With the introduction of the Regulation on European Crowdfunding Service Providers (“ECSP”), crowdfunding is now gaining momentum throughout the European Union (“EU”). It is an alternative means of financing for start-ups and small and medium-sized enterprises, which can take various forms including Investment-Based Crowdfunding and Lending-Based Crowdfunding, regulated under the ECSP.
Investment-Based Crowdfunding is defined under the ECSP as:
the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of… the placing without a firm commitment basis… of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders… in relation to those transferable securities and admitted instruments for crowdfunding purposes.
Crowdfunding normally takes place on an online platform operated by a Crowdfunding Service Provider (the “crowdfunding platform”), whereby project owners present the projects in need of funding. The public/crowd will then be able to evaluate the presented projects and decide whether they would like to invest/fund or not.
Investment-Based Crowdfunding is therefore a means for the project owner to acquire financing by allowing investors to invest in its project (that is, the company). In return, the investors receive transferable securities and admitted instruments (such as shares in a company, or bonds). In this manner, both the project owner and the investor are receiving something, which elevates the incentive for the investors to invest in and fund a project. Investment-Based Crowdfunding is opposed to other forms of crowdfunding means whereby the funding party does not receive anything in return, such as Donation-Based Crowdfunding (the latter which remains, as of yet, unregulated).
With Investment-Based Crowdfunding, the investors as shareholders of the project/company will feel more connected to the project/company they are investing in. As shareholders, having partial ownership of the said project/company means that they stand to profit should the business succeed, or make a loss should it fail. However, the ECSP provides for extensive rules on disclosure requirements by both the project owners and the Crowdfunding Service Provider in order for the investors to make an informed decision before investing.
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