Over the last few years, equity crowdfunding has grown significantly. With a growing number of start-ups and private market investors looking for alternatives to venture capital, crowdfunding platforms have exploded in popularity.
The volume of equity-based crowdfunding reached a total transaction value of 280 million U.S. dollars in Europe in 2020, while reward-based crowdfunding deals were valued at 262 million U.S. dollars, according to Statista. The transaction value for equity-based crowdfunding in Europe (excluding the UK) increased considerably between 2013 and 2020. The market grew from 63.1 million U.S. dollars in 2013 to 280 million U.S. dollars in 2020.
Equity Crowdfunding consists of selling a share in your business to several investors in return for investment. The existence of equity funding is well established, with private equity, venture capital and angel investing long playing a role in developing companies. The main difference between equity crowdfunding and these traditional models, is that it is offered to a wide range of potential investors rather than establishing a one-to-one relationship. Some of them may also be current or future customers. Equity crowdfunding does this by matching companies with potential investors via an internet-based platform.
The EU market for crowdfunding is underdeveloped compared with other major world economies. One of the biggest hurdles crowdfunding platforms face seeking to offer their services across borders has been the lack of common rules and diverging licensing requirements across the European Union. This has resulted in high compliance and operational costs, which prevented crowdfunding platforms from efficiently scaling the provision of their services. As a result, small businesses had fewer financing opportunities, and investors had less choice and faced more uncertainty when investing cross-border.
To help investors and businesses seize the potential of crowdfunding and make it easier for platforms to offer their services EU-wide, the new Regulation on European Crowdfunding Service Providers (ECSP) for business entered into force on 10 November 2021. The regulation lays down uniform rules across the EU to provide investment-based and lending-based crowdfunding services related to business financing. It allows platforms to apply for an EU passport based on a single set of rules, making it easier to offer their services across the EU with a single authorisation.
The new rules will harmonise crowdfunding for business across all 27 EU member states; platforms will be able to offer transactions across borders, and investors will be able to choose where to allocate their money freely. The new legislation will make the sector safer. The risk with equity crowdfunding will remain centred around the investment target and its ability to perform according to its business plan and within its market.
Targeting both entrepreneurs and microfinance providers, a marketplace platform will be developed through the Rest@rts project to gather the supply and demand in a friendly and easily accessible business environment. In this platform, crowdfunding will be playing a key role, as the ReSt@rts partners understand that the use of alternative financing is essential whenever the traditional ways of funding fail. Thanks to ReSt@rts, many Mediterranean young would-be entrepreneurs will get a new chance to fund their business ideas. Eventually, concerned entrepreneurs will have access to a wide Mediterranean cross-border networks of investors.
