%, see European Commission (2015a), p 7.

22. See European Commission (2015a); European Commission (2016a), and subsequently European Commission (2016b).

23. Tomboc (2013–2014), pp 256 et seq.

24. Ibid., p 256.

25. Hurt (2015), p 224; Ibrahim (2015), pp 561 et seq.; Heminway (2014), p 832.

26. Kirby and Worner (2014), pp 21 et seq.; Baumann (2014), pp 44 et seq.; Tomboc (2013–2014), pp 259–260; Nietsch and Eberle (2014), p 1789; European Commission (2015a), pp 4, 5 and 7; European Parliament (2016b), p 14.

27. European Commission (2015a), Introduction, pp. 4 and 7. For a discussion of how crowdfunding fosters the economy in general, see Kirby and Worner (2014), pp 21 et seq.

28. Kirby and Worner (2014), p 22; European Commission (2015a), Introduction and p 4.

29. Zetzsche (2012), p 343.

30. See Mingfeng and Viswanathan (2016).

31. For a bird’s eye perspective, see Fendrick et al. (2017), pp 31–34.

32. Klöhn et al. (2016), p 58 (listing 22 insolvency cases while only in 4 cases investors were offered a premature exit at a premium to their entry price for the German Market). See European Commission (2016b), pp 15–16.

33. Gilson (2003), p 1076.

34. Sannajust et al. (2014), p 1923.

35. See Agrawal et al. (2014), pp 76 et seq.

36. See Lin (2017) (arguing in favor of regulation of the platform).

37. See also Hagedorn and Pinkwart (2016).

38. See also ESMA (2014a), p 11; European Commission (2016b), p 5, 24 (describing some concepts of emerging yet illiquid secondary markets).

39. See also European Commission (2013), pp 7 et seq.; see also ESMA (2014a), p 11 and Dorff (2013–2014), p 516.

40. Examples of platforms that went insolvent include Emphas.is with a debt load exceeding 300,000 BPD. ‘Crowdfunding platform Emphas.is goes insolvent amid internal conflicts’, British Journal of Photography (14 October 2013), available at https://insolvencyguardian.com.au/blog-view/crowdfunding-platform-emphasis-goes-insolvent-490580/ (accessed 21 September 2017).

41. See, for instance, the list of insolvencies of crowdfunded German businesses (‘Liste aller Crowdfunding-Pleiten’), online at http://crowd-investment.de/crowd-pleiten/. A series of high profile insolvencies has prompted the call for adequate regulation in England, see the letter by the Chairman of the Treasury Committee Andrew Thiery to Tracey Mc Dermott, head of the Financial Conduct Authority (‘FCA’), of 1 June 2016, available at http://www.parliament.uk/documents/commons-committees/treasury/01062016-Chairman-to%20FCA.pdf; in turn, the FCA warns on its website ‘Due to the potential for capital losses, we regard investment-based crowdfunding in particular to be a high-risk investment activity […] It is very likely that you will lose all your money. Most investments are in shares or debt securities in start-up companies and will often result in a 100% loss of capital as most start-up businesses fail’. More and more regulators worldwide recognize the necessity to require intermediaries to pursue bankruptcy checks on issuers, see Corporations and Markets Advisory Committee (CAMAC) (2014). See also UK FCA (2016).

42. International Organization of Securities Commissions on IOSCO (2017), p 11.

43. See also ESMA (2014a), p 8, paras. 18 et seq.; Hornuf and Schwienbacher (2015), p 6; Nietsch and Eberle (2014), p 1789; Fink (2012–2013), p 16; Kirby and Worner (2014), pp 45 et seq.; Ibrahim (2015), p 573; on information asymmetry in the SME context, see Gilson (2003), p 1077.

44. Nietsch and Eberle (2014), p 1789.

45. ESMA (2014a), p 8, para. 19; Hornuf and Schwienbacher (2015), p 6; Agrawal et al. (2014), p 68.

46. European Commission (2013), p 7.

47. Fink (2012–2013), p 31.

48. Heminway (2014), p 837.

49. The later funders’ decision may rely on the decision and characteristics of early funders, see Belleflamme et al. (2015), pp 32 et seq.

