EUROPEAN COMMISSION Brussels,8.3.2018 SWD(2018) 56 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European Crowdfunding Service Providers (ECSP) for Business



and



Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL



amending Directive 2014/65/EU on markets in financial instruments {COM(2018) 113 final}



{COM(2018) 99 final}

{SWD(2018) 57 final}



Table of Contents Glossary List of Figures List of Tables Introduction 1 Policy Context and Problem Definition 1.1 Background and context 1.1.1 Key characteristics of crowdfunding 1.1.2 Size, geographic overview and trends 1.2 Problem definition 1.2.1 Barriers to cross-border scaling up leading to underdevelopment 1.2.2 Investors' lack of trust to engage on a cross-border basis 2 Why should the EU act? 2.1 The necessity of an EU action 2.2 The value added of an EU action 3 Objectives: What is to be achieved? 4 Policy Options and analysis of impacts 4.1 Scoping the policy action

4.1.1 Crowdfunding models 4.1.2 Fundraising threshold 4.1.3 Services 4.1.4 Instruments 4.2 Baseline scenario – no EU framework (option 1) 4.3 Building on reputational capital: minimum standards with best practices (option 2) 4.3.1 Rationale and key characteristics 4.3.2 Impacts 4.4 A product-based approach: bringing crowdfunding within the existing EU single rulebook (option 3) 4.4.1 Rationale and key characteristics 4.4.2 Impacts 4.5 A complementary service-based solution: a regime for 'European Crowdfunding Services Providers' (ECSPs; option 4) 4.5.1 Rationale and key characteristics 4.5.2 Impacts 5 Comparing the policy options 6 Overall impact of the preferred option 7 Monitoring and evaluation Annex 1: Procedural information Annex 2: Stakeholder consultation – Synopsis Report Annex 3: Who is affected and how?

Annex 4: Overview of Crowdfunding regulatory Frameworks in a selection of EU Member States 7.1 Overview of the legislative framework 7.1.1 Authorisation 94 7.1.2 Organisational requirements 95 7.1.3 Conduct of business rules 95 7.1.4 Transparency 96 Annex 5: Interplay with other EU legislation 98 Annex 6: Case Study extracts 114 Annex 7 List of references 120 Glossary AIFMD Alternative Investment Fund Managers Directive CF CrowdFunding CMU Capital Markets Union EBA European Banking Authority ECB European Central Bank ECP European Crowdfunding Providers ESAs European Supervisory Authorities ESMA European Securities and Markets Authority FTE Full-time equivalent IB Investment-Based ICSD Investor-Compensation Schemes Directive KIIS Key Investment Information Sheet LB Lending-Based MiFID Markets in Financial Instruments Directive MiFIR Markets in Financial Instruments Regulation NCA National Competent Authority PD Prospectus Directive PSD Payment Services Directive PSWFC Placing of Securities Without a Firm Commitment RTO Reception and Transmission of Orders SAFE Survey on the access to finance of enterprises SMEs Small and medium-sized enterprises List of Figures Figure 1. Funding escalator Figure 2: European Alternative Finance Market Volumes 2013-2016 in EUR billion Figure 3: European Alternative Finance Market by category Volumes and average growth rates 2013-2016 in EUR million Figure 4: World Online Alternative Finance Volumes 2013-2016, by regions (bn EUR) Figure 6. Bank lending to businesses in the Euro area (EUR million; end of the year, outstanding amounts) Figure 7. Total crowdfunding volume, average size of inflows and outflows, 2013 -2016 (EUR million)

Figure 8. Impact of regulatory costs on operational costs Figure 9. Industry perceived risks to future growth of the alternative finance sector Figure 10. Percentages of responses to the question: "Would you invest with the same confidence through platforms established in another EU Member State?" List of Tables Table 1. Typology of crowdfunding business models Table 2. Start-up crowdfunding: crowdfunding model, rewards and information asymmetries Table 3. External effects of crowdfunding platforms Table 5. Key requirements – Option 2 Table 6. Key benefits and costs, by stakeholder type – Option 2 Table 7. Key requirements – Option 3 Table 8. Key benefits and costs, by stakeholder type – Option 3 Table 9. Key requirements – Option 4 Table 10. Key benefits and costs, by stakeholder type – Option 4 (see quantification in Annex 3) Table 11. Key characteristics of the policy options Table 12. Benchmarking policy options Table 4. Illustrative summary of EU legal acts Table 13. Cases where MiFID/CRD/CRR provide for initial capital of less than standard €730,000 Introduction This initiative is part of the Commission's priority of establishing a Capital Market Union (CMU), as announced in the Commission Work Programme 2018. Broadening access to finance for innovative companies, start-ups and other unlisted firms is at the heart of the CMU Action Plan . Investment finance remains difficult for these firms, particularly when they move from start-up into the expansion phase. The plan aims at strengthening a Europe-wide 'equity culture' and at developing alternative means of financing, including crowdfunding and peer-to-peer finance.

As a new form of technology-enabled financial service, crowdfunding carries the potential to help better match investors looking to support innovative business ventures with projects in need of funding. With appropriate safeguards, such as investor protection measures, crowdfunding can become an important source of non-bank financing and thus further the CMU overarching goals of supporting a more sustainable financial integration and public/private investments for the benefit of job creation and economic growth. Crowdfunding is increasingly establishing itself as an essential part of the funding escalator for start-ups and young businesses. It is often the main funding tool for early stage companies financed by family, friends & own funds up to later development rounds where venture capital or even private equity funds start taking interest in those ventures. Crowdfunding also provides a complement (if not an alternative) to unsecured bank lending, such as bank overdrafts or credit card loans, which are currently the main sources of external finance for SMEs, especially during the initial period of activity. This type of bank lending is often overly expensive for start-ups and more generally less accessible for SMEs due to structural information asymmetries (like the lack of credit and business history). In addition, bank lending volumes to both start-ups and SMEs have been severely affected by the 2008 financial crisis and since then have fallen below pre-crisis levels. CBInsights identified lack of funds to be the second most of important reason as to why start-ups fail, representing 29% of the cases. Funding aside, crowdfunding is also used as a unique marketing tool and has helped businesses build their brand to attract a wider customer base as well as to help pass through the proof of concept phase. The Commission Services have been monitoring crowdfunding market developments for several years. A staff working document was published in May 2016 which concluded that there was no strong case for EU level policy intervention at that juncture. Since then, the Commission Services have gathered additional evidence on the demand for cross-border activity and on the barriers in the Single Market through stakeholder consultations and external studies. Moreover, the continued concentration of the European crowdfunding sector in a few Member States has underlined the need to make this funding method available more widely, notably for the benefit of fund seekers and investors in smaller Member States. This initiative is also part of the Commission's FinTech Action Plan which aims to ensure that the EU adopts an innovation-oriented approach towards FinTech by creating a competitive environment where innovative products and solutions can be rapidly applied in a safe and stable environment. As observed through the recent developments related to Initial Coin Offerings, technology is bringing about unprecedented changes to the financial sector, creating new opportunities and also risks. In this context, our goal can only be achieved by bringing forth a forward-looking regulatory framework that is fit-for-purpose in an increasingly digital age. Within the newly emerging space of digital finance, it must be ensured that investors are aware of the activities and risks they engage in so that they are able to make sufficiently informed decisions. The initiative focuses principally on the activity (operation of the platform) rather than the features of the underlying instrument being traded (risk capital, debt or other instrument). It aims to help platforms to scale-up across the Single Market by creating a clear regulatory framework at the EU level that enables cross-border activity and addresses risks in a proportionate manner. In order to create the necessary trust for cross-border investment, investors need to have access to the necessary flow of information to understand underlying risks and platforms need to have the necessary safeguards in place to preserve investor protection and minimise financial stability risks. 1Policy Context and Problem Definition The basic function of crowdfunding can be described as an open call via the Internet for the provision of funds by the public at large to support specific initiatives by typically small fundraisers. The investors/lenders can provide the means as a pure donation (intangible reward) or in exchange for some form of reward in order to compensate for the financial risk taken (tangible reward). Crowdfunding platforms play a key role: as technology-enabled platforms/systems they enable interaction between fundraisers and the "crowd" (wide investor community). The core functionality performed by these platforms is that of matching supply and demand for capital in the form of ownership claims on project/company proceeds or debt claims on borrowers. Platform operations can be small, with less than 10 employees, or reach levels of more than 200 staff and operating with subsidiaries in several European countries. Although the overall concept of crowdfunding is straightforward (request for money via an open call), various categories have developed depending on the type of rewards offered to investors/lenders. Section 1.1.1.1 provides an overview of the main categories. 1.1Background and context Crowdfunding has increasingly developed since the early 2000s, fuelled by the widespread use of the Internet. The crowdfunding industry is thus a relatively young industry. The total online alternative finance market in Europe, which comprises predominantly crowdfunding, grew by 92% over previous year to reach a value of EUR 5.4 billion in 2015. Without the United Kingdom, by far the largest market in Europe, the market size reached around EUR 1 billion. Overall, the European market is still relatively modest compared to the online alternative finance markets in the US and Asia. Key characteristics of crowdfunding There is no single comprehensive definition of crowdfunding. Definitions are often limiting in view of the innovative forms that crowdfunding service providers develop (Mollick, 2013). Crowdfunding is an open call for the collecting of resources (funds, money, tangible goods, time) from the wider public through an Internet-based platform for a specific project. Crowdfunding platforms can thus be viewed as 'two-sided' markets, i.e. a matching service that subsidises the (full or partial) cost of offering access to one side (investors) with the fees charged on the other (project owners). Crowdfunding platforms link fund seekers to investors/lenders. The key characteristics of the crowdfunding platforms change according to the model under consideration. The remuneration model of crowdfunding platforms typically charge the fundraising project with a fee, as a percentage of the total amount raised, while investors are not usually paying to invest on the platform or only if additional services are provided. The platform usually selects the project that can be listed on the platform and either allows investors to pick the projects on their own or it applies some discretion (after having established some key preferences for the investor) on which project the money would be invested. In the case of crowdfunding platforms dealing with financial products, platforms are also not trading with their own balance sheet in most of the cases. Some lending-based crowdfunding platforms also rate the risk of different borrowers and place them into portfolio of loans with similar risks. Investors then set the level of risk they want to undertake, while money is automatically invested in the different portfolios. Therefore, the degree of agency relationship that the platform has with investors might change according to the business model, including the degree of discretion that the platform has in determining the investment decision. Some equity crowdfunding platforms also exercise voting rights on behalf of client that are willing to use a proxy. Similarly, some lending-based platforms also enforce the terms of the loan agreement on behalf of the investor, directly or through debt collection agencies. 1.1.1.1Business models The type of fundraising activities varies greatly across the different crowdfunding models. The motivation and type of participants, as well as the resulting relationship between investors/lenders and fund seekers/borrowers, vary as well (Belleflamme, et al., 2012). There are different models of crowdfunding platforms and any categorisation is provisional, as the market develops and integrates new technologies in the service provision. The four main categories of crowdfunding platforms are: 1)Donation; 2)Investment; 3)Lending; and 4)Reward.

