Introduction to crowdfunding and peeling back the layers of EU and national legislation. Challenges to Capital Markets Union and cross-border investment with a particular look at the Prospectus Directive.

1. Crowdfunding Introduction – UK Legal Perspective
Paul Massey
General Counsel, Crowdcube
Director of the UK Crowdfunding Association
Director European Crowdfunding Network
24.04.16 British German Jurists Association Conference Bristol

2. Contents
Introduction to Crowdfunding
Case Study - Sugru
Brief Introduction to the Legal layers
– UK National regulation – FCA rules and financial
promotion, tax incentives
– Due diligence and co-investment
– EU – challenges to Capital Markets Union and
Digital Single Market for crowdfunding
– Prospectus Directive

3. Use the Internet to raise finance from the Crowd (let’s define that later)
Crowdfunding sector’s success rests on two pillars
1. Financing Innovation to create jobs, growth and investor returns
2. Investor Protection to maintain reputation

4. Individuals give
money in return
for a reward or
recognition,
product or service
DEBT EQUITY
DEBT BASED
CROWDFUNDING
Individuals buy a
security, normally a
form of bond, to
earn interest and
their capital back.
P2P
Individuals lend
money to other
individuals to earn
interest and their
capital back
.
P2B
Individuals lend
money to
businesses to
earn interest and
their capital back
These fall under the new regulated
activity of Facilitating loans via an
electronic platform. The FCA calls
this loan based crowdfunding
A regulated activity
that the FCA calls
Investment based
Crowdfunding
PEER TO PEER LENDING
A regulated activity
the FCA includes in
Investment based
Crowdfunding
INVOICE
TRADING
Individuals buy
invoices at a
discount, then sell
them back to
firms at a profit.
Not regulated by
the FCA
REWARDS
No financial return
so not regulated
by the FCA
Individuals buy
shares in early
stage businesses
for capital growth
or dividends
Brief overview of the UK Market

5. Case Study - Sugru
So what does an equity crowdfunding campaign
look like?

6. Case Study - Sugru
https://www.youtube.com/watch?v=TU39Tkemnq0

7. Community of Makers

8. Crowdfunding Success!
Crowd Capital = finance + brand ambassadors

9. UK Alternative Finance –Market size
Source: Nesta Cambridge University 2015 Crowdfunding Report

10. UK Alternative Finance –Market size
Source: Nesta Cambridge University 2015 Crowdfunding Report

11. UK Alternative Finance –Market size
Source: Nesta Cambridge University 2015 Crowdfunding Report

12. UK National Regulation
Equity Crowdfunding regulated by
the Financial Conduct Authority
Investment opportunities in ‘non-readily realisable securities’ can only be offered
to:
• professional clients,
• retail clients who are advised,
• retail clients classified as corporate finance contacts or venture capital
contacts,
• retail clients certified as sophisticated or high net worth, or
• retail clients who confirm that they will not invest more than 10% of their
net investible assets in these products.
Appropriateness test ensures retail clients understand risks of investment

13. UK National Regulation
FCA’s principles for business include:
• Treating Customers Fairly
• Financial Promotions must be fair, clear and not misleading
Platforms carry out due diligence on pitch content and corporate
structure
Disclosure and risk warnings
Co-investment with Venture Capital and the crowd
• Review share rights such as liquidation preference and anti-dilution and ensure
the crowd is treated fairly alongside venture capitalists.

14. UK National Regulation
Investor Tax Relief
SEIS – Seed Enterprise Investment Scheme
• Raise up to £150,000 (total company limit)
• Investors receive 50% income tax relief
• No capital gains tax to pay
EIS – Enterprise Investment Scheme
• Raise up to £5 million in any tax year
• Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year)
• No capital gains tax to pay
Various qualifying conditions, including sector exclusions.
Qualifying shares must be held for 3 years.

15. Legal Issues – EU
Challenges to Capital Markets Union and Digital Single Market
Prospectus Directive
Prospectus required for “offers of transferable securities to the
public”
Costly for SMEs / hard for retail investors to understand
Questions around Prospectus laws at national and EU level:
• What is an “offer to the public”?
• What is a “transferable security”?
• Which Member State’s rules apply (home vs host member
state prospectus exemptions; country of origin principle)?

16. Legal Issues – EU
Challenges to Capital Markets Union and Digital Single Market
Prospectus Directive
Article 1
Purpose and scope
1. The purpose of this Directive is to harmonise requirements
for the drawing up, approval and distribution of the prospectus
to be published when securities are offered to the public or
admitted to trading on a regulated market situated or operating
within a Member State.
2. This Directive shall not apply to:
(h) securities included in an offer where the total consideration
for the offer in the Union is less than EUR 5 000 000

17. Legal Issues – EU
Challenges to Capital Markets Union and Digital Single Market
Prospectus Directive
Has not resulted in harmonised prospectus requirements!
Member states apply different exemption thresholds between
€100k and €5 million
ECJ case demonstrates it is not clear why they do this:
Opinion of AdvocateGeneral E.Sharpston in ECJ case C-441/12
42. … I consider that an issuer … would be entitled to rely on the
Prospectus Directive as amended … and that national courts
would be obliged to disapply any domestic rule requiring such
publication.” (see position paper on final slide for full text)

18. -1
0
1
2
3
4
5
6
0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000
GrowthRate
Prospectus Exemption Level €
Challenges to Capital Markets Union and Digital Single Market
Prospectus
exemption Growth Rate
Austria 250,000 0.4
Belgium 300,000 1.1
Denmark 1,000,000 1.1
France 1,000,000 0.2
Finland 1,500,000 -0.4
Germany 2,500,000 1.6
Netherlands 2,500,000 1
Sweden 2,500,000 2.3
Ireland 5,000,000 5.2
Spain 5,000,000 1.4
Italy 5,000,000 -0.4
Luxembourg 5,000,000 5.6
Portugal 5,000,000 0.9
United Kingdom 5,000,000 2.9
I plotted Prospectus Exemptions against GDP Growth for Western Europe – 2015 data

19. Legal Issues – EU
Challenge to Capital Markets Union and Digital Single Market
National Laws may override the EU’s regulatory passport
regime. Examples:
• Investor protection requirements vary
• Notary requirements in certain jurisdictions
• Spain requires NIE number and escrow arrangements
• France requires local unique authorisation
6 EU countries now have their own crowdfunding regulations
• Lots of work for lawyers!
• Net result is less cross-border investment and hard for
platforms to enter new markets in EU

20. Positive Change on the horizon in 2016…
…if 28 Member States agree
Prospectus Regulation proposal:
- SME Growth Prospectus – simplified Q&A format
- Increase of the Prospectus exemption under Article 3
- Parliament proposes up to €20m exemption threshold
- Council proposes up to €10m exemption threshold
- Threshold level set by Member States above €1m
- ESMA (European Securities and Markets Association) notified of
national disclosure requirements
Crowdfunding sector is consulting with the EU on the proposal and
calling for pan-EU Prospectus exemption and higher threshold
http://eurocrowd.org/2016/04/20/crowdfunding-platforms-welcome-progress-prospectus-directive/

21. Thank you!
Danke!
Paul Massey
Twitter: @paulmassey
paul@crowdcube.com