50. Agrawal et al. (2014), p 66.

51. Hornuf and Schwienbacher (2015), pp 11 et seq.; Fink (2012–2013), p 31.

52. Agrawal et al. (2014), p 66; also Hornuf and Schwienbacher (2015), p 12; Tomboc (2013–2014), p 269.

53. Agrawal et al. (2014), p 68; Nietsch and Eberle (2014), p 1789.

54. See also ESMA (2014a), p 11; discussing the potential civil law consequences; see Nietsch and Eberle (2014), pp 1792 et seq.

55. Heminway (2014), p 832; Hazen (2011–2012), p 1766; also Fink (2012–2013), pp 8, 31 (finding that crowdfunders stem from various social groups, are very heterogeneous and not necessarily acquainted to the world of venture capital and risky investments).

56. Sceptical also Tomboc (2013–2014), p 268; Hazen (2011–2012), p 1737; Nietsch and Eberle (2014), p 1789.

57. Ibrahim (2015), pp 574 et seq.

58. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMD) [2011] OJ L174/1–73.

59. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITSD) [2009] OJ L302/32–96.

60. See Art. 23 MiFID II, Art. 12.1(b) UCITSD as well as Art. 12.1(d) AIFMD.

61. We only state here that the rationale of financial law applies. This does not exclude that some rules are superfluous or too burdensome, but this is a question of which financial law applies to which conduct.

62. For example, the peer-to-peer lending, where crowdfunding provides only 0.02% of the bank originated credit, see Kirby and Worner (2014), p 33.

63. See European Commission (2016b), p 13 (‘A growing trend that is expected to become more prominent in the future is the institutionalisation of crowdfunding, notably in terms of the investors. This trend is supported by a recent study which found that 45% of platforms in the United Kingdom reported institutional involvement, compared to 28% in 2014 and just 11% in 2013. Institutional involvement is particularly strong in consumer loans crowdfunding, while in equity-based crowdfunding a growing number of venture capital and angel investors are co-investing alongside or in parallel with “crowd investors”. The “institutional investor” category is quite broad and includes banks, mutual funds, hedge funds, pension funds, asset management companies, but also local authorities and national development banks.’).

64. See Report of Cambridge Centre for Alternative Finance in partnership with KPMG and CME Group Foundation on Sustaining Momentum, The 2nd European Alternative Finance Industry Report (September 2016), available at https://assets.kpmg.com/content/dam/kpmg/nl/pdf/2016/sector/financial-services/sustaining-momentum-the-2nd-european-alternative-finance-industry-report.pdf, pp 20 and 41 (‘Institutionalisation took off in mainland Europe in 2015 with 26% of peer-to-peer consumer lending and 24% of peer-to-peer business lending funded by institutions such as pension funds, mutual funds, asset management firms and banks. 8% of the investment in equity-based crowdfunding was also funded by institutional investors such as venture capital firms, angels, family offices or funds. Excluding the UK, 44% of the surveyed European platforms reported some level of institutional funding in 2015 and just under 30% of peer-to-peer consumer lending platforms reported having a majority institutional shareholder (e.g. a VC, corporate or a bank)’).

65. Ibid., p 20 (finding that in 2015 the European online alternative finance market—including inter alia crowdfunding and peer-to-peer lending—, grew by 92%); Kirby and Worner (2014), pp 35 et seq. (estimating that peer-to-peer lending could reach up to $70 billion until 2019); European Commission (2015c), p 75 (speaking of a rapidly evolving crowdfunding market in the EU).

66. The same argument applies to other ‘digital’ business models that target financial services markets. See Zetzsche et al. (2017).

67. This is the difference between debt funds and crowdfunding platforms. Debt funds are subject to European regulation (AIFMD). European regulators and ESMA in particular have insight into and may interfere in the debt fund market. They cannot interfere in the crowdfunding markets.