There are then a number of platforms that combine different models or run a model that cannot be immediately classified under these four categories, but they are usually of a much smaller scale compared to main ones. Nevertheless, we can identify a number of common features that are helpful in explaining why economies of scale and market integration matter (see Table 1 ). Notably, the type of reward that investor are potentially getting is a key distinguishing feature across the different models. It goes from no-tangible reward, like the recognition that donors get in donation-based crowdfunding, to a very tangible reward, like the product or service that company produce in exchange of a price usually lower than the future market value, when the product will be publicly marketed. Sub-type Reward type Donation Crowdfunding Pure Donation No reward Reward Donation Recognition, tokens or other non-tangible rewards No tangible Reward Other Low value tangible rewards Investment-based Crowdfunding Entrepreneur-led Equity, bond-like shares, securities, revenue or profit sharing; Projects accessible to all investors Investor-led Securities, revenue or profit sharing; Projects accessible to accredited investors only Lending Crowdfunding (peer-to-peer finance) Forgivable Loan Interest only if project / firms has revenue or profit Traditional Loan Fixed-term interest Pre- financing of account receivables Discounted invoices Reward-based Crowdfunding Product/service reward Reward in form of a finished product or a service Tangible Reward Source: Commission services. Donation-based Crowdfunding Donation-based crowdfunding typically involves investor providing a monetary contribution in exchange of a non-tangible asset (like recognition or a token) or of a tangible asset of far lower value than the contribution (like a t-shirt or a pen). This crowdfunding model relies on philanthropy, whereby people give money towards a 'good cause'. Backers may receive tokens that increase in prestige as the size of the donation increases, but these tokens do not hold any economic value. In 2015 donation-based crowdfunding has the smallest average fundraising size (EUR 2 771). The contribution is typically either directly channelled to the donee or collected by the platform (often a Non-Governmental Organisation), which will then pass them onto the recipient(s). Investment-based Crowdfunding ESMA defines 'investment-based' crowdfunding as: '[..] a call for funds for a specific project, usually through the internet. The people providing funds may do so [..] in return for a right to participate in a share of the revenues or profits of the project, or through the purchase of a debt, equity or other security.' (ESMA, Opinion on Investment-Based Crowdfunding, ESMA/2014/1378, 18 December 2014, p. 6). The model involves a project owner (fundraiser), an intermediary (the platform) and an investor (the crowd). The number and size of the projects being financed may suggest that the crowd may also include project owners, so the platform stands between a large number of fundraisers and investors. The instrument being marketed can be an equity stake in the undertaking or any other type of financial instruments in the form of a transferable security (e.g. debt securities). The reward relies on a future stream of cash flows. In the case of an equity stake, as would be the case for listed companies, the investing shareholders hold partial ownership of the company or project and stand to profit, if it performs well, or lose everything if it fails. Generally, these instruments have limited marketability on secondary markets, which increases the probability to lose the full investment. However, as the market expands, there are greater chances that demand for trading on secondary market will increase. In 2015 equity-based crowdfunding had the highest average deal size by model at almost EUR 460 000, whereas the average deal size for debt-based securities is just over EUR 190 000. It is expected to see continued growth in average funding size for equity-based crowdfunding (in the UK the average deal size is well over EUR 600 000). Lending-based Crowdfunding EBA defines lending-based crowdfunding as: 'Open calls to the wider public by fund seekers through a third party, typically an on-line platform, to raise funds for a project or for personal purposes, in the form of a loan agreement, with a promise to repay with (or in certain cases without) interest. The fund raisers may include individuals, start-up companies or existing SMEs that are seeking an alternative means of funding, rather than the traditional credit market.’ (EBA, Opinion on lending-based crowdfunding, EBA/Op/2015/03, 26 February 2015). Unlike the traditional banking model, lending in crowdfunding platforms is dispersed while borrowing is concentrated among selected project owners. These investments can yield a higher return than savings accounts offered by banks, but can be subject to higher risk. No regulatory safeguards, such as bank deposit guarantee schemes or investor protection schemes, protect these investments, besides the different pecking order compared to financial instruments (investment-based instruments) in case of bankruptcy. If the borrower defaults or the platform becomes insolvent (in case it pools assets on own balance sheet), the lenders risk losing part or almost all of their investment. The fundraising entity commits to pay interest on the sum lent by each respective investor at regular intervals, as it would be the case for a regular bank loan. There is a variety of business models that could be defined as lending-based crowdfunding. This depends mostly on the constellation of relationships between the parties involved, for example business-to-business lending, peer-to-business, business-to-peer and peer-to-peer. Although many hybrid models are emerging (as well as increasing participation by institutional investors), two main models according to the recipient of the funds are observed: 1)Consumer lending; and 2)Business lending. Consumer lending involves lending to natural persons for consumption purposes (e.g. travel, cars, mortgage), while business lending involves providing funds to legal and natural persons for business purposes. Business lending can also take the form of individuals or institutional investors purchasing invoices or receivable notes from a business at a discount, holding it for the duration and receiving a financial return. Average deal size approaches EUR 100 000 for peer-to-peer business lending and peer-to-peer consumer loans are on average EUR 10 000 per loan. Automation (automatic selection and automatic bidding of small & large funding amounts) plays a key role in the development of this market segment. Cambridge Centre for Alternative Finance reported that in 2015, 82% of consumer-lending and of 38% business peer-to-peer lending were funded through automation. Reward-based Crowdfunding

