Yesterday a group of academics, crowdfunders, and other relevant parties offered a framework for crowdfunding in the EU, titled appropriately, “A Framework for European Crowdfunding.” Contributors came together from Austria, Belgium, Finland, France, Germany, Great Britain, The Netherlands, Poland, and Portugal to emphasize the importance of crowdfunding for Europe’s future success. Many of their messages are highly relevant to the crowdfunding landscape in the United States as well, as the SEC continues the rule making process.
The 40-page plan begins by saying, “New forms of economic activity may gain foothold and begin to disrupt established ways of doing business. Crowdfunding is arguably the most visible instance at present of such a reshaping being under way. As a phenomenon, it prompts us to revise our understanding of and approaches to small to medium scale fundraising across most economic activity.” Due to the ongoing economic crisis, the EU needs to not only accept but encourage change and innovation, particularly in the form of crowdfunding. The old models no longer exist in a vacuum, and looking to them to encourage future success alone is foolhardy. Rather, they say that the EU should look to new and democratic forms of funding–namely crowdfunding–in order to help small and medium sized businesses get the capital and support they need to become competitive in the marketplace and increase employment opportunities–and economy–across the EU.
They note that the scope of crowdfunding goes well beyond raising money, and that “not only can crowdfunding provide start-up capital, it espouses several non-financial benefits: validation of product features, market segmentation, price and demand, pre-sales and customer feedback as well as word-of-mouth marketing and a stable, committed shareholding structure.” Because investors choose to fund projects they care about, they often remain invested and interested in the company well after they have paid the initial capital. The end-user becomes a part of the creation process, which increases the “pool of innovative ideas” and the opportunities for word-of-mouth marketing. In order for this highly involved model of crowdfunding to work and maintain a high level of integrity, the creators of the framework recommend a three pillar approach: Regulation, Education, and Research
Their suggestions regarding regulation center on the idea that there needs to be a fine balance between over and under-regulation. The former would cripple the market, but the latter would leave it vulnerable to fraud. Fraud protection, they say, is potentially the most important issue to address in order to maintain the integrity of crowdfunding. They list a number of ways the industry can protect against fraud, including utilizing social media to do background checks on entrepreneurs and encouraging crowdfunding platforms to prioritize fraud prevention and vetting services. As the number of crowdfunding platforms increases and the market becomes more saturated, these services will become essential for platforms to remain competitive. Thus, these platforms can have a certain degree of self-regulation that may not need to be mandated, though that remains up for debate.
Next the framework recommends education across the board: stakeholders, funders, and entrepreneurs. They believe these groups should be educated on the benefits of crowdfunding and the various types of crowdfunding that exist, namely donation, reward, lending, and equity. Crowdfunding in general requires a certain degree of intrinsic motivation on the part of the funder, but the four types inspire people to varying degrees beyond that emotional connection:
- Donation involves no additional tangible rewards
- Reward-based funding offers some kind of product in return for donations
- Lending offers to repay the donation with interest
- Equity allows funders to buy shares in the company
Each of these plays to different markets (e.g., donation to non-profits and NGOs, rewards-based to consumer product companies, equity to early-stage businesses). By educating the various factions involved in crowdfunding on these topics, the framework suggests that fundraisers will be able to run competent campaigns and funders will have a greater understanding of what to expect when they donate their money.
Finally the framework calls for research. They believe there should be a professional industry body and that within and beyond that, the industry should encourage academic and third-party research to increase transparency within the industry and drive competition and innovation.
By doing all of these things, the framework hopes that crowdfunding can become a viable option for driving new business throughout Europe. They believe it is “one of the most promising tools to help enable economic growth, job creation, and innovation.” They say, “We believe crowdfunding is one of the most viable means of funding new ideas, small business and job creation across Europe. It is a highly democratic tool that is posed to have a disrupitve impact on community, start-up and consumer finance by allowing value creation on many levels, not just financial.” Furthermore, they believe that crowdfunding, because of its democratic and broad-ranging nature, can help combat future economic recessions. Because crowdfunding is controlled by the masses, and not by a few select banks, it combats the “too big to fail” financing model and spreads the wealth among many people so that even if some projects do fail, it does not cause a global economic disaster.
Crowdfunding, they say, is the future for the European small and medium business community. It will allow them to grow to their full potential if they can find a way to regulate it within reason. We here at Launcht see many parallels between the concepts put forward in the framework document and with the regulatory process we are working through with the SEC and FINRA. To get an idea of what these concepts look like when they are being translated into regulation please keep an eye on our Crowdfunding Equity blog and our work with The Crowdfund Intermediary Regulatory Advocates (CFIRA) We can only hope the same is true for the United States. To see our thoughts on the future of crowdfunding, click here.