68. See European Commission (2014a), p 5.

69. On the stakeholder orientation of European financial law, see Zetzsche (2012), p 339 (citing Arts. 25 et seq. AIFMD as an example).

70. See Gabison (2015); Tomboc (2013–2014), p 268.

71. Tomboc (2013–2014), pp 268 et seq.

72. See CAMAC (2014), pp 21 et seq. (detailing the approaches of the UK, New Zealand, Canada and the US on conflicts of interests). Under the Australian Corporations Act 2001, as amended by the Australian Corporations Amendment (Crowd-sourced Funding) Act 2017 (No. 17/2017), available at https://www.legislation.gov.au/Details/C2017A00017 (accessed 28 September 2017), the conflicts rules applicable to financial intermediaries apply to crowdfunding responsible intermediaries; IOSCO (2017), p 31 § 3.4.(i)2. IOSCO emphasizes risks regarding to retail trading over investment platforms, in particular risks resulting from conflicts of interest and insufficient cost and fee transparency.

73. Cf. Art. 26 TFEU [2012] OJ C326/1-390.

74. 510 crowdfunding platforms were active in the EU in 2014, of which eight were non-EU platforms, see European Commission (2015c), pp 21 et seq.

75. European Commission (2015c), p 29.

76. Ibid., at p 40.

77. See European Commission (2014a), pp 5 et seq. (mentioning the Directive on Unfair Contract Terms, IP law and the Anti-Money Laundering legislation).

78. See European Commission (2015c), p 75.

79. European Commission (2014a), p 8.

80. European Commission (2014a).

81. For a detailed discussion see Zetzsche (2016); Zetzsche (2017), sect. III.2.

82. See Spindler (2017), at pp 139–145.

83. ESMA (2014a), pp 11 et seq.

84. European Parliament (2016c), Art. 15.

85. European Commission (2015c), p 23; Hornuf and Schwienbacher (2015), p 5; Ibrahim (2015), p 569.

86. See on the use of mezzanine for Germany, Hornuf and Schwienbacher (2015), p 6.

87. In addition to financial markets law rules on the digital single market may apply, which are not subject to our considerations, see Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the internal market [2000] OJ L178/1–16. Also Anti-money laundering provisions may apply, see Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing [2015] OJ L141/73–117.

88. See Arts. 3 and 14 Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L345/64.

89. See Art. 4.1(8) Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II) [2014] OJ L173/349–496, as amended: ‘portfolio management’ means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.

90. Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No. 648/2012 (MiFIR) [2014] OJ L173/84–148.

91. Cf. Art. 1(1) UCITSD; Art. 4(1)(a) AIFMD; Art. 4(1) Regulation (EU) 2015/760 on European long-term investment funds (ELTIFR) [2015] OJ L123/98–121; Art. 3(a) of the Regulation (EU) No. 345/2013 of the European Parliament and of the Council of on European venture capital funds (EuVECAR) [2015] OJ L115/1–17, and Art. 3(a) of the Regulation (EU) No. 346/2013 of the European Parliament and of the Council on European Social Entrepreneurship Funds (EuSEFR) [2013] OJ L115/18–38. For a detailed discussion, see Zetzsche (2017), sect. V.1.

92. See Arts. 2 and 3 Council Directive 2013/36 of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV) [2013] OJ L176/338–436; Art. 4(1) CRR.

93. See Hooghiemstra and de Buysere (2016), pp 140–148 (providing a summary on European financial law).

94. European Commission (2014b), p 4 (mentioning lack of information about foreign legal requirements and high costs of authorisation on other EU Member States as barriers to cross-border crowdfunding).

95. Art. 5(2) and (4) UCITSD.

96. For a detailed overview, see Zetzsche (2017), sect. VI.

97. See European Commission (2016b), pp 8 et seq.

98. Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) [2014] OJ L352/1-23.

99. Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC; see also Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market [2017] OJ L168/12-82.