Reward-based crowdfunding was the earliest form of modern day crowdfunding to develop. This model is based on providing the investor (usually called 'backer') with a non-monetary reward, in the form of the product or service that the fundraiser offers or is going to offer in the future. Backers usually get a discount on the future market price, which increases with the distance in time between contribution and finalisation and public marketing of the product. Contributors are not accredited investors to participate in any financial returns. The only commitment of the fundraiser is to deliver the service or the good at a future date. Average fundraising size is EUR 4 266. Mixed models In recent years, new operators have entered the market, which may offer mixed elements of the different business models. For example, equity investors may, in addition to their equity stake, receive additional non-monetary rewards. A further new crowdfunding approach is to sell a portion of future sales (royalty) in return for an investment. This can be attractive for investors as they receive regular income from gross revenues, while benefitting the entrepreneur(s) who keeps full ownership of the company. The downside is that royalties are deducted from revenues and therefore add to the expenses of running the business, thereby making this model potentially attractive only for high profit margin businesses. 1.1.1.2Economics of crowdfunding and key stakeholders Crowdfunding can help (innovative) start-ups to provide financing in the early stages of business development. Besides the monetary benefit, crowdfunding can also offer a number of non-monetary benefits, such as: I.Validation of the business idea; II.Product validation (elicitation of customer preferences regarding product features by means of feedback and endorsements); III.Market validation (testing the waters before a possible official market launch); and IV.Market penetration/expansion. For investors/lenders, the type of financial reward depends on the crowdfunding model. In the lending crowdfunding model, loans plus interest are repaid based on pre-launch conditions in case of traditional lending, contributions are only repaid if and when a project generates revenue or profit in case of forgivable loan type lending. Equity crowdfunding attempts to raise money from the crowd in exchange for a stake in the firm. Peer-to-peer business lending is used particularly by young SMEs and micro-companies that have established early cash flows but are in need of additional funding to expand or bridge short-term funding gaps. The high growth rate suggests that there is a strong demand for this type of funding and that these companies are either unable to attain a standard business loan from a bank or achieve preferable financing conditions on P2P business lending platforms. While peer-to-peer consumer lending has started to enable people to balance their time spending directly without a bank or other intermediary acting as an indirect facilitator, this type of crowdfunding does not contribute to the alternative funding of firms. The same applies for donation-based crowdfunding, which is mainly aimed at charities and other philanthropy or artistic enterprises. In view of financing young innovative firms peer-to-peer business lending and investment-based crowdfunding are the most relevant types. Investment-based crowdfunding is usually less attractive for very young companies as low revenues and total profit-levels tend to limit the ability to raise sizeable funds. Super-fast growing companies can mark an exception in this regard. Investment-based crowdfunding is generally more aimed at firmly established companies that are too small to access public capital markets but wish to finance substantially larger projects compared their current operations in order to drive further expansion. Selling equity stakes not only acts as a funding source but it also distributes business risk across a larger number of stakeholders and can bring experienced partners into the business. Source: Paschen (2017) Network effects A platform with a high number of active investors will be more attractive for an entity seeking to raise funds, as the additional investors will increase the likelihood to raise sufficient funds for the project. Likewise, a platform with a lot of accessible fundraising projects will be more attractive for investors. It provides them with a wider choice and allows for greater diversification of investments where the investor engages in multiple projects. Demand on both sides of the market give rise to network external effects, both across investors/lenders and fund seekers/borrowers (cross-group external effects) as within the investors/lenders' or fund seekers/borrowers' group (within-group external effects). Overall, platforms will exhibit positive cross-group externalities from investors/lenders to fund seekers/borrowers and positive within group externalities for investors/lenders (Belleflamme, P., Omrani, N., & Peitz, M., 2015). This interaction creates demand side-economies of scale, also referred to as network effects. Each new investor/lender or fund seeker/borrower creates additional value across the user group on the other side of the platform respectively i.e. a positive externality from the consumption of the service. Similarly, there are network effects that act within a single user group. A larger number of informed investors on a platform may, for example, act as a form of guidance for other investors and thus improve their returns (positive externality). Likewise, a larger number of fund seekers/borrowers competing for potential investors may reduce the chances of attracting funds (negative externality). This externality acts simultaneously with the cross-group positive externality for investors so that the overall effect in terms of social welfare remains positive in most scenarios. The above described network effects become significant once a certain number of subscriptions are achieved often referred to as 'critical mass'. Given that the size of the user base on a platform is positively correlated to the value of the service, more users imply a higher value and thus increase demand. However, in order for this interaction to work, a platform needs a certain number of users to create sufficiently strong network effects.

Increase number of campaigns (fund seekers/borrowers) Increase number of investors/lenders Investor/lender ·more choice ·harder to reach sufficient funding ·easier to reach sufficient funding Fund seeker/borrower ·more competing projects ·easier to reach sufficient funding Source: Commission services. The network effects stimulate concentration in the crowdfunding market. Big platforms become even bigger, while small platform will not reach the critical size and will be forced out of the market. Finance is in general considered a distance-sensitive business, especially when it comes to small fundraising projects. However, crowdfunding can overcome this proximity bias given its reliance on the Internet to match investor/lender with fund seeker/borrower. Current research indicates that crowdfunding has partially overcome this proximity bias (Agrawal, Catalini and Goldfarb 2011; Mollick 2014), while geographic clusters exist and proximity may still impact the type and success rate of projects. Nevertheless, the crowdfunding market differs along crowdfunding model and sector allowing for specialisation, so opposing forces may counterbalance this concentration trend (Belleflamme, Lambert, and Schwienbacher 2010). Information asymmetries Information asymmetries are another key feature of crowdfunding markets, besides network effects, due to its highly dispersed investor structure. Ex-ante, adverse selection problems could arise given that investors/lenders lack the necessary information to assess the likelihood of success of projects. Hence, platforms risk attracting only low-quality projects, given that high-quality projects may not find the required funding at adequate conditions, due to investors' inability to assess their quality. Ex-post, a moral hazard problem might face difficulties to ensure that fund seekers/borrowers deliver what they have promised. From the investor/lender perspective, an investment could be riskier than expected due to risk/return profile not being properly disclosed and/or more costly than expected due to costs (direct and indirect) not properly disclosed. For the fund seeker/borrower, the funding could be more expensive than expected when costs (direct and indirect) and risk/return profile are not properly disclosed, which could also lead to reputational risk for the platform (lack of transparency / misleading information). Moreover, invested capital (partly or completely) may be lost or not reclaimable due or the fund seeker/borrower may be faced with the inability to repay dues due to platform failure (counterparty risk). The project may not get funded or the investment lost due to fraud (risk of fraud) or a delay or mistake in the information flow, processing, safekeeping or administration (e.g. computer breakdown, mistake) (operational risk). All these risk can also lead to reputational risk for the platform. Belleflamme and Thomas (2016) suggest five governance strategies for crowdfunding platforms to deal with these asymmetric information problems: (i) information dissemination; (ii) fraud prevention; (iii) provision point mechanism, whereby fundraisers only receive money if a minimum threshold is reached; (iv) facilitate information exchange among investors/lenders; (v) establish trust in the platform. Essentially these strategies attempt to increase the amount and quality of available information; built reputation signalling high-quality platforms and projects; and reduce monitoring costs due to moral hazard. Although crowdfunding is still relatively small compared to the complete alternative finance market, it is considered to be an essential chain to allow innovative SMEs to develop and to bridge the ‘death valley’ between own resources, friends and family and attracting financing from sophisticated investors like business angels and venture capital providers. Crowdfunding provides an alternative to traditional sources of finance which aren't available due to information asymmetries (lack of credit and business history) or often overly expensive for start-ups to access (Tunguz, 2013). The alternative financing methods of crowdfunding has shown a significant potential for financing firms, in particular for SMEs and micro-enterprises, and bridge existing funding gaps. SMEs will attract different types of financing depending on their stage of development as mirrored by the funding escalator (see Figure 1 ). Crowdfunding is particularly interesting for start-ups that are trying to develop and maintain a viable business from an initial business idea (Stemler, 2013). Crowdfunding has also been identified as being important for the development of innovative firms (Stanko and Henard, 2017). Source: Commission services. Each crowdfunding model brings specific monetary and non-monetary benefits that can be matched with start-up needs as they grow over the start-up life stage. Paschen (2017) shows that lending based and investment based crowdfunding are associated with SMEs that are in the start-up and growth phase respectively. Size, geographic overview and trends The European alternative finance market as a whole raised a total of funds of EUR 5.43 billion in 2015. This represents an annual growth rate of 92%. The market remains heavily dominated by the UK which constituted a market share of 81% with EUR 4.41 billion in 2015. The rest of the European market raised a total of EUR 1.2 billion and grew at a lower rate of 72% in that year. In 2015, a total of EUR 4.2 billion were raised through crowdfunding in the EU. This makes crowdfunding the most important sub-market of the alternative finance sector. Excluding the UK, the countries with the largest total market volumes in 2015 were France, Germany, the Netherlands, Finland and Spain. Examining the market share in more detail, peer-to-peer consumer lending has the largest market share, followed by peer-to-peer business lending and equity-based crowdfunding. In 2015 peer-to-peer consumer lending had a market share of 35.9% worth EUR 366 million, excluding the UK. It is the most established market segment, with growth between 2014 and 2015 declining to 33% from 75% between 2013 and 2014. Source: University of Cambridge (2017)

