On November 10th 2021, the new European Crowdfunding Regulation came into force to harmonise how retail investors invest in startups and private businesses across Europe. The law has entered into application and platforms can now start operating cross-border.
The new regulation creates a uniform regulatory framework across the EU for both equity-based and lending-based crowdfunding platforms, allowing them to apply for an EU Passport based on a single set of rules, and making it easier to offer services to both businesses and investors across the EU.
- A single authorisation and passporting process for platforms willing to operate across Europe, coordinated by the European Securities and Markets Authority (ESMA).
- A single set of requirements for businesses to raise up to € 5 million over a period of 12 months, without having to produce a full Prospectus.
- A new harmonised document for each offering, the Key Investment Information Sheet (KIIS). The KIIS includes information about shareholders, features of the platform process, terms of the offering, risk factors, and investor rights or fees, among others.
- A new investor assessment to confirm their understanding of the risks involved when investing in startups and private businesses.
- A set of new obligations for platforms, including conflict of interest policies, prudential policies or information requirements for platforms willing to invest in their own offerings listed on the platform.
Impact on Businesses and Investors
Private businesses will be able to raise up to € 5 million from European retail investors (the crowd) in an online and founder-friendly process without falling under local fragmented restrictions across Europe. Crowdfunding platforms that are licensed in the EU and UK may also be used by businesses to raise up to €13 million across the EU and UK – €8 million from UK-based retail investors plus €5 million from EU-based retail investors.
The new Directive also allows the use of Single Purpose Vehicles (SPV’s), a common structure in the Angel and Venture Capital industry used to pool individual investors investing small amounts of money into startups. SPVs make it easier to manage individual investors and grant them the same level of investor rights as larger investors. At Crowdcube we use a Nominee Structure. Thanks to our Nominee, companies keep their cap table simple, their shareholders register up to date, manage investor communications and updates, coordinate corporate actions and consents and execute pre-emption rounds when needed. On the other hand, investors are the beneficial owners of the shares. With over 1,000 businesses and 300,000+ retail investors already under our Nominee, we are now ready to offer this service to European founders and investors.
Another new addition to the Directive are Bulletin Boards, a secondary marketplace where investors can indicate their interest in buying and selling shares. At Crowdcube, we’ve recently launched Cubex, our own secondary marketplace that gives investors and shareholders the opportunity to discover, research and express an interest to buy or sell shares in their favourite private European companies. All transactions at Cubex gives companies the ability to remain in control of sellers, buyers, timing and structure – its company-led secondaries.
Altogether, we believe this new Directive is about to transform for good the Venture Capital and Private Equity markets in Europe, democratising retail investment and unlocking the huge potential of community raises led and shaped by the retail revolution.