100. Art. 3 PD.

101. PD, recitals 18 et seq.; Art. 5 PD.

102. Art. 6 PD.

103. Report of Center for Strategy and Evaluation Services (CSES), Study on the Impact of the Prospectus Regime on EU Financial Markets Final Report (June 2008), pp. 47 et seq., available at http://ec.europa.eu/finance/securities/docs/prospectus/cses_report_en.pdf.

104. They try to tailor their business so as to manoeuvre under and around it, see ESMA (2014a), p 9, para. 22; Klöhn et al. (2016), pp 61 et seq.

105. Those are detailed in the Gesetz über Vermögensanlagen (Vermögensanlagengesetz—VermAnlG), Vermögensanlagengesetz vom 6. Dezember 2011 (BGBl. I S. 2481), das zuletzt durch Artikel 5 des Gesetzes vom 17. Juli 2017 (BGBl. I S. 2446) geändert worden ist (06.12.2011), available at https://www.gesetze-im-internet.de/vermanlg/BJNR248110011.html (accessed 28 Sept. 2017).

106. According to Art. 1(3)(d) Prospectus Regulation this threshold will be raised to 10 mio.

107. See however Opinion of Advocate General Sharpston in ECJ case C-441/12, ECLI:EU:C:2014:2026, paras. 38 et seq. (19 June 2014). According to Art. 3(2) Prospectus Regulation this threshold will be raised to 500 TEUR.

108. See Commission draft of the Prospectus Regulation, COM(2015) 583 final, p 13.

109. Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC [2017] OJ L168/12-82.

110. European Commission (2015b), p. 20; European Commission (2015c), p 40; Report on the Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading, European Parliament (2016c).

111. See European Parliament (2017), p. 5 (detailing that average size of investment in 2014 amounted to EUR 260,000).

112. German law requires a short form document pursuant to ss. 13, 14 VermAnlG. For details, see Klöhn et al. (2016), pp 61 et seq. (with a technical critique). For similar obligations in Italy, Spain, France and Finland, see Hooghiemstra and de Buysere (2016), pp 150–151; Ferrarini and Machiavello (2017), at 23.26; see also Härkonen (2017), p 121 (comparing US and European disclosure obligations).

113. See CAMAC (2014), pp 21 et seq. (detailing the approaches in New Zealand, Canada, and the US) as well as § 738 J et seq. of the Australian Corporations Act 2001, as amended by the Australian Corporations Amendment (Crowd-sourced Funding) Act 2017 (No. 17/2017). IOSCO (2017), pp 65 et seq., about FinTech growth in emerging markets/Asia. The regulatory environment for peer-to-peer (P2P) lending platforms and equity crowd funding (ECF) varies considerably across emerging markets. Some countries have implemented regulation, while others have no tailored regulatory framework due to the still nascent nature of these business models and the fact that the full benefits and opportunities, as well as the risks and challenges, are not yet fully understood (at pp 67–68).

114. See Härkonen (2017), p 121 (comparing US and European disclosure obligations).

115. Arts. 24 et seq. MIFID II; see Zetzsche and Marte (2015), pp 120 et seq. .

116. Art. 25(2) MiFID II.

117. See § 2a Gesetz über Vermögensanlagen (Vermögensanlagengesetz—VermAnlG). For details, see Klöhn et al. (2016), pp 61 et seq.; Spindler (2017), p 134.

118. Hooghiemstra and de Buysere (2016), pp 153–157; Ferrarini and Machiavello (2017), at 23.30.

119. See § 3 Bundesgesetz über alternative Finanzierungsformen (Alternativfinanzierungsgesetz—AltFG), BGBl. I No. 114/2015, as amended by BGBl. I No. 107/2017 (Version of 28 September 2017); see Rericha and Toman (2015), p 403.