Peer-to-peer business lending had a market share of 20.8% in 2015 worth EUR 293 million and experienced the highest annual average growth rate of 223% between 2013 and 2015. While EU investment-based crowdfunding did not grow quite as strongly as P2P business lending, it nonetheless achieved a 3-year growth rate of 128%. Reaching a market share of 15.6% worth EUR 222 million, the European equity-crowdfunding market is significantly larger in relative terms than the American and Asian market. As for P2P business lending, the high growth rate indicates that smaller firms in the EU are in need of additional funding and manage to realise good conditions via crowdfunding platforms. Source: University of Cambridge (2017).Note: P2P Business includes 'p2p property lending', which is used to finance property development projects. Despite the relatively fast development of the European market for crowdfunding, the continent has not kept pace with other major regions around the world. As seen from the figures below, even when including the UK, the EU market has not been developing as fast as in other areas. Given that the growth rate in Europe has already started to slow, it is possible that the gap in contrast to other regions will continue to grow over the coming years. Source: University of Cambridge (2017). The European market has grown asymmetrically and remains heavily concentrated in a few large countries, specifically the UK, France and Germany in terms of the number of platforms and volumes of capital raised. Excluding the UK, the countries with the largest total market volumes in 2015 were France (EUR 319 million), Germany (EUR 249 million), the Netherlands (EUR 111 million), Finland (EUR 64 million) and Spain (EUR 50 million). The expansion of crowdfunding remains heavily domestically oriented in the EU with little cross-border activity. Between 2013 and 2014, there was EUR 180 million of cross-border funding for successful projects which amounted to 8% of the total EUR 2.3 billion raised for successful projects. However, this was predominantly raised through non-EU platforms. Cross-border activity within the EU amounted to EUR 16.9 million, a mere 0.73% of the total raised in this period. A recent survey indicates that for almost half of the platforms none of the funds raised came from foreign investors; moreover, more than three-quarters of the platforms indicated that they had raised less than 10% from foreign investors. With regard to foreign outflows, only a quarter of platforms raised funds for projects outside the national borders. While crowdfunding was only a marginal trend being embraced by early adaptors a few years ago, the sector has grown at an extremely rapid pace over the last years and is seeing increasing interest in all levels of society. The European crowdfunding market has experienced more institutional involvement recently in terms of funding and platform ownership suggesting that the market is beginning to mature. Participation rates of institutional investors in crowdfunding grew by 83% between 2013 and 2015, with institutional investors providing around one quarter of funds in peer-to-peer lending and 8% in equity-based crowdfunding. The increasing rate of institutional investors demonstrates a rise in trust levels vis-à-vis crowdfunding investments. Given the large sums of institutional money potentially available for the further development of the market, it will be crucial to maintain trust by establishing standards that act to uphold high levels of integrity. Inability to curtail risks of fraud or other illicit activity could be a major setback for the development of the European market. The European crowdfunding market is also showing early signs of consolidation with the first platforms merging or attempting to take over platforms and unsuccessful platforms exiting the market. Moreover, enabling regulation in Member States has been shown to correlate with high market volumes in the industry. At the same time, existing laws de facto impede certain types of crowdfunding to develop in some Member States. While the market continues to grow quickly, regulatory barriers are limiting the potential of the European crowdfunding market. More cross-border activity would spur the further development of the industry and access-to-finance for early-stage firms, especially in small Member States and those Member States with less developed national markets. 1.2Problem definition The following section explores two main problems in the European market for crowdfunding: one, the inability of the crowdfunding market to scale up at a level that would provide a meaningful boost to early stage funding for businesses across Europe; two, the lack of trust by investors to engage in cross-border activity. While some domestic crowdfunding markets are developing rather fast, the size to finance these platforms can raise is too small compared to the overall early-stage financing needed by non-financial corporations. Cross-border activity is almost absent and platforms struggle to scale up enough to be able to undertake cross-border activities. Most notably, while project owners are willing to fund themselves cross-border, the cross-border accessibility and demand on crowdfunding platforms is fairly limited, beyond what the local origins and the limited international exposure of the project may naturally determine. A major consequence, among others discussed in the following sections, is the inability to create a solid pool of early-stage financing across Europe, which would serve very young businesses irrespective of their place of establishment. Concerns about the reliability of crowdfunding platforms are considered as key risks for the future growth of the industry. The biggest risks perceived are loan defaults or business failures, fraudulent activities or the collapse of platforms due to malpractice. This reflects concerns about weak governance practices, notably in areas such as risk management or the prevention of conflict or misalignment of interests. Moreover, investors appear not to have sufficient information or to be misinformed about the potential risks of projects or about the operation of platforms. Requirements to ensure an adequate disclosure of offers intermediated through crowdfunding platforms do not exist or vary considerably which complicates comparability. Moreover, from a financial integrity perspective, platforms remain vulnerable to issues concerning the security of client data and the use of crowdfunding for illicit activities. The problem tree below provides an overview of those two major problems, with its underlying drivers and consequences. Barriers to cross-border scaling up leading to underdevelopment SMEs are heavily reliant on short-term unsecured bank funding. Currently, the weight of crowdfunding over the total SME funding is still fairly small, with bank funding to SMEs in the order of hundreds of billion euros, compared to the EUR 7.671 billion of the whole European crowdfunding market in 2016. Nonetheless, as banks restructure and consolidate, there is a structural downward trend in the availability of the most used bank financing tool for SMEs, as well as bank loans below EUR 1 million (see Figure 5 ). The development of crowdfunding markets as a stable funding tool for businesses is increasingly becoming a key element for Europe's financial system and partially replacing short-term unsecured bank funding.

Source: ECB Data Warehouse. While the European crowdfunding market has skyrocketed over the recent years, with annual growth rates exceeding 100% in some sub-sectors, there are increasing indications that the rapid expansion phase may significantly slowdown in coming years. Establishment of new platforms seems to have peaked and is foreseen to decrease further, as 2016 started to show a phase of consolidation within MS. The growth rate in the most established market segment of peer-to-peer lending, dropped by more than half to 33% in 2014-15 (75% in the previous year). Furthermore, the European crowdfunding sector remains strongly fragmented along national borders, despite crowdfunding is less sensitive to distance than traditional finance (Agarwal, Catalini and Goldfarb 2011). More than two thirds of European platforms collected 5% or less of their total funds from cross-border investors. 76% of platforms reported that no project listed on their platform comes from outside the national border. 16% of platforms indicated that less than 10% of funds raised left the country of origination. Only 10 Member States have active investment-based crowdfunding platforms operating in multiple jurisdictions. While the survey reported the existence of 33 platforms with some form of MiFID license, only 5 tied agents related to those firms were reported to have been operational in another Member State. As all of them were reported in the UK, this indicates that – given the high regulatory costs involved with entering a new market – platforms focus their efforts on large domestic markets, thus depriving less-developed and smaller Member States from the benefits of alternative finance. Source: Commission services' estimates from University of Cambridge (2017) . Note: the estimates are based on the assumption that outflows and inflows are similarly distributed across all categories of platforms. While some platforms are receiving cross-border investments, they are often not actively marketing in those countries, mostly because of the regulatory implications, as reported in case studies reviewed in Annex 7. The regulatory environment confronting the crowdfunding industry is very diverse, presenting considerable complexity for those platforms keen to extend operations on a cross-border basis without a passport and high compliance costs due to different requirements in national jurisdictions. Licensing requirements in many Member States create additional cost barriers not just through licensing and local advisory fees, but also due to the rising legal uncertainty. Platforms are often not allowed to operate under the same business model and have to adjust their models according to separate jurisdictions. One platform indicated that often even the local law offices from the target Member State cannot assure them that they could operate within the market without the possibility of legal sanctions as the. A number of platforms have noted that bespoke national regimes are one of the major hurdles to cross-border activity. As Member States do not coordinate their actions whilst implementing tailored regulatory frameworks for crowdfunding activity, these tend divergence in a number of aspects such as permitted activity, instruments, thresholds and other requirements – making it increasingly difficult for businesses to simultaneously comply with a number of different requirements. These platforms also highlighted that EU action should not be delayed because an increasing number of Member States are coming forward with their own locally tailored regimes and are also reviewing them to add further detail to the requirements. This continues to create even greater obstacles for cross-border activity and may in the end create a great number of entrenched local frameworks and heavy resistance towards convergence by local market incumbents that want to preserve their existing business models. Market observations indicate that there are currently no platforms that actively operate at a pan-European level. Platforms that do operate cross-border generally choose to do so only within a limited number of (often neighbouring) countries. A platform notes that "…operating in seven different countries requires compliance with seven different crowdfunding regulations or, in the absence of those, with other local rules." Platforms that accept cross-border fundraising projects and investments state that they are facing significant legal uncertainties in terms of whether this could stand in conflict with national legislation applying in their home MS. For a third of the platforms in the survey, compliance costs can make up more than 20% of total operational cost in cross border business and for 50% they make more than 10% of operational costs (see Figure 7 ). Source: European Crowdfunding Network and Osborne Clarke These costs can have negative consequences for the level of competition, leading to market concentration, higher costs and less choice for clients with a lower drive for innovation. As platforms continue innovating their business models, expansion into other markets would also support profitability and ensure platforms can develop on a sounder footing and, as the market matures, can consolidate at European level. As they mostly rely on a remuneration-based model, i.e. charging project owners as a percentage of the capital raised (according to the 'two-sided' characteristic of the market discussed in section 1.1.1). Cross-border is also a necessary step for platforms developed in smaller member states, where the size of the domestic market (in terms of number of domestic project owners as well investors with a suitable risk profile) may not be sufficient enough to ensure long-term sustainability or even emergence of such a market. Statistics collected by ESMA show that investment-based crowdfunding platforms are pre-dominantly concentrated within the largest and more developed European markets that have the capacity to raise significant funding amounts. On the other hand it is well-recognised that there is a very significant gap for early stage investments in small European States. Market fragmentation also reduces the benefits of network effects on funding costs and pushes the market into a vitious circle that could constraint crowdfunding markets for a long time. Furthermore, in targeted consultations, the industry has highlighted that profitability remains an issue for the sustainability of their business models due to insufficient scale, even for established platforms in large markets. ESMA highlights that the fees charged by investment-based platforms have been increasing – as indicated by the 2016 survey, reaching on average 5-8% of the total fundraising amount, which puts the total revenues for the whole European crowdfunding industry between EUR 272 and 434 million. One of the largest investment-based platforms in the UK has helped businesses raise GBP 358 million since 2011. Given that they charge 7% of the total amount, revenues to cover 6 years of operations and around 80 staff thus equals GBP 25.06 million (a bit more than EUR 4 million per year). Respondents to the FinTech Consultation generally argued that the existing national regimes for crowdfunding have a significant impact on sector development. The vast majority of national competent authorities stated that the existence of multiple regimes and the lack of a common EU regulatory regime create barriers for cross-border expansion of crowdfunding platforms. None of them mentioned proximity between investor and fundraiser as a reason for platforms not to develop cross-border. Almost half of the other respondents equally noted that national regulatory regimes hinder cross-border activities for crowdfunding and peer-to-peer finance. They noted that harmonisation at the EU level could reduce fragmentation of the EU market, mainly attributable to divergences in the regimes adopted by different Member States. It was also highlighted that the MiFID passporting regime, despite its high cost, is often ineffective in facilitating activities across the EU, as some Member States require separate authorisation under the respective bespoke national regimes, regardless of whether firms hold a MiFID license in another MS. Respondents likewise stressed (in line with EBA) that the EU passport under the Payment Service Directive could never cover the full range of activities, also in the case of lending-based crowdfunding platforms. According to most respondents, the lack of an EU framework and the lack of passporting rights make it complex and costly for crowd and peer-to peer platforms to scale up across the EU. Moreover, there is additional uncertainty weighing on platforms' decision to go cross-border. EBA highlighted that '[..]the lending-related aspects are not covered by EU law, leaving several risks and risk drivers that the EBA had identified unlikely to be addressed. [..]the EBA concludes that the business models of lending-based crowdfunding platforms do not fall inside the perimeter of credit institutions and their typical business model as defined in the EU legislation. The funds provided by lenders with crowdfunding platforms would therefore not qualify as deposits eligible for protection under a deposit guarantee scheme, taking into account the definition of ‘deposit’ in Article 2(1), point 3, of Directive 2014/49/EU (the Deposit Guarantee Schemes Directive).' It suggests that the risk of regulatory circumvention or uncertainty, due to a patchy framework of national regulations, may discourage further cross-border activity, both for platforms and investors. Other barriers to cross border expansion were identified during a workshop with platform representatives. One platform found the lack of reliable data such as access the creditworthiness of foreign SMEs to considerably limit the countries towards which a cross border expansion is possible. Another platform recalled that, besides the substantial national rules they have to comply with within each jurisdiction and the licencing process itself often proves to be a long, tedious and disheartening process. Moreover, as it was pointed out by a respondent, the general absence of a clear regulatory framework may inhibit new market entrants. They would be concerned with the consequences of sunk costs and future potential regulatory costs when acting without a basic guiding regulatory pathway for making jurisdictional and legal choices. The study by ECN and Osborne (2017) produced a number of case studies on major European platforms operating cross-border. Annex 7: Case Study extracts provides examples of the different issues that these platforms faced when attempting to operate in other EU Member States. The main report of the study also highlighted six different methods that platforms currently have to resort to for cross-border transactions, highlighting the disadvantages of each and concluding that no suitable framework currently exits. It is worth noting that two of these methods are not comprehensive as they do not permit active cross-border marketing of services and provide only a partial solution for some business models in certain Member States. As for the other four options, the study underlines that the most significant obstacles are separate, lengthy and thus costly national regulatory approval procedures (up to one year), time-consuming processes for identifying suitable partnerships in other Member States, costly compliance with MiFID as well as the cost of setting up special purpose vehicles and their recognition within different local regulation.

