With the introduction of the European Crowdfunding Service Providers Regulation (“ECSPR”), crowdfunding is a growing sector throughout the European Union (“EU”). Crowdfunding is an alternative means of financing for start-ups and small and medium-sized enterprises. It comes in various forms, including Investment-Based Crowdfunding and Lending-Based Crowdfunding, both of which are regulated under the ECSPR.
Lending-Based Crowdfunding is defined under the ECSPR as:
the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of… the facilitation of granting of loans.
Furthermore, the ECSPR defines a loan as:
an agreement whereby an investor makes available to a project owner an agreed amount of money for an agreed period of time and whereby the project owner assumes an unconditional obligation to repay that amount to the investor, together with the accrued interest, in accordance with the instalment payment schedule.
Therefore, Lending-Based Crowdfunding works very similar to normal loans. In brief, the process starts with the project owner presenting its project for funding on the online platform operated by the Crowdfunding Service Provider (the “crowdfunding platform”). The public/crowd will then be able to evaluate the presented projects and decide whether they would like to fund or not.
Unlike in Investment-Based Crowdfunding, the investor in Lending-Based Crowdfunding will not be receiving transferable securities in return. The investor grants a loan to the project owner to fund the project presented, and the project owner will then be obliged to repay the loaned sum together with the accrued interest within an agreed period of time. This is very similar to traditional lending, such as loans lent by a bank. However, with crowdfunding the process of lending is divided between various investors rather than one source. The Crowdfunding Service Provider’s role in this regard is to facilitate the matching up between the investor and the project owner for the loan to occur.
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