120. See, for instance, s. 738ZC of the Australian Corporations Act 2001, as amended by the Australian Corporations Amendment (Crowd-sourced Funding) Act 2017 (No. 17/2017) (‘The responsible intermediary for a CSF [Common Strategic Framework] offer must reject an application made by a person pursuant to the offer if: (a) the person is a retail client in relation to the offer; and (b) having regard only to CSF offers for which the intermediary is the responsible intermediary, the application would result in the total amount paid or payable by the person in respect of applications made by the person, in any period of 12 months, pursuant to CSF offers made by the same company, exceeding: (i) $10,000.’).

121. For instance, while in the UK Financial Control Authority (FCA) (2014) Policy Statement PS14/4 in theory requires an appropriateness assessment of retail clients intermediaries, it does not require insurance that individuals continue to qualify under that appropriateness test on an ongoing basis. In particular, the appropriateness test does not apply where retail clients certify that they will not invest more than 10% of their net investible assets in non-readily realisable securities. Furthermore, an appropriateness test of the past is valid for 12 months.

122. See Legislative Decree No. 179 of 19 October 2012, subsequently converted into Law No. 221 of 17 December 2012, which was implemented by Consob Regulation No. 18592 of 26 June 2013 (drawing on MiFID for equity based crowdfunding models); on details Nigro and Santoro (2014), pp 229 et seq.; d’Ippolito et al. (2016), pp 27–37 (referring to the MiFID suitability test as the main hindrance for the Italian crowdfunding scheme and mentioning reform initiatives); IOSCO (2017), p 74.

123. However, see Hooghiemstra and de Buysere (2016), pp 153–157 (arguing in favor of a pan-European investment cap).

124. ESMA states that invested sums can ‘be substantial’, see ESMA (2014a), p 8, para. 20.

125. Consequently, the danger of being defrauded may be higher, see Agrawal et al. (2014), p 77; for a similar consideration with respect to US securities regulation with examples, see Pesok (2014), pp 149 et seq.

126. See Hazen (2011–2012), p 1765 (stating that ‘fraud can come in small packages too’). European Commission (2014b), p 6 (stating that one in four respondents considers the risks of fraud or misleading advertising in crowdfunding as too high to even participate); ESMA (2014a), p 11.

127. For inconsistencies under MiFID I see Ferrarini and Machiavello (2017), at 23.37, 23.51.

128. European Commission (2014b), p 4.

129. See Agrawal et al. (2014), p 74 (finding that crowdfunding platforms charge an initial fee of 4–5%); an unpublished LL.M. master thesis at the University of Liechtenstein revealed a larger variety, and overall higher costs than Agrawal et al., see Steib (2016).

130. Agrawal et al. (2014), p 74.

131. See Arts. 5(1) and 6 UCITSD; Art. 6(1) AIFMD; Art. 14 EuVeCaR (registration); Art. 14 EuSEFR (registration); Arts. 5, 6 ELTIFR; Art. 5(1) Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (MMFR) [2017] OJ L169/8-45; Art. 5 MiFID II; Art. 8 CRD IV.

132. See Arts. 6, 7 UCITSD; Arts. 6–10 AIFMD; Arts. 7–10, 12–14 EuVeCaR; Arts. 7–10, 12–14 EuSEFR; Art. 7 ELTIFR (referring to AIFMD); Arts. 5, 6 MMFR (referring to UCITSD and AIFMD); Arts. 9 et seq. MiFID II; Arts. 10 et seq. CRD IV.

133. See Arts. 6, 7 UCITSD; Arts. 6–10 AIFMD; Arts. 7–10, 12–14 EuVeCaR; Arts. 7–10, 12–14 EuSEFR; Art. 7 ELTIFR (referring to AIFMD); Arts. 5, 6 MMFR (referring to UCITSD and AIFMD).

134. See Câmara (2015), pp 237 et seq.; European Commission (2010), Commission Staff Working Document: Corporate Governance in Financial Institutions: Lessons to be Drawn from the Current Financial Crisis, Best Practices; accompanying document to the Green Paper Corporate Governance in Financial Institutions and Remuneration Policies, SEC(2010) 669 (2 June 2010).