To conclude, besides the uncertainty for platforms and investors, the high costs for the crowdfunding industry to scale up and overcome low profitability may increase pressure towards domestic concentration, leading to rent-seeking behaviours and higher costs for fund raisers that may actually reduce the appetite for this funding tool for small businesses. Investors' lack of trust to engage on a cross-border basis Even though crowdfunding has been rapidly expanding, the vast majority of investors remain cautious about its risks. As suggested in Figure 6 , the level of cross-border inflows (cross-border investments) is only a small fraction of total volumes, even lower than the outflows, i.e. how much fundraising goes to non-domestic projects. Its size relative to the total has not changed since inception in 2013.. The share of cross-border activity has remained stable at very low level (roughly 4% for inflows and 7% for outflows) between 2013 and 2015. A full understanding of the project risk associated with crowdfunding is often constrained by the lack of metrics, due to the modern nature of this financing tool. Nonetheless, a survey conducted by the Cambridge Centre for Alternative Finance shows that the chief concern for the platforms is the reliability of crowdfunding platforms themselves. The graph below shows that three most perceived threats for investors are the collapse of a platform due to malpractice, project fraud and an increase in project failure-default rates. Only the latter can be directly assessed through metrics. In case of frauds or malpractice, the platform could be victim itself of the fraudulent behaviour of the project promoter, especially without obligations and liability for the latter. Source: University of Cambridge ( 2017). Research indicates that there is limited confidence for cross-border investment in particular. As reflected in a targeted survey designed by the Financial Services Users Group and the European Crowdfunding Stakeholders Forum, there is a clear lack of trust towards platforms established in neighbouring Member States. Figur e 9 illustrates that 71% of lending-based platform users and 42% of equity platform users would not invest with the same confidence, if the platform was not established within their home jurisdiction. Source: European Crowdfunding Network and Osborne Clarke (2017), "Identifying market and regulatory obstacles to cross-border development of crowdfunding in the EU" The mistrust towards foreign platforms may reflect concerns about weak governance practices, notably in areas, such as risk management or the prevention of conflict or misalignment of interests. Continuous monitoring of the sector and the independent initiatives adopted by the Member States have shown that authorisation, organisation and conduct of business requirements for crowdfunding platforms within the Member States vary considerably (please Annex 1 for an overview of selected Member States). Targeted consultations with lending-based platforms also pointed out differences in the treatment of professional investors, who may be required to check compliance with know-your-customer rules in multiple (EU) legislations that are implemented nationally (such as anti-money laundering legislation or the E-Commerce Directive). As the investor would be facing high cost, vis-à-vis the size of the investment, platforms shall be allowed to discharge these obligations, but this is not always the case. In some Member States, there is currently no or unclear application of Anti-money laundering rules to lending-based or investment-based (in non-transferable securities) crowdfunding platforms, which are in some cases shifted onto professional investors investing on these platforms (from their home authority). This complexity fosters uncertainty that increases investors' distrust to engage cross-border via these platforms. An analysis of the different disclosures & safeguards applied by the Member States was carried out in a recent report commissioned by the European Commission. The study showed that, although most countries have a certain system for safeguarding against these risks in place, the approaches can be very different and thus the systems diverge. The divergence of the national approaches towards authorising and monitoring platforms creates uncertainty regarding the level of scrutiny they are subject to within a neighbouring jurisdiction. Given that a different system is applied within each regime of the EU28, the average retail investor may not be able to devote sufficient resources to finding and validating information on the applicable safeguards. As a result, he may choose to remain and invest within his home jurisdiction. Furthermore, there are reputational risks which may result in scandals within one jurisdiction creating mistrust towards the whole crowdfunding sector. The Trustbuddy Scandal of 2015 is said to have had a reputational effect on other Scandinavian platforms as a whole. Concerns regarding transparency and project fraud are well-grounded, as investors may not have sufficient information (and often capability) to make proper risk assessments. Although widely spread, fears of direct fraud have not manifested, it remains uncertain as to whether investors receive sufficient information on the projects prior to investing and whether platforms perform sufficient pre-screening. A solid approach would be to rely on other measures such as risk warnings, funders' categorisation and funders' tests, due diligence as well as softer disclosure requirements. Although with the same objective, Member States have taken different approaches towards reaching this goal. For example, as regards fundraisers' disclosure to funders - platforms are expected to follow certain procedures regarding this information flow. Common basic information is that fundraisers are obliged to disclose information to funders concerning their ID and business in a fair and not misleading way. However, differences exist in the way this disclosure is filed and the information disclosed. Two Member States have designed a template which must be filed by fundraisers. In another Member State, fundraisers are obliged to file a three-page fact sheet, if no prospectus is required, where they disclose information about their business. In some other countries, the regulators authorize platforms to check for the complete and accurate information provided by fundraisers. Similar principals apply to prescribed due diligence procedures by the Member State. As highlighted in the recent report on barriers to cross-border crowdfunding, these can vary considerably. This creates an issue of scalability as due diligence and other procedures are often an essential part of a platforms' business model. It has also been observed that some platforms carry out high-level due diligence on their listed projects, however do not disclose the information due to fears of legal suit. Diverging measures of investor protection create unnecessary confusion for retail investors that have to familiarise with different systems. Prospective and current investors demonstrate a lack of trust, as they may not receive sufficient information about the returns and risks of the projects. This uncertainty is further increased as the conducted due diligence and presented information are often carried out in different ways. This results in high search costs that defer investors who would otherwise be willing to invest in other Member States. The issue of trust is also highly applicable in defining the selection criteria used in cases where automatic decisions on investors' money are taken by the platform. The issue of liability of the platform, when provide discretionary services, goes down to delineate the responsibility of fair representation between the project owner and the platform. Uncertainty regarding investor rights, the responsible governing authorities and tax treatment in a cross-border setting will also further deter potential investors. Some platforms in targeted consultations also voiced investors' concerns about the need to ensure a minimum regulatory framework to create sufficient trust in a platform, especially for professional investors. Risk of regulatory arbitrage can have a direct impact on investors' trust, leading to underinvestment. This conclusion was shared by some of the respondents to the Inception Impact Assessment, one of which, representing a consumer protection organisation, observed that divergent or even absent national approaches create regulatory loopholes and spur regulatory arbitrage, bounding consumers to invest in projects they shouldn’t, whereas a clearer regulatory environment would provide more choice, grant higher standards of consumer protection and thus encourage investments. 2Why should the EU act? The legislative action to be examined would lay down uniform rules on crowdfunding platforms for certain crowdfunding activity when operating cross-border. It aims at ensuring that such platforms are subject to consistent rules across the EU and that they are identifiable as such by investors throughout the EU. At the same time it also aims at ensuring a level playing field between different crowdfunding providers, irrespective of market size or legal framework applicable in their home market. It aims therefore at establishing uniform conditions for platforms operating with an EU label. This proposal thus harmonises the operating conditions for relevant players in the crowdfunding market, for the benefit of fundraisers and investors. Legislative action to establish an EU framework for crowdfunding services examined in this report is based on Article 114 of the TFEU. 2.1The necessity of an EU action While many Member States leave the activity unregulated, others have put in place stringent bespoke national frameworks to cater specifically for crowdfunding activities. Large differences in regulatory standards adopted by Member States continue to increase market fragmentation resulting in a lack of economies of scale and inconsistent approaches to transparency and financial risks, as explained in section 1.2. Different regulatory approaches in this area create an un-level playing field, erecting additional barriers to a Single Market in financial services and products. Member States have already taken divergent and uncoordinated action to develop national crowdfunding regulation, and it is likely that this development will continue. Divergences in such rules increase costs and uncertainties for platforms, fund raisers, and investors, and represent an impediment to the further cross-border development of the market. These divergences represent an obstacle to the establishment and smooth functioning of the Single Market. Transparency and prudential rules may be necessary to ensure investor protection and financial stability across the EU, while ensuring a level playing field among the different platforms established in the different Member States.

