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Crowdfunding with
  27+ regulators
  J u n e 7 t h , B r u s s e l s
  K r i s t o f D e B u y s e r e
Three legal barriers

1.Promotion restrictions are not designed with
  the internet in mind

2.Private or closely held company regimes may
  hinder new shareholders to underwrite

3.Financial services regulations may put
  platform operators in legal uncertainty
Promotion
                                restrictions
                                             Prospectus required,
            €5m                              Prospectus Directive
     (€2.5m until end of June
              ’12)

                                             Member states may
                                          choose their own regime.
                                             Thus: cross-border
                                          promotions may be costly
          €100 000                         Member states may not
                                            impose a prospectus
                        €0
NB 1: member states may also not impose a country-specific prospectus regime, even not in the zone
between €100 000 and €5m, if only 150 persons per member state are addressed, if only qualified
investors are addressed, or if tickets of minimum €100 000 are promoted.
NB 2: platforms that promote stakes in an intermediate platform entity, instead of the final
investee (often to reduce administrative barriers), will very quickly reach the €100 000 threshold.
Promotion
       restrictions
Possibilities for the internet age:

  Use exemptions that are based on an
  investment cap per investor (instead of
  exemptions that are based on the number
  or type of investors, or the total amount of
  the offering)?

  And/or offer a harmonized country-
  preempted regime below €5m (instead of
  almost 30 country-specific regimes, or a
  prohibitively expensive €5m+ regime)
Restrictions in
        company laws
Most startups opt for a “cheap” corporate regime: a
private or closely held company regime, instead of a
public company regime

These “cheap” regimes contain restrictions on
transfering shares, or accepting new shareholders:
good for family owned businesses, bad for
entrepreneurial growth companies

Company regimes are country-specific: information
costs and advisory costs remain high, both for
investors and entrepreneurs
Restrictions in
           company laws
Possibilities?

  Offer a company regime to entrepreneurial firms, that
  is cost-effective and open to accepting new
  shareholders (thus merging features of private & public
  company regimes), and which has a mechanism to issue
  shares that would fit the information age.

  Implement the regime Europe-wide, to reduce
  information costs, to prevent regulatory capture from
  national organizations or advisors, and to offer cross-
  border investors a regime that they understand and
  already know from their home state.
Restrictions from
investment services

A problem of platforms

The source of the problem: a combination of
uncertainty about interpretation, and a lack of
exemptions in the rules, allows regulators to
potentially place platforms in heavily regulated
regimes. This is a substantial risk for platforms.
Restrictions from
  investment services
Example & recommendation

 According to Directive 2006/48/EC, you must be
 licensed as a credit institution to be able to accept
 reclaimable funds from the public. So, what about
 platforms that allow their investors to reclaim their
 money, after a failed campaign?

 Recommendation: create legal certainty, by way of an
 exemption, that the platforms that care most about
 their investors, don’t risk the hardest regime
Restrictions from
   investment services
Example & recommendation

 According to Directive 2006/48/EC and 2009/110/EC,
 you must be licensed as a credit institution to be able
 to electronically store monetary value that can be used
 for payment transactions. So, what about platforms
 that display the amount of funds that an investor has in
 his virtual account, and that he can allocate to
 campaigns from investees?

 Recommendation: create legal certainty (exemption)
Restrictions from
    investment services
Example & recommendation

 When the AFIM Directive will be implemented (22
 July 2013), member states need a minimal regime for
 sub-€100m non-UCITS collective investment
 undertakings. Some member states already have/had
 such a regime. So what about platforms that act as an
 investment pool between companies & investors?

 Recommendation: create legal certainty (exemption +
 passport) that investment pool based platforms will be
 able to operate and promote Europe-wide, like the
 proposal for AFIM-exempted venture capital funds
Restrictions from
   investment services
The MiFID Directive is however the worst one:

 According to the MiFID Directive, a number of
 activities are regulated: placing of financial
 instruments, executions of orders on behalf of clients,
 reception and transmission of orders in relations to one
 or more financial instruments, services related to
 underwriting, operating a multilateral trading facility
 (and in the future potentially also an organized trading
 facility).
Restrictions from
     investment services
The MiFID Directive is however the worst one:

 It is too costly for a platform operator with cross-border
 intentions, to interact with all regulators, to solicit their
 interpretations of those MiFID regulated activities.

 Even if a platform operator would opt for the option to
 go for a MiFID passport, then the problem of client
 classification and obligations towards clients under
 MiFID (still) exists: complying with that, makes the
 platform substantially less appealing for users
Restrictions from
  investment services
Thus, offer legal certainty, by way of exemptions,
that allow platforms to operate within certain
boundaries, without facing awkward side-effects.