135. See Arts. 10–15 UCITSD, Arts. 12–19 AIFMD; Arts. 7, 10–13 EuVeCaR; Arts. 7, 10–13 EuSEFR; Art. 7 ELTIFR (referring to AIFMD); Arts. 5, 6 and 12, 22 MMFR.

136. See Art. 24 AIFMD; Arts. 39 et seq. MiFIR (product intervention).

137. See Zetzsche and Eckner (2015), pp 323 et seq.

138. Zetzsche and Eckner (2015).

139. See Art. 51(1) UCITSD; Arts. 15, 16 AIFMD; Art. 7 ELTIFR (referring to AIFMD) with additional rules in Arts. 5(2) and 23(6) ELTFIR; Arts. 21–25 MMFR (EuVeCaR and EuSEFR as low key regulation do not provide explicitly for risk management).

140. Klöhn et al. (2016), p 65.

141. See CAMAC (2014), pp 21 et seq. (detailing the approaches in New Zealand, Canada, and the US) as well as s. 738C and Chapter 7 of the Australian Corporations Act 2001, as amended by the Australian Corporations Amendment (Crowd-sourced Funding) Act 2017 (No. 17/2017); IOSCO (2017), p 68.

142. See UK FCA (2014) Policy Statement 14/4; Ferrarini and Machiavello (2017), at 23.42 (detailing the UK approach). For an overview of implementation in Europe, see ESMA (2015) (stating that 14 MiFID-regulated crowdfunding platforms are licensed in the UK, two in the Netherlands and each one in Italy and Germany). On the platform-focused approach/regulation in France, see European Commission (2015c), pp 63 et seq. See also Bonneau (2014), p 5. For a comparative overview of crowdfunding platform regulation in Europe see Hooghiemstra and de Buysere (2016), pp 159–163.

143. ESMA (2014a), p 28.

144. For Italy, see Legislative Decree No. 179 of 19 October 2012, subsequently converted into Law No. 221 of 17 December 2012, was implemented by Consob Regulation No. 18592 of 26 June 2013 (drawing on MiFID for equity based crowdfunding models); Nigro and Santoro (2014). The MiFID-style licensing requirements imposed minimum costs on the platforms which they will transfer to issuers that are funded via the platform and make new entry in the market for crowdfunding platforms more expensive, see Gabison (2015), p 22. Some commentators deem this law a nuisance rather than nurture of the crowdfunding development. See d’Ippolito et al. (2016) (referring to the MiFID suitability test as main hindrance for the Italian crowdfunding scheme); Aschenbeck-Florange et al. (2013), pp 24 et seq.

145. Note that this approach differs from the exemptions stated in Art. 3 MiFID for domestic bespoke regimes, cited in European Commission (2016b), p 19.

146. See Annex I A(1) and (2) of MiFID II.

147. See Annex I A(8) and (9) of MiFID II.

148. CRD IV, Art. 29(3).

149. CRD IV, Art. 29(1).

150. See Arts. 95 et seq. CRR and Art. 15 MiFID II.

151. See Art. 16(7) MiFID II.

152. MiFID II recital (9) and Art. 6(f) of Commission Delegated Regulation (EU) 2017/566 of 18 May 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards for the ratio of unexecuted orders to transactions in order to prevent disorderly trading conditions [2017] OJ L87/84-89; MiFID II recital (15) (45–48), (51–52) (57) (59) and Arts. 27, 29, 33–36 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive [2017] OJ L87/1-83.

153. Commission Delegated Regulation (EU) 2017/565, recital (15) (75–76) (91) (100) (116).

154. Commission Delegated Regulation (EU) 2017/565, recital (61–62) (65–66), Arts. 36–37.

155. Commission Delegated Regulation (EU) 2017/565, recital (1) (74) (82) (114), Arts. 50, 89.

156. Commission Delegated Regulation (EU) 2017/565, recital (76); see recital (76) and Art. 24(9) of MiFID II.

157. Commission Delegated Regulation (EU) 2017/565, recital (40–41), Arts. 2(5), 27.

158. Commission Delegated Regulation (EU) 2017/565, recital (1) (28) (93) (96–98) (113–114), Arts. 21(a)(e), 22.2(c) and 3(b), 59–62, 76, 83–84.

