Blog

Search form

ECRI Conference: CONSUMER PROTECTION IN FINANCIAL SERVICES, THE CHALLENGES OF INNOVATION AND CAPITAL MARKETS UNION

At the Ecri Conference Brussels May 2015. JB McCarthy Development Director of the FSIC, was a panel member at the European Credit Research Institute (ECRI) conference in Brussels and gave a presentation on

CROWDFUNDING MODELS – ENSURING FUTURE GROWTH REQUIRES FURTHER REGULATION AND EDUCATION

"Crowdfunding has emerged as a novel way for entrepreneurial ventures to secure funds without having to seek out venture capital or other traditional sources of investment. The earliest iterations of crowdfunding were focused on internet community based projects that had either a charity or collective project goal. The community-based ethos behind these types of crowdfunding initiatives is an important factor in helping to regulate what gets funded or not. Videos and other social media initiatives help those projects with a social or community goal or cause to rally their members in support of the initiative. These earlier types of crowdfunding have now been supplemented by commercial lending and equity investment models. The multitude of crowdfunding web sites and approaches has led to some confusion in interpreting the terms and how best to select and leverage the appropriate solution. These various models of crowdfunding can be explained by grouping them into the following four primary types and illustrating the different models with reference to examples (see the table below).
The potential commercial impact of these new funding models has been recognised by new and small businesses that might otherwise have difficulties accessing funding through standard commercial routes. Upon signing the US JOBS Act (Jumpstart Our Business Startups Act) in 2012 to legalise equity crowdfunding, President Obama stated that “for start-ups and small businesses, this bill is a potential game changer”. Within the EU, the approach to regulating these types of companies has been fragmented, with various regulators adopting different approaches ranging from a wait-andsee stance by some regulators to proactively developing new authorisation processes by others. The limited research that has been undertaken in this area has shown low levels of malfeasance, but there are some reports of dissatisfaction about schedules and unmet deliverables. It is clear that for crowdfunding to become a mainstream solution for commercial lending and equity investment needs in Europe, better authorisation processes and new types of prudential supervision must be developed by European regulators. Furthermore, there is a pressing need to educate businesses and individual consumers on the differences between the various types of debt and equity instruments available."

Primary types of crowdfunding
 

Lending Equity Investment
www.lendingclub.com www.fundedbyme.com
www.zopa.com www.microventures.com
www.prosper.com www.crowdcube.com
www.smava.de www.earlyshares.com
www.ppdai.com www.aswarmofangels.com
 

Patronage Charity
www.kickstarter.com www.fundrazr.com
www.indiegogo.com www.causevox.com
www.rockhethub.com www.fundraise.com
www.sellaband.com www.donorschoose.org
www.fundanything.com www.justgiving.com
Source: Gleasure, R. & Feller, J. 2015. From the Wisdom to the Wealth of Crowds: A Metatriangulation of Crowdfunding Research, TOTO Working Paper 2015.01 v5.

The potential commercial impact of these new funding models has been recognised by new and small businesses that might otherwise have difficulties accessing funding through standard commercial routes. Upon signing the US JOBS Act (Jumpstart Our Business Startups Act) in 2012 to legalise equity crowdfunding, President Obama stated that “for start-ups and small businesses, this bill is a potential game changer”. Within the EU, the approach to regulating these types of companies has been fragmented, with various regulators adopting different approaches ranging from a wait-andsee stance by some regulators to proactively developing new authorisation processes by others. The limited research that has been undertaken in this area has shown low levels of malfeasance, but there are some reports of dissatisfaction about schedules and unmet deliverables. It is clear that for crowdfunding to become a mainstream solution for commercial lending and equity investment needs in Europe, better authorisation processes and new types of prudential supervision must be developed by European regulators. Furthermore, there is a pressing need to educate businesses and individual consumers on the differences between the various types of debt and equity instruments available.

The post conference Newsletter is available here.

 

 

About ktan