While there is no coordination effort undertaken so far among Member States on rules for lending services by non-deposit-taking institutions, the application of MiFID rules to investment-based crowdfunding platforms is insufficiently uniform, as MiFID was not constructed to ensure proportionality to crowdfunding services and the use of discretions to ensure that proportionality by Member States (such as article 3 exemption) has resulted in further divergences and impediments to cross-border activity via a MiFID passport. In effect, many countries have decided to adopt an ad hoc regime, to use the article 3 MiFID exemption for two specific investment services, or not to regulate at all this area. In one Member State, platforms do not have to follow a specific due diligence procedure but they must disclose information to potential funders on which due diligence procedure is undertaken. In another Member State, platforms are obliged to predefine the due diligence criteria they follow. In other ones, platforms must inform potential funders about the due diligence process they follow. In one more, platforms are restricted from performing and sharing due diligence under the crowdfunding exemption, but need to publish relevant information to investors to enable their informed decision making This situation restricts access to early stage capital markets financing only to bigger EU countries and investors have limited accessibility and ability to diversify risk in the same way irrespective of where they are geographically located. In effect, there are important and innovative sectors, like technology, whereby the geographical proximity is not a key factor to invest, hence the reliance on an international investor base. This cross-border investor struggles to emerge on European crowdfunding platforms due to cross-border barriers highlighted above, despite the fast growth of domestic markets. As a result, the inability of investors to engage cross-border is capable to generate extra costs for businesses. In effect, anecdotal evidence and desk research show that many micro firms decide to incorporate the legal entity in the country where the crowdfunding market is more developed (like the United Kingdom). While this could be influenced also by other factors, such as the local financial ecosystem, this also means that small businesses in sectors that do not allow mobility of production factors would not be able to access these funding opportunities, unless an efficient domestic crowdfunding market already exists. Hence, the inability of platforms and investors to move cross-border may inhibit access for companies in a large set of sectors, especially in capital intensive ones (e.g. manufacturing), cutting them out of this market. These variations also create an un-level playing field for platform providers depending on their location, and by fragmenting fund models along national lines erect additional barriers to a Single Market in financial services and products. Key drivers include different interpretations and treatment of crowdfunding service providers as well as additional mistrust that this creates for investors in a cross-border setting. Investor preference for platforms within a familiar environment is thus preferred. 2.2The value added of an EU action EU action would reduce significantly the complexity, financial and administrative burdens for all key stakeholders, i.e. crowdfunding platforms, project owners and investors at the same time ensuring a level playing field among all the service providers using the same EU label. Furthermore, harmonising prudential rules, operational conditions and rules on transparency for all the relevant players would bring clear benefits to investor protection and financial stability. By harmonizing the essential features that constitute a crowdfunding platform, the proposal aims at establishing a uniform framework in relation to the definition of such crowdfunding activity, clearly setting common rules in specific areas. Newly emerging evidence in stakeholders' consultations and recent developments, such as the departure of the United Kingdom from the European Union (leading roughly 80% of the European market to move into a third country regime), further justifies action at this point in time. The purpose of the action at EU level is to protect the public interest against these problems by contributing to the effective and efficient development of the crowdfunding services in the EU, protection of investors, stability and effectiveness of the financial system, for the Union economy, its citizens and businesses. This impact assessment accompanying the Commission's proposal contributes to greater understanding of why these objectives are better achieved at Union level. Therefore, the establishment of an EU framework for crowdfunding services would fall under the competence of the EU according to Article 114 of the Treaty of Functioning of the European Union (TFEU). 3Objectives: What is to be achieved? The general objective is to increase the efficiency and diversification of the EU's capital market by eliminating problems to the development of a cross-border pool of financing for businesses. A single market for crowdfunding services would also provide access to alternative financing tools to expensive short-term unsecured bank lending for SMEs, especially for startups and other fast-growing companies, while ensuring a high level of investor protection. Thus, the initiative will support the CMU objectives of establishing a single EU capital market and strengthening market-based finance. In view of the key role of innovative firms for job creation and growth, the initiative also envisions to contribute to the wider EU objective of creating jobs and boosting growth. In order to achieve the overarching goals above, the following specific objectives need to be achieved: 1.Enabling platforms to scale up (objective 1); and 2.Enhancing investors' trust, by strengthening platforms' integrity (objective 2a) and transparency for investors (objective 2b). Enabling platforms to scale throughout the EU by creating a more proportionate regime. For instance, proportionate licensing requirements would enable cross-border business without requiring further authorisation in each EU country, thereby facilitating the attraction of a critical mass of investors and fundraisers matching the right investors with the right fundraisers across the EU. Enhancing trust may require to strengthen platforms' integrity and to increase transparency for investors, for what concerns the project, the instruments being intermediated and the processes performed by the platform. The sector adherence to a common set of standards may promote its reputation and help establish itself as a stable and reliable source of alternative finance. Proper levels of governance requirements, to ensure that management is fit and proper, and adequate internal controls are important step to achieve the second specific objective. Appropriate levels of information disclosures to ensure that prospective and current investors receive sufficient information about the returns and risks of the projects, together with fitting safeguards to prevent fraudulent activities by the platforms as well as by the project owners (fundraisers), are paramount. 4Policy Options and analysis of impacts The following section covers the assessment of the scope of the initiative and of the policy options to meet the objectives, with their impacts. 4.1Scoping the policy action The policy action would exclude donation, reward and lending to consumers for consumption purposes from the scope. Projects below EUR 1 million would qualify for crowdfunding services under the EU regime, which include reception and transmission of orders and placing of securities without firm commitment. The list of products to be covered includes transferable securities, loan agreements and other credit intermediation products. The following sections discuss three aspects that help to define the scope of the policy intervention. This initiative falls within the remit of the Capital Markets Union (CMU) Action Plan, which has been recently reassessed with its Mid-Term Review. The target of this initiative is thus to further the European Union's goal to develop a more integrated market for capital to counter-balance overreliance on bank finance and produce more private risk sharing, which can help to stabilise Europe's financial system, as well as more risk capital for European businesses (in particular, SMEs). One of the means of achieving this goal is the development of a viable market for alternative finance, such as crowdfunding. More specifically, the policy action wants to enable crowdfunding to increasingly become a stable source of early-stage financing for businesses, which could complement bank-based short-term funding (e.g. bank overdrafts or loans). Crowdfunding models

