Business | Markets

Margareta Pagano: Europe bangs the crowdfunding drum

 
The Euro in front of the headquarters of the European Central Bank (ECB) in Frankfurt
Reuters
Margareta Pagano
22 April 2014

Who would have thought it? The European Commission has just published a remarkable policy paper extolling the virtues of crowdfunding as a great way to finance small companies and stimulate growth.

Indeed, the Brussels policy wonks are so gaga over the power of this means of alternative finance to transform economies that they call their communiqué Unleashing The Potential of Crowdfunding in the European Union.

The EC paper, which was presented in March to the European Parliament and which we report here exclusively, argues that the long-term possibilities for crowdfunding are so enormous because for the first time entrepreneurs are able to connect directly with potential investors around the world. The paper’s authors see benefits across the board for companies: lower costs for finance, administration, help with marketing as well as the potential to improve research and innovation.

But wait — there’s even more that’s positive. The communiqué also warns that member governments should tread carefully in how their national regulators treat the new phenomenon: “The danger is that too burdensome and premature regulatory action could stymie the development of crowdfunding.”

It also asks whether “there are rules that are unnecessarily burdensome in the crowdfunding context and which should be adapted to the needs of users to help crowdfunding fulfil its potential, in particular for SMEs”. What’s more, it suggests that national governments should explore the possibility of matching private and public finance in co-investments for new businesses.

How extraordinary is that? We are so used to the EU being the dirigiste bogeyman that such enthusiasm for anything remotely radical that disrupts the status quo in the financial world, let alone something as democratic as crowdfunding, should come as a shock. What’s so interesting about the debate emerging about the nature of regulations is that those arguing for a lighter-touch regulation don’t fit into neat political or ideological silos.

Rather, the greatest champions of crowdfunding often sit on the radical right-to-libertarian spectrum as well as the communitarian left, aka the EC. They are aware that the real significance of crowdfunding is the potential for it to be truly disruptive to the financial and banking system, not just by opening up channels of finance to those who have previously been excluded but also disrupting the system itself.

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Indeed, Andy Haldane, Bank of England director for financial stability, has predicted that by connecting the savers and entrepreneurs you even see the banking middlemen becoming surplus to requirements.

By far the most enthused about crowdfunding are the French. New socialist prime minister Manuel Valls is a fan, and due to publish rules in July that are expected to take a liberal approach, allowing investors to invest as much as they want in equity crowdfunding and lifting a draft limit that companies can only raise up to 3 million (£2.5 million). In the US, President Obama is a supporter. He has been backed by the right-wing Tea Party, leaving the centrist Democrats to fuss over how much money the public should be allowed to risk.

As anyone following the rapid growth of crowdfunding here in the UK will know, the debate over the level of regulations that the City watchdog, the Financial Conduct Authority, has introduced is reaching boiling point, particularly for equity crowdfunding.

Stephen Hazell-Smith, a fund manager and a founder of AIM, is furious with the FCA’s tough rules which state which and how many members of the public can invest in companies — up to 10% of “non-readily available assets”— claiming they are nonsensical and unenforceable: “It would be supremely ironic if the EU proved to be more open-minded than the FCA. People are allowed to bet on the horses what they want, so why not on companies?”

Another FCA critic is the PM’s ex-adviser, and champion of TechCity, Rohan Silva. He warns the regulator is harming innovation and enterprise by enforcing such stringent rules and is taking the crowd out of crowdfunding. Taking a more cautious approach is Julia Groves, chair of the UK Crowdfunding Association, who says while the new rules are “fair”, the devil will be in the detail of how the FCA implements them. The truth is that crowdfunding is unstoppable: a new project is being set up every three minutes somewhere in the world and in the UK in March £3800 an hour was being raised.

There are about 500 online platforms globally, more than half a million new companies were crowdfunded in Europe in the last year, and $22 billion (£13 billion) in new funds has been raised, an amount predicted to triple over the next few years. As venture capital, bank lending and angel investing dry up, a fantastic new pool of capital is being made available.

We won’t know what the Commission, which has set up a European Crowdfunding Stakeholder Forum, has to say about regulations until next year when it’s due to report back. For once, the Treasury should praise its continental colleagues for their foresight and Anglo-Saxon radicalism, and hopefully overturn the FCA’s heavy-handed and bureaucratic approach. It can tell them the joke doing the rounds: “I bought a share in a crowdfunded racehorse. Been careful not to invest more than 10% of my assets but now I can bet as much as I want.” Says it all.