The regulation of the European crowdfunding industry adopted in October 2020 continues to move all stakeholders. But the initial euphoria of the "European Crowdfunding Service Provider Regulation" (ECSPR) has faded. One reason for this is the Schwarmfinanzierungs-Begleitgesetz (SFBG, engl. Crowdfunding Accompanying Act) – a law whose name is as unwieldy as its design. Find out what has changed since our first market observation.
The enthusiasm was great when the decision of the "European Crowdfunding Service Provider Regulation" (ECSPR) brought a uniform regulation of European crowdfunding platforms within reach. But it will not be that simple, because the regulations that apply across Europe must first be transposed into the respective national law. In Germany, this is the “Schwarmfinanzierung-Begleitgesetz” (SFBG). Among other things, it contains provisions on prospectus liability and supervision by the Federal Financial Supervisory Authority (BaFin). Overall, it is intended to strengthen investor and consumer protection in the long term.
So far, so good. But the devil, as so often, is in the details. The SFBG is an omnibus law in which several more or less related legislative initiatives have been combined into one law. However, it contains massive hurdles in its restrictive design, especially with regard to the crowdfunding component.
In the run-up to the passing of the bill, the two industry associations active in Germany, Bundesverband Crowdfunding (BVCF) and Verband Deutscher Kreditplattformen (VdK), have been actively educating the responsible politicians about the negative consequences. The focus is particularly on the liability structure for platforms and project initiators, which is handled more restrictively than in any other existing capital market law. The objection of the associations is that this does not promote crowdfunding as originally intended by the ECSPR, but hinders it compared to other public financing instruments. The “Crowdfunding Accompanying Act” would become a Crowdfunding Prevention Act.
German platforms seeking an ECSPR licence could be forced to apply for the licence in another EU country where regulation is more appropriate.
The draft also met with incomprehension outside the German crowdfunding industry and even in the leading media. On 6 May 2021, the day the law was to be passed, the Frankfurter Allgemeine Zeitung ran the headline "A disaster", illustrating the full extent of the SFBG. An english article about the situation you can read in the industry medium Crowdfund Insider here.
Now we would like to tell a hero story. The one about how an entire industry managed to stop a draft law at the last second with combined strength, tireless crisis meetings and sometimes pleading emails to the responsible state secretaries. Unfortunately, this was not the case – the efforts were, but not the result.
On the evening of 6 May 2021, starting at 10:20 pm, the responsible parliamentarians of the respective parliamentary parties presented their statements on the SFBG in the German Bundestag. The only party that actively supported the German crowdfunding industry was the FDP, represented by Frank Schäffler, who spoke passionately against the restrictive design. Our photo shows Innovestment's managing director during his statement.
But the rejoicing came too soon, the effort was in vain. At 10:58 pm, the law was passed. The SPD and CDU/CSU voted in favour, the FDP and the AFD against (the latter, as with everything that comes from Europe). Bündnis 90/Die Grünen and Die Linke abstained.
Now the only hope was that the Bundesrat (federal council) would take countermeasures in its session on 28 May 2021. The possibility existed, and fortunately it happened in the end. North Rhine-Westphalia tabled a motion for a resolution on the liability clause and thus instructed the federal government to make further improvements. A sigh of relief. Now it is up to the Federal Government to follow up on this motion. On a positive note, the Bundesrat clearly emphasises that "crowdfunding is an important vehicle for raising liquidity, especially for start-ups".
Parallel to the preparations in Germany, the submission of the ECSPR consultation by the European Securities and Markets Authority (ESMA) was also underway. The consultation was an opportunity for the industry to respond to the technical design of the ECSPR. Coincidentally, the levy was also due on 28 May 2021.
It was preceded in the weeks before by intensive consultations between platforms within the European Crowdfunding Network (ECN/Eurocrowd) and its ECSRP working group.
Essentially, this is about clarifying how certain legal texts are interpreted and ultimately implemented by national regulators. The discussions at national level had shown that the same regulations are interpreted quite differently in different Member States. Therefore, it was particularly pointed out how important it is to set a clear framework in order not to end up with regulatory competition between the Member States.
If you are interested in the industry representatives' views and discussion on the ECSPR, you can find the recording of the online event on the ECSPR entitled "ECSPR - Opportunity or Threat?" of the ECN here.
We also cover the topic in our upcoming Money-Mittwoch on 9 June at 17:30 (in German). You can find more information on our events page.
If you have read Part 1 of our market observation on the ECSPR, you will certainly remember the announcement of the merger between the British platforms Seedrs and Crowdcube. However, this is now history.
On 25 March 2021, the British regulator Competition and Markets Authority (CMA) vetoed the merger. The concerns regarding market power were too great. The basis of the decision was the explicit consideration of the equity-based crowdfunding market segment in the UK. Here, Seedrs and Crowdcube together have a market share of 90 percent. However, the importance for the startup financing market was disregarded, where the merged company would have represented an important building block in the financing landscape alongside VCs, business angels, etc.
We therefore think the CMA's decision is a pity and wish our colleagues from Seedrs and Crowdcube all the best for their individual paths. May they continue to provide many startups with financing and investors with low-threshold investment opportunities. Shortly after the CMA's decision, Seedrs announced on their blog that they will accept the decision and have already raised fresh capital for further growth.
It is apparent that many questions regarding the implementation of the ECSPR have not yet been conclusively clarified. Therefore, in the coming weeks, it will be important for the national regulatory authorities to clarify the questions in close coordination with the industry. After all, the new European regulation will already come into force on 10 November 2021. From then on, a twelve-month transition period will start for platforms.
As a platform operator and market participant, we find it regrettable that the implementation of the ECSPR into German law has not been given priority in Germany. This is shown by the fact that the potentials are not only not recognised, but deliberately over-regulated. Whether scandals like Prokon or Wirecard have led to this? In any case, the fear of being scolded by consumer protection agencies seems to be too great, which is why the German policy-makers decided to overregulate in order not to make oneself vulnerable.
Certainly, the legislative process was too short to catch up with all parties in depth. And presumably our own industry has failed in recent years to demonstrate its already existing and, above all, future importance for Germany as a business location. This must now be made up for. We remain optimistic that at least the liability regulations will be revised by the federal government. And ultimately, both the ECSPR and the Schwarmfinanzierungs-Begleitgesetz (Crowdfunding Accompanying Act) will be reviewed for their effectiveness in 2023. So any need for adjustment can still be identified. We remain committed and will continue to keep you informed of developments.