Crowdfunding models can be clustered in four groups: donation, reward, lending and investment-based. The investment and lending-based crowdfunding models offer a product with a financial return, which by nature relies on a future cash flow stream. This characteristic structurally produces additional information gaps that typically require a different regulatory intervention than consumer protection regimes. In this case, the combination of the crowdfunding model with a dispersed investment structure (and small ticket size that offers limited incentives to engage in monitoring) and a financial product calls for a targeted intervention to address risks for cross-border market stability and investor protection, which may not be sufficiently (or too aggressively) addressed under current national regimes. Crowdfunding via lending platforms (also called peer-to-peer lending platforms) can provide funds to businesses, as well as individuals. A further distinction is needed in the case of lending to individuals, as this can entail both lending to natural persons for business purposes (e.g. for purchasing equipment needed to carry out a business, such as an ice-cream van) or for personal consumption (e.g. travel, goods, etc), also called 'consumer lending'. The involvement of a consumer, receiving a loan for personal consumption and operating outside of professional capacity, places this activity within the remit of the Consumer Credit Directive. In case of a consumer receiving a loan to purchase an immovable property, this activity falls within the remit of the Mortgage Credit Directive. Given that these are already regulated activities (even though only from the lender's perspective) with a clearly local dimension in terms of operations and risk assessment, as well as lower ticket sizes for consumer credit compared to other crowdlending activities (on average – EUR 9 585), inclusion of this business model would not be warranted. Inefficiencies in providing consumer credit (including through the use of crowdfunding platforms) are already being assessed as part of the Retail Financial Services Action Plan and will feed into the forthcoming evaluation of the Consumer Credit Directive. In assessing whether or not to include donation-based crowdfunding, the Commission has pointed out in its Report on the assessment of risks of money laundering and terrorist financing affecting the internal market and relating to cross-border activities, that all forms of crowdfunding are significantly vulnerable to money laundering and terrorist financing –COM(2017)340 and SWD(2017)241. Part of the vulnerability was identified with the lack of a horizontal framework on crowdfunding platforms. For this reason, the Commission has proposed in the same document that Member States should consider applying anti-money laundering rules to crowdfunding platforms. Nevertheless, donation crowdfunding falls outside the scope of a European action, as it does not entail any 'tangible' return over the investment, whether financial or non-financial. Reward crowdfunding does not entail a financial return, even though it is an attractive funding tool for businesses. To preserve consistency among the European legislative frameworks, the existing consumer protection regime would still apply to those models. Less clear the application of legislation on money laundering and terrorism financing to donation crowdfunding under existing national legislations and supervisory arrangements. Insufficient basic transparency can undermine investors' trust and generate spillover effects on the stability of the Single Market. However, the donation crowdfunding industry is marginal and the average size of these firms is typically below 5 employees. In that respect, while extending the policy intervention applicable to crowdfunding platforms providing investment services over products with a financial return, to ensure application of Anti Money Laundering (AML) and Counter-Financing Terrorism (CFT) rules, would have represented merits in term of level playing with other financial services, it has been considered as too premature at this stage. This position does not prevent the Commission to envisage future policy actions on that matter. While application of AML and CFT is paramount, a targeted regulatory response would be more appropriate. Inclusion of donation services within the current initiative would result in a disproportionate action that would hinder and probably impede completely the provision of the service at domestic and cross-border level. Fundraising threshold Crowdfunding is a financial service, so policy intervention does not only need to define the nature of a crowdfunding activity (see previous section), whose core feature is intermediating funding between a dispersed issuer and investor structure, but also the conditions to avoid regulatory circumvention of well-established legislative frameworks for financial services, like investment services legislation (Markets in Financial Instruments Directive, MiFID). On the one hand, a defined 'issuance' or 'fundraising' size limit would narrow the scope to relevant crowd business activity and minimise the risk of circumvention. On the other hand, a limit on issuance size may potentially curtail crowdfunding issuance in specific capital intensive sectors, where the funding size is structurally higher. This upfront scoping relies on the recent impact assessment of the new Prospectus Regulation (PR), which has introduced a crowdfunding exemption from prospectus requirements for securities offers with a total consideration below EUR 1 million (during a 12 month period). This threshold was developed using data from a public consultation where respondents indicated that offerings fluctuates between EUR 50 000 and EUR 1 500 000 as well as market surveys that indicated average offering sizes to be between EUR 220 000 and EUR 250 000. The final number was decided during negotiations. According to the latest available market data, the average issuance of the business models with the largest ticket sizes is below the EUR 1 million threshold (investment-based crowdfunding averaged EUR 459 003 and peer-to-peer business lending averaged EUR 99 985 per fundraiser in 2015). In order to provide a passporting capability for platforms, as well as to ensure coherence with other financial legislation, the proposal should thus cover security and other products (as defined in the following section) issuances with a total consideration of below EUR 1 million over 12 months. Above EUR 1 million, there is national discretion whether or not to require a prospectus for public issuances (under conditions set by the Prospectus regulation). Also, cross-border offerings for issuances in that range would be under the EU Prospectus Regulation. The Prospectus provides appropriate space for sufficiently large funding rounds to be raised without mandating production of costly legal material and application of burdensome legal obligations, which would be disproportionate to the level of risk, size and activity of crowdfunding platforms. As this policy option builds upon regulating the provision of the service, the threshold would apply also to non-security-based financial products (e.g. loans), i.e. irrespective of the product actually negotiated on the crowdfunding venue. Any issuance above this threshold, for the provision of services discussed in the following section, does thus warrant the application of more mature and complex regulatory regimes, like MiFID or a more mature credit intermediation regime, because of the spillover effects that this greater amount would generate on risks for investor protection and financial market stability. Services Crowdfunding involves several different processes and transactions and an effective regulatory framework needs to be clear about what crowdfunding is and what is not. While preventing regulatory arbitrage risks within the financial sector, a limited number of activities can be identified as distinguishing features of crowdfunding platforms, leveraging on the existing framework for investment services under MiFID, which defines services that can qualify as European crowdfunding services. Upon consideration of different business models, as well as Member State experience in creating their own bespoke regimes, two types of investment services can be used to provide a principle-based definition of crowdfunding, and therefore be potentially subject to a lighter-touch and enabling framework: 1) Reception and transmission of orders (RTO); and 2) Placing of securities without a firm commitment basis (PSWFC). In several occasions, ESMA has confirmed that almost all investment-based crowdfunding platforms mainly offer reception and transmission of orders as core service. In addition, placing of securities without a firm commitment basis is also included, because, as ESMA pointed out, in the case of crowdfunding the reception and transmission of orders and placing of securities without a firm commitment can appear as the same activity, since the distribution element of the offer is embedded in the platform. Other services/activities, such as portfolio management, investment advice and execution of orders on behalf of clients, are usually added on top of the core service and would be subject to the full MiFID regime and other existing EU regimes. As the definition of advice is still not sufficiently narrow across member states, its inclusion in the list of crowdfunding services would create risks of regulatory arbitrage. If a platform wishes to provide additional services, it would then be subject to specific financial services regulations (i.e. MiFID, AIFMD, PSD2). For lending-based platforms, the lack of any European regime (as discussed in section 1.2.1) leaves space for the policy action to define the most suitable definition of lending activities that would suit the spirit of the chosen option. The EBA definition, discussed in section 1.1.1.1, i.e. an 'open call to the wider public by fund seekers through a third party, typically an on-line platform, to raise funds for a project, in the form of a loan agreement, with a promise to repay with (or in certain cases without) interest', could be a workable broad-enough definition to capture lending-based platforms in our policy options. An alternative option would be to use only the EUR 1 million threshold to define the scope of the policy action, so regulating all kinds of investment services (beyond the two identified above) and lending activities under a common EU crowdfunding regime (below the threshold). On the one hand, this would increase the possibility for crowdfunding to develop multiple variations of business models under one set of rules. On the other hand, this possibility would raise two important issues that leads to exclusion upfront. First, it would heighten risks of regulatory circumvention of the established European financial services regulatory framework, as it would lead to more fragmented issuance below EUR 1 million to be intermediated via crowdfunding structures and additional enforcement issues with more complex services (e.g. portfolio management), for which it would be difficult to monitor the application of the EUR 1 million threshold. Second, it would increase set off significant investor protection issues, by allowing complex services to be marketed in the same way very simple ones, like RTO, are. The high risk of frauds and misselling leads us to exclude this sub-option upfront. Instruments For what concerns the instruments traded on crowdfunding platforms, they can be either (transferable) securities, loan agreements or other credit intermediation instruments. National platforms currently face scalability challenges due to the specific instruments they use in their home market. Furthermore, in many Member States companies (project owners) are structured as a limited company (e.g. GmbH) or a limited partnership (e.g. KG) whose shares do not constitute 'securities' within the meaning of MiFID, but they are constructed as a loan. Hence, the relevant European legislation (e.g. the Prospectus Regulation and the Markets in Financial Instruments Directive) may not apply to some instruments in certain jurisdictions. It is thus important to adopt a sufficiently comprehensive approach towards instruments in order to ensure both scalability of operations and mitigation of circumvention risks. The definition of products that are intermediated on crowdfunding platforms (e.g. business loans, securities, royalties, among others) is thus fairly broad in order to cover a sufficient number of business models, while ensuring legal certainty via a strict definition of the services that the platform can perform. The exclusion of non-transferable securities lie in the structure of the product that should not allow transferability, plus the risks that these products may have in terms of investor protection, by locking in investors with limited exit options. The exclusion is also coherent with the established EU legal framework and pre-empts the legal constructs that may hide risks for investors due to their complexity. 4.2Baseline scenario – no EU framework (option 1) In line with the overview of legislative frameworks (see annex 5 for a summary overview), the policy baseline scenario is enshrined in a list of national regimes (for those countries that regulate crowdfunding), which embeds the following key features: 1.The authorisation procedure; 2.The governance and operations of a crowdfunding platform; and