159. Commission Delegated Regulation (EU) 2017/565, recital (90) (102–108), Arts. 59.4(m), 64–66.

160. Commission Delegated Regulation (EU) 2017/565, recital 44–46, at pp 29 et seq.

161. Commission Delegated Regulation (EU) 2017/565, identification of the target market by the distributor: categories to be considered, recital 26–27, at p 9.

162. See Della Negra (2016), pp 160 et seq.; see recital (15-18) (20), Arts. 9, 10 of Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits [2017] OJ L87/500-517; ESMA (2016); ESMA (2014b), para. 2.7.

163. Art. 16(3) sub 6 MiFID II.

164. Art. 16(3) MiFID II, sub 5 (‘An investment firm which manufactures financial instruments shall make available to any distributor all appropriate information on the financial instrument and the product approval process, including the identified target market of the financial instrument.’). On MiFID II’s target market requirement see recital (17–20), Arts. 9 (1)(9)(11–14), 10 (1)(2)(3)(5)(7)(8) of Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits [2017] OJ L87/500-517; ESMA (2016), pp 5 et seq.; Brenncke (2015), p 1173.

165. See ESMA (2016), recital 39, at p 12 and related to distribution of products manufactured by entities not subject to MiFID II product governance requirements, recital 52–54, at p 31.

166. See Steib (2016).

167. Arner et al. (2016), p 1271.

168. Report of Cambridge Centre for Alternative Finance in partnership with KPMG and CME Group Foundation on Sustaining Momentum, supra n. 64 (This threshold is equal to 500 funding decisions if we assume that the average funding contribution amounts to 500 EUR. Data as to 2015 and 2016 suggest that the average contribution is a little less than that amount).

169. See Spindler (2017), pp 139–142.

170. While the threshold we propose is to a certain extent arbitrary (and could be raised to EUR500,000 or EUR1,000,000 with little effort), the EUR100,000,000 threshold proposed by Hooghiemstra and de Buysere (2016), p 163, is too high due to the risk imposed on investors.

171. We have addressed the argument that crowdfunding platforms are too small to provide a risk to the financial system supra Sect. 2.2.

172. Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No. 1093/2010, and repealing Directive 2007/64/EC [2015] OJ L337/35-127.

173. European Commission (2014b), p 6. A recent European Commission consultation on crowdfunding showed that one in four respondents considers the risks of fraud or misleading advertising in crowdfunding too high to even participate.

174. Bradford (2015), p 377.

175. The recent proposal by the European Commission for a Crowdfunding regulation (supra n. 11) follows the manager regulation approach laid out in this article, but adds additional disclosure and marketing rules for European Crowdfunding Service Providers not licensed under MiFID.

176. Otherwise crowdfunding markets could render markets for lemons, see Ibrahim (2015), pp 591 et seq.; Tomboc (2013–2014), pp 263 et seq.

177. The ‘regulatory stimulus cycle’, where policymakers react and contribute to boom and bust cycles of financial markets is prominently examined. See Gerding (2014).

178. In fact, whether regulation will dry out innovation is a question of market maturity. The largest European crowdfunding market—the UK—draws on a MiFID-style platform regulation, which is even more stringent than the one suggested herein.

179. Supra n. 11.

Authors and Affiliations

1. Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics and Finance, University of Luxembourg, Luxembourg, Luxembourg

   Dirk Zetzsche

2. Director, Center for Business and Corporate Law, Heinrich-Heine-University, Duesseldorf, Germany

   Dirk Zetzsche

3. Ph.D. Candidate, University of Zurich, Zurich, Switzerland

   Christina Preiner

4. Trainee-in-law, Gasser Partner, Vaduz, Liechtenstein

   Christina Preiner

Corresponding author

Correspondence to Dirk Zetzsche.

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