If no Europe-wide certainties and exemptions are
created, then the current trend will continue where
platforms come up with a wide variety of different
transaction models, to comply with the
administrative barriers and interpretations in one
country. This is trend is very investor unfriendly.

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Crowdfunding

  • 1. Crowdfunding with 27+ regulators J u n e 7 t h , B r u s s e l s K r i s t o f D e B u y s e r e
  • 2. Three legal barriers 1.Promotion restrictions are not designed with the internet in mind 2.Private or closely held company regimes may hinder new shareholders to underwrite 3.Financial services regulations may put platform operators in legal uncertainty
  • 3. Promotion restrictions Prospectus required, €5m Prospectus Directive (€2.5m until end of June ’12) Member states may choose their own regime. Thus: cross-border promotions may be costly €100 000 Member states may not impose a prospectus €0 NB 1: member states may also not impose a country-specific prospectus regime, even not in the zone between €100 000 and €5m, if only 150 persons per member state are addressed, if only qualified investors are addressed, or if tickets of minimum €100 000 are promoted. NB 2: platforms that promote stakes in an intermediate platform entity, instead of the final investee (often to reduce administrative barriers), will very quickly reach the €100 000 threshold.
  • 4. Promotion restrictions Possibilities for the internet age: Use exemptions that are based on an investment cap per investor (instead of exemptions that are based on the number or type of investors, or the total amount of the offering)? And/or offer a harmonized country- preempted regime below €5m (instead of almost 30 country-specific regimes, or a prohibitively expensive €5m+ regime)
  • 5. Restrictions in company laws Most startups opt for a “cheap” corporate regime: a private or closely held company regime, instead of a public company regime These “cheap” regimes contain restrictions on transfering shares, or accepting new shareholders: good for family owned businesses, bad for entrepreneurial growth companies Company regimes are country-specific: information costs and advisory costs remain high, both for investors and entrepreneurs
  • 6. Restrictions in company laws Possibilities? Offer a company regime to entrepreneurial firms, that is cost-effective and open to accepting new shareholders (thus merging features of private & public company regimes), and which has a mechanism to issue shares that would fit the information age. Implement the regime Europe-wide, to reduce information costs, to prevent regulatory capture from national organizations or advisors, and to offer cross- border investors a regime that they understand and already know from their home state.
  • 7. Restrictions from investment services A problem of platforms The source of the problem: a combination of uncertainty about interpretation, and a lack of exemptions in the rules, allows regulators to potentially place platforms in heavily regulated regimes. This is a substantial risk for platforms.
  • 8. Restrictions from investment services Example & recommendation According to Directive 2006/48/EC, you must be licensed as a credit institution to be able to accept reclaimable funds from the public. So, what about platforms that allow their investors to reclaim their money, after a failed campaign? Recommendation: create legal certainty, by way of an exemption, that the platforms that care most about their investors, don’t risk the hardest regime
  • 9. Restrictions from investment services Example & recommendation According to Directive 2006/48/EC and 2009/110/EC, you must be licensed as a credit institution to be able to electronically store monetary value that can be used for payment transactions. So, what about platforms that display the amount of funds that an investor has in his virtual account, and that he can allocate to campaigns from investees? Recommendation: create legal certainty (exemption)
  • 10. Restrictions from investment services Example & recommendation When the AFIM Directive will be implemented (22 July 2013), member states need a minimal regime for sub-€100m non-UCITS collective investment undertakings. Some member states already have/had such a regime. So what about platforms that act as an investment pool between companies & investors? Recommendation: create legal certainty (exemption + passport) that investment pool based platforms will be able to operate and promote Europe-wide, like the proposal for AFIM-exempted venture capital funds
  • 11. Restrictions from investment services The MiFID Directive is however the worst one: According to the MiFID Directive, a number of activities are regulated: placing of financial instruments, executions of orders on behalf of clients, reception and transmission of orders in relations to one or more financial instruments, services related to underwriting, operating a multilateral trading facility (and in the future potentially also an organized trading facility).
  • 12. Restrictions from investment services The MiFID Directive is however the worst one: It is too costly for a platform operator with cross-border intentions, to interact with all regulators, to solicit their interpretations of those MiFID regulated activities. Even if a platform operator would opt for the option to go for a MiFID passport, then the problem of client classification and obligations towards clients under MiFID (still) exists: complying with that, makes the platform substantially less appealing for users
  • 13. Restrictions from investment services Thus, offer legal certainty, by way of exemptions, that allow platforms to operate within certain boundaries, without facing awkward side-effects. If no Europe-wide certainties and exemptions are created, then the current trend will continue where platforms come up with a wide variety of different transaction models, to comply with the administrative barriers and interpretations in one country. This is trend is very investor unfriendly.

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