3.The information disclosure to investors and business conduct. The baseline scenario assumes that no policy action(s) are taken at the European level, which would aim to address the problems set out in section 1.2. While the baseline would allow for flexibility to act at a later stage, when the market is more mature and has found a stable structure, this implies that a fragmented and complex regulatory framework for crowdfunding platforms would persist across Member States (or further fragment as a growing number of Member States are considering bespoke regulation). Extra costs for businesses and operators may continue to increase to even higher levels. In terms of authorisation for investment-based crowdfunding, some Member States would continue to draw on MiFID article 3 to carve out crowdfunding from the Directive's scope and preserve (or set-up) their bespoke national regimes. Other Member States would cover crowdfunding under their respective transpositions of the MiFID. In theory, the latter approach opens the possibility to passport crowdfunding activities across the EU. In practice, however, MS with national bespoke regimes would continue to disallow crowdfunding platforms to avail of such passporting rights in their jurisdictions. Similar situations would persist across other relevant regulatory regimes, such as Payment Services Directive, Prospectus Directive and Alternative Investment Fund Managers Directive, in that member states would choose whether or not to apply certain provisions with regard to crowdfunding. As a result of the heavily diverging regulatory approaches taken, there would be no single market for crowdfunding in the EU and operators would be inhibited from growing and expanding their platforms seamlessly across MS. The regulatory fragmentation would generally prevent platform operators to expand their offerings into other MS without making substantial modifications to operating protocols, consumer protection measures and/or other administrative aspects. These changes are not only costly but also make it difficult or, at times, even impossible to channel investments and fundraising projects in different MS through a common platform. For lending-based platforms, the implementation of quite different national regimes, especially when combined with the regime for investment-based platforms, will make the system more complex and unable to overcome (if not magnifying) the problems highlighted in section 1.2. Operators would not only face substantial operational and compliance costs on cross-border market entries but would also fail to reap increased network externalities if they cannot on-board projects and investors onto their initial platform. These costs and missed network effects would continue to severely limit the incentives for operators and investors to engage in cross-border activities. An additional hindrance is that investors would face varying degrees of legal uncertainty, if and where investors and/or fund-seekers access platforms from another Member State. Operators may also find that the fragmented regulatory framework supresses the cross-border demand for their services, lowering the incentives for such offerings yet further. As authorisation, organisation and conduct of business requirements for crowdfunding platforms within the Member States would continue to vary considerably, investors and fund seekers will have difficulties to compare offerings and assess any associated risks. Different standards in terms of transparency, investor protection and due diligence requirements would furthermore contribute to already existing home and familiarity biases and lower the trust of consumers in cross-border offerings. This is especially true on the investor side, which will generally be less proficient in assessing and evaluating associated risks beyond the standard investment risks. These hurdles to cross-border business operations and consumption imply that the EU crowdfunding market will remain heavily fragmented. Neither platform operators nor fund seekers or investors would be able to benefit from a functioning single market. Crowdfunding networks would essentially remain limited to their national markets, which is of particular importance for the future growth of operators based in small MS. Investors and fund seekers would be unable to benefit from increased competition, choice and innovation. Overall, the EU market would not converge into a single integrated market. It would thereby not operate as efficiently as it could under conditions of intensified cross-border competition. A fragmented market would furthermore hinder platform operators to scale up and keep pace with larger platforms established in the US and Asia. Inaction would also interfere with important market and policy developments. First, most of the market (roughly 70-80%) is concentrated in one country, the United Kingdom. Without a functioning third country regime, the departure of the UK from the EU poses the risk of leaving the EU with even lower scale to deal with the cross-border provision of early stage financing for businesses across Europe. It also raises questions about the need for a more uniform approach to provide a framework to assess the equivalence of a third country regime. Second, even though the review of the European Supervisory Authorities (ESAs) aims at improving the capability to analyse risk for consumers and investors and promoting more regulatory and supervisory convergence to enable more sustainable cross-border integration, inaction would still hinder the ability of the ESAs to promote meaningful supervisory convergence due to the severe market fragmentation. Third, inaction would hinder the activity of the FinTech sector, which increasingly offers support to the development of crowdfunding services, through the outsourcing of separate functions (e.g. payment services). A fragmented approach would result in multiple regimes that may or may not be supportive of FinTech services, so diluting the 'single market network effect'. None of the stakeholders taking part to the Inception Impact Assessment consultation found option 1 to be preferable, all agreeing on the need for an EU action to ease the scale-up of the platforms' operations. 4.3Building on reputational capital: minimum standards with best practices (option 2) This option would introduce minimum standards for crowdfunding activities, in relation to transparency (with the Key Investor Information Sheet, KIIS) and authorisation (notification only with ex post review by NCAs). Organisational and conduct requirements are left to either self-regulation or national requirements (where available). This policy option builds upon the regulatory approach applied in some Member States, whereby minimum regulatory standards are combined with self-regulatory efforts by the industry. A 'softer' non-regulatory action can be excluded upfront, as it won't solve the first problem driver, which lies with different national regimes without a minimum level of harmonisation. Rationale and key characteristics The rationale for this option is that crowdfunding is still an industry in its infancy and should be allowed to develop with the least 'regulatory touch', relying as much as possible on industry's best practices and the reputational capital that platforms have to stay in business. The policy action would thus foresee to establish minimum disclosure requirements in order to ensure that investors have sufficient information concerning the investment risks they are undertaking. Given considerations of reputational capital, platform operators already have an incentive to ensure information disclosure between fund seekers and investors. This policy action would only ensure that minimum harmonised standards are upheld across all platforms in the EU to deal with the second key problem driver of the dispersed investor structure. The disclosure regime could take the form of a Key Investment Information Sheet (KIIS), which would offer a standardised template with the minimum information necessary about risk and characteristics of the instruments sold to investors (whether a share or a loan agreement, the document will adapt its content accordingly). This document could be issued without pre-approval, but only with ex post monitoring by the competent authority about its key characteristics (and request to make adjustments, if necessary). The first problem driver, concerning with fragmented (licensing) regimes, is dealt with a notification-only procedure. No ex ante authorisation would be necessary, except for a notification to the competent authority that business has started. The competent authorities would only monitor the implementation of the disclosure standards and ensure that the adopted best practices do not clash with other existing regulatory regimes. Authorisation procedure Governance & operations Information disclosure & conduct Harmonisation tool Ex post review of best practices & ongoing supervision of disclosure requirements Best practices Key Investment Information Sheet (KIIS) Directive Other aspects, such as organisational and business conduct requirements of platforms, would be based on industry best practices agreed on by industry (via, for instance, a code of conduct) and providing a lighter intervention to address further areas under the problem drivers identified in section 1.2. It could be envisaged that there would be some light initial screening in this regard carried out by NCAs, after the platform notifies the commencement of the business activities. The establishment of minimum disclosure obligations would require the adoption of a Directive. The threshold in the Prospectus Regulation for the exemption from prospectus requirements will still apply, with member states deciding how to implement it and whether to carve out an additional exemption for crowdfunding offerings between EUR 1 million and EUR 8 million. Impacts This policy option holds the benefit that the crowdfunding industry would be given space and time to further develop its business models without meeting stringent regulatory requirements or authorisation procedures. It would keep compliance costs at a minimum (cost-efficient), especially for those platforms which today are already complying with various national regimes, which would remain in place. A harmonised approach on disclosure requirements would ensure that investors and fund seekers can rely on the same minimum standards on a cross-border basis. This would help to facilitate greater trust in cross-border activity as investors could rely on the same standards when accessing platforms cross-border. Likewise, it would aid cross-border fund seekers in that the information requirements would be largely aligned, meaning that different platforms could be tapped throughout the EU without requiring substantial changes in this regard. Platform operators would benefit as well, given that they would need to implement fewer changes to their platform setup when entering another Member State. Furthermore, as the sound provision of information and disclosure to investors' lies in the interest of platform operators, there will be few operators that would be required to make substantial changes to their arrangements. This means that the compliance costs would be kept to a minimum. The policy action however insufficiently addresses the current regulatory fragmentation, for instance with regard to authorisation requirements. While the option does not hold any detrimental impacts in this regard, it would not solve the current issues arising from regulatory fragmentation. Operators would still need to apply for national authorisations in Member States with bespoke regimes already in place, thereby hindering cross-border market entry. Without EU rules granting passports to the platforms, authorisation requirements are likely to remain significantly different across Member States. There is also uncertainty as to how compliance with industry standards would be handled and/or supervised. Such standards would not be binding and would take the form of guidance. Member States would still have the possibility to impose binding standards at national level on top of these, maintaining or amending the national bespoke regimes. In this situation, with major jurisdictions that have already implemented a national crowdfunding regime, a self-regulatory approach developed by the industry may also result in additional complexity. The difficulty and costs associated with this option would thus not be likely to help improve cross-border transactions. Investor confidence would also not be likely to improve under this policy option as a high amount of legal uncertainty would remain.

The precise compliance costs arising from this policy option are very difficult to assess, given that they will vary across operators, depending on the current platform specifications. Assuming that 200-250 platforms are captured by the initiative we estimate total one-off compliance costs to lie in the range of EUR 888,800 – 2,222,000 or EUR 4,444 – 8,888 per platform for the necessary IT changes. The costs of compiling a single KIIS are estimated at EUR 3,000 of which EUR 1,000 are regulatory costs. There may also be certain costs imposed on NCAs. The level of these costs will however depend on how compliance with the disclosure requirements would be monitored. These costs would be minimal and not exceed supervisory costs of monitoring the operators of a pure order transmission broker regulated under MiFID. It should be noted though, t