At the Mind the Bridge Global Angel Forum, I had the chance to interview Kristof De Buysere. Kristof, who is finishing his Ph.D. in Business Law, has co-authored a widely used framework document distributed by the European Crowdfunding Network. He is really knowledgeable about securities laws and regulations that impact equity crowdfunding.
Q: Kristof, what’s your opinion about the potential diffusion and growth of crowdfunding in Europe?
A: Securities regulations, that overly entrench an intermediated business model, heavily hinder the full development of crowdfunding. This phenomenon today is actually only a fraction of what could theoretical be. The same problem has been true for other disintermediated forms of fundraising and secondary trading that have existed in the past, before the notion of crowdfunding was in use.cTherefore, it would not be appropriate to consider the current forms of crowdfunding when we talk about it. This way we would leave an enormous space (“what could have been there”) out of the equation. In fact, everything ranging from a modest crowdfunding platform up to a stock exchange should be included in the definition.
Q: In which countries is it more evolved?
A: Sadly enough, the scale of development is indeed bound to national boundaries, due to securities regulations that platform and project promoters need to follow. That being said, there are indeed a-synchronic rates of development between countries. Countries like the UK, The Netherlands, and France are for instance relatively more developed markets in Europe today.
Q: Can you share some data?
A: I mainly specialize in equity crowdfunding. Although I don’t have detailed statistics at hand, it can be said that equity crowdfunding is substantially less represented than other types of crowdfunding. It is also much more transaction-specific and not homogeneous, compared to peer to peer lending for instance. And it is much more difficult to estimate the value, if the financial return is the may concern (there is also a lack of a secondary market).
The popularity and diffusion of a specific type of crowdfunding are different per country and is often a result of the status of the securities regulations. For instance, the United States proved to be a very reward-based and lending-based market, but it is not an equity crowdfunding market at all. In the UK however, lending and equity-based crowdfunding both co-exist on a well-developed scale (although peer to peer lending has also there a much higher representation due to the reason that was just named).
There is also a project from the University of California at Berkeley, where detailed its data will be collected and consequently be provided to have this kind of insights. There are a strong need and demand for crowdfunding data.
Q: Which are the next steps for more widely diffusion of crowdfunding?
Especially from the equity side, the focus is too much on the promotion/marketing rules. There, modern policymakers (operating a social welfare state), balance the risk of individuals that will be adversely affected (investor protection, both from participating in risky undertakings as well as the risk of being exposed to fraudsters), and the social welfare that can result thanks to positive externalities that thriving companies offer to society. Then, when policymakers want to accommodate the demand for regulatory change, they often focus on those promotion/marketing rules, and on the investor protection aspect. This may perhaps be linked to the fact that the demand-side for regulatory change also specifically asks for exemptions in those promotion / marketing regimes. But other changes are needed as well.
I stress that much more than that is needed to unlock equity crowdfunding. For instance, market infrastructure providers -like platform operators- still operate under too much uncertainty regarding national interpretation of investment services activities (i.e. MiFID interpretations – where they will rather be classified as an intermediary instead of a market infrastructure operator), an inaccessible systems for electronic settlement of shares in unlisted companies, the inability of most small company types to sell shares to the public/third parties, etc.
Q: What the impact on Angels and VCs?
A: VC firms have a very polarized attitude towards crowdfunding. Either they believe in it, or they don’t (or consider it as a threat to some of their business, and may therefore not like it). Nonetheless, there is investment activity in crowdfunding platforms (but not in projects as such). Also, the reward based crowdfunding offers a very good signaling or validating effect to see if a consumer product can catch some interest. This may then lead to a VC investment.
For angels and/or private investors, it appears that some angel groups are using private crowdfunding platforms (or rather deal presentation and syndication platforms towards their members – for transactions which still require offline negotiations).
However, it may have a big impact on “deal presentations”, i.e. platforms that offer a window on the market and make deal flow accessible, while the deal negotiation and deal closing are done separately (often offline).