08.10.2020

BRUSSELS INTRODUCES NEW EUROPEAN RULES FOR COLLECTIVE FUNDING OF SMALL BUSINESSES

The European Parliament adopted rules on 5 October that facilitate EU collective funding platforms linking start-ups and investors. The rules aim to make it easier to operate across the single market on platforms that enable investors to provide capital to companies.

The legislation expands the access of start-ups and small companies to potential investors and provides investors with a greater choice of projects and better protection. Collective funding platforms operating in more than one EU country will have to comply with a single set of basic requirements instead of different rules for each country. The rules will apply to providers of collective funding services who raise up to 5m euros per project per year.

What is collective funding?

Start-ups and innovative companies often have difficulty obtaining financing in traditional ways such as bank loans. Collective funding service providers allow such companies to connect and raise funds from many small investors. Fundraising is usually done through digital platforms.

Existing national rules on collective funding are not the same and legal uncertainty is an obstacle to investing in projects in other countries. This also limits opportunities for companies that want to attract investment, especially if they are funding in smaller markets.

Finding funding from small businesses and people with innovative ideas will now be much easier. The adoption of the new rules will facilitate collective funding, the so-called crowdfunding, in the EU. This type of funding is a way to raise funds for projects and businesses. It allows a large number of people to raise money through online platforms and is most often used by start-ups or growing companies as a way to access alternative means. The regulation harmonizes the rules for such platforms in the EU, which will ensure transparency, legal protection and low costs. If a start-up entrepreneur has not yet started his business, he will soon be able to register in any collective financing platform in Europe and seek funds from consumers, who may be the most ordinary citizens looking for a meaningful investment in their savings. Once the amount has been collected and the business has started, investors can receive, depending on the conditions of the platform, a percentage of the business, the funds they have invested plus interest, or a product produced. This model works effectively in the United States.

How the new rules protect investors

One of the major risks of collective funding is that investors' decisions are not driven by data, but are influenced by emotions. Bankruptcy of small companies and delays in the delivery of goods are among the problems that investors fail to anticipate.

In addition to monetary resources, a successful collective funding campaign can highlight the potential and public confidence in the business, which will make it easier to find additional funding from other financial sources that will accept the project as less risky. Businesses often start successfully after such a campaign because they have already garnered popularity and support from potential customers during the fundraising campaign. There are a number of types of collective funding. The best known are collective funding through partner lending, equity and compensation, most often in the form of a product or service voucher when they are ready.

The new EU rules require collective funding platforms to provide clear information on the potential financial risks for each project. Investors must have access to an investment prospectus for projects prepared by the project organizer or the platform.

The new rules for collective funding service providers will apply one year after their publication in the Official Journal of the EU.