European Union and Crowdfunding regulation: Should We Worry?

European Union and Crowdfunding regulation: Should We Worry?

european Union crowdfundingThe European Trade commission is taking notice of crowdfunding. According to an article from Reuters, they are thinking of adding a label or seal to crowd funding endeavors to indicate the quality of the effort. This would apply primarily to equity based or loan crowdfunding, where investors should expect to receive some sort of return on their investment.

A white paper issued by the Financial Conduct Authority says that while crowdfunding platforms have done a good job policing their own behavior, they are concerned that uninformed investors might not ask the right questions. They also point out that inexperienced business people might not mention all the information their customers need. The people at FCA are concerned about the potential for wrong-doing by unscrupulous business owners or loss of money by naïve investors.

At the same time, seasoned crowdfunders are concerned that over-regulation could harm crowdfunding by over-burdening its peer-to-peer lending platforms with excessive paperwork. This could cause the platform companies to need additional staff, costing them more money which would have to be passed along to companies and investors using their platforms. A staff that is too large and expensive or systems that slow down spontaneity could cripple the neighbor-helping-neightbor element of crowdfunding exchanges.

The good news, however, is that some countries in the EU are planning to create departments that would not only work specifically with crowdfunding companies, but would also support grass-roots lending and investing in small companies. They feel that encouraging these small entrepreneurs would boost the European economy and open doors for new businesses. Even so, some crowdfunding networks, such as the European Crowdfunding Network, are concerned that regulations by individual states within the Europe could develop into a maze of regulations that would prove difficult for both businesses and investors.

Arenas such as social crowdfunding, where participants donate money to a cause or rewards-based artistic endeavors are not as affected as equity crowdfunding. This is primarily because people who donated to social causes do not expect a personal return on their investment. People contributing to a rewards-based effort expect to receive only the advertised object given for their level of investment. Equity based crowdfunding gives shares to investors, just as they might in a more traditional business situation. For this reason, organizations dealing with financial matters are concerned that small investors, who have not done sufficient homework or who might not understand how investing in a business works, could lose their savings.

Europe is not the only geographical area where people are developing regulation for crowdfunding. There are bills under consideration in Canada and the United States, as well. Entrepreneurs and investors are understandably concerned about the outcomes. Thus, developing legislation that will support crowdfunding, while preventing wrong-doers from using this exciting new financial arena inappropriately, becomes a careful tightrope walk between creating a clunky vehicle that will hamper and harm and a light shield that will help participants collaborate. Therefore, both crowdfunding investors and more traditional businesses are keeping a weather eye on developments as legislators work to establish new rules.