lunes, 24 de marzo de 2014

An introduction to #crowdfunding in the European Union: Markets and Regulation

One of the major impacts of the Great Recession we are currently living is the decrease in the access to loans. All the companies are suffered with this hardening of the conditions to access to financial sources, but specially the SMEs and innovative projects. This fact will slow the growth and recovery because we need more startups to create the needed job for recovery and, according with the OECD"young firms with fewer than 50 employees represent only around 11% of employment, but they generally account for more than 33% of total job creation in the business sector; their share of job destruction is around 17%".

If the traditional sources of credit have disappeared, we need to relay on alternative ones as crowdfunding, the collective effort of individuals who network and pool their money to support efforts initiated by other people or organizations. Crowdfunding it is not as innovative as some people believe, in the XIX century was used as an effective way to erect monuments as the Statue of Liberty. What is innovative is the massive way we can apply this financial procedure thanks to the Internet.

The internet has helped to create a new market for crowdfunding  The market of the crowdfunding platforms (CFP).  According with the "Crowdfunding Industry Report",  in 2012 there were more than 500 CFPs with an estimated business volume of 2,806 $ million.

Not all the crowdfunding initiatives follow the same pattern. Depending on the expectations and type of reward expected by the funders we can distinguish for types of crowdfunding initiatives
  • Donation: a donor contract without existential reward (40% of CFP market)
  • Reward: purchase contract for some type of product or service (62 % of CFP market)
  • Lending: credit contract, credit is being repaid plus interest (20% of CFP market)
  • Equity: shareholding contract, shares, equity-like instruments or revenue sharing in the project/business, potential up-side at exit (21% of CFP market)
Although currently the reward model has the biggest share of the market,  the equity model has the biggest CAGR.

As fulfilling the expectations of the funder is critical to the survival and growth of the CFP market, government need to regulate in a more strict way the crowdfunding model, paying attention to who can operate a crowd funding platform. The prevention of fraud and the mitigation of risks are the axes of the needed regulation.

Once more, the USA has overtaken Europe in the regulation of crowdfunding. The Jumpstart Our Business Startups Act or JOBS Act has included a chapter dedicated to the regulation of crowdfunding  The Act for seen a register of CFPs and establishes financial limits to the crowdfunding model.

As the larger the potential number of funders the bigger the CFP market could be, there is not alternative for Europe but a shared regulation of crowd funding in the European Union. An EU Directive or Regulation would create the needed single market for crowdfunding, with cross-border guarantees to the potential funders. The report "A Framework for European Crowdfunding" provides extensive details of the benefits and barriers of the European CFP market. The focus of this common EU regulation for CFPs should be: operational and financial transparency, security of information and payments, platform functionality, customer protection, and operational procedures.

Crowdfunding looks as a model with enough potential for funding startups, but this potential will never be reached without a flexible but effective regulation at the European level.

3 comentarios:

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