Back in 2008, the credit crunch following the Global Recession was one of the triggers for the emergence of equity crowdfunding. Could it help today like yesterday sustain entrepreneurship? Europe has always lagged behind in the creation of new firms, a thing which could worsen in the current pandemic climate but that is pivotal for economic growth. So, how could Europe benefit from crowdfunding nowadays?
To try to figure out if that would be the case, let’s focus on the state of the art of the industry. “I can say that crowdfunding is going through an extremely positive period throughout Europe,” argues Francesca Passeri, Director of Public Affairs of European Crowdfunding Network, the European trade body for the industry. “The most recent data by the University of Cambridge’s Cambridge Centre for Alternative Finance show that the volume of transactions in Europe in 2018 reached 18 million Euros, an increase of 52% compared to 2017. More recent national data confirm this trend in the industry also for 2019 as also validated by our members on several occasions.”
Nevertheless, Passeri claims, such a picture wouldn’t suffice to figure out what’s going in the market. This is why, she suggests, it is necessary to look at how new and old players interact. “I think it is a good practice to analyse the state of the art of crowdfunding in Europe also looking at the number of partnerships with institutional players (e.g. banks, investment funds, private equity and guarantee mechanisms) that have been established in recent years.”
Two are the main reasons for this, she adds: “The first is that crowdfunding portals are becoming more and more accredited in the eyes of traditional financial market players as reliable and quality partners; the second is that these partnerships have an extremely positive impact on both companies that decide to finance themselves through crowdfunding and investors or private lenders because they promote a virtuous cycle of project selection and therefore quality offers.”
“There are two immediate challenges for the crowdfunding industry: the introduction of the European legislation and the integration of social and environmental sustainability considerations.”Tweet
However, the regulatory framework plays a pivotal role in these dynamics. “We hope that the introduction of the European Crowdfunding Regulation (i.e. ECSP) will only reinvigorate this trend, allowing portals, companies and investors to benefit from the “common” dimension of the single European capital market.”
This doesn’t come without its challenges though. “From my point of view, there are two immediate challenges for the crowdfunding industry: the first is the introduction of the European legislation and the consequent coordination of national laws, while the second is broader in scope and has to do with the integration of social and environmental sustainability considerations.”
More in particular, “The introduction of the harmonised European legislation will certainly represent a great opportunity for the industry as a whole. However, it would be unwise ignoring the challenges of adapting national legislation, especially for regulators who will have to find effective ways of connecting with ESMA. One of the risks, in my view the most pressing one, is not to be ready at the end of the transition period (i.e. 12 months after publication in the Official Journal of the European Union), and to be forced to ask for an extension thus delaying the whole process. Efficient management of such a risk would require cooperation between national regulators and the industry’s representative bodies from the very beginning of the process so that risks can be managed and the understanding of new procedures and opportunities facilitated.”
The second challenge is related to social and environmental sustainability, “which will soon become essential in the financial system. To date, the Sustainable Finance Action Plan proposed by the European Commission responds – rightly so – to the urgent need to shift large flows of capital towards sectors and activities that meet the sustainability objectives set by the SDG and the Paris Agreement. The framework presented by the EU Commission is designed for large institutional investors, asset managers and multinationals, but over 90% of Europe’s business environment is made up of micro, small and medium enterprises. In this context, the challenge of crowdfunding will be to succeed in translating methodologies for monitoring and reporting ESG factors, making them applicable to companies targeting this tool and facilitating clear access to retail investors. As ECN we are already working in this direction, by opening a forum for comparison and collaboration between the most active portals in Europe and those that need support to approach the issue.”
Oliver*: Francesca, what’s next then for the European Crowdfunding Network?
Francesca Passeri: As mentioned, we have been working on a programme that certainly focused on sustainability issues. Another major focus for the future is providing support to national ecosystems in the transition process to ECSP: in this sense, we are already moving through various national clusters we usually cooperate with, but we aim to structure it as widely as possible. An additional point of attention will be facilitating and exploring new opportunities for institutional partnerships between crowdfunding platforms and other actors: we want to make the work done by collaborating with the European Commission, the European Investment Bank and the European Investment Fund to a higher level, moving from evaluations and good practices on a case-by-case basis to a more standardised, transparent and open approach. The last areas of activities will be related to fostering the development of crowdfunding knowledge and training: we have launched the first certified crowdfunding training curriculum and we want to make it accessible throughout Europe. At the same time, we are thinking of developing our research activities in an academic sense, to encourage the emergence of relevant literature on present and future issues to further professionalization and innovation within the sector itself.