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The facilitation and regulation of crowdfunding, one of the fastest growing ways of financing start-up businesses, is under consideration by the European Commission. David Blair, Head of Financial Regulation at Osborne Clarke, considers this move, which indicates the Commission will take a pragmatic approach to make Europe a hub for entrepreneurial activity.
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The European Commission is keen to assess the potential benefits and risks of crowdfunding, an alternative form of financing, with a view to promoting it across the EU and increasing entrepreneurship. It is asking, via consultation, for the views of anyone with an opinion on crowdfunding or who might contribute to the growth of crowdfunding platforms, in order to help it design a policy framework to untap the potential of this new form of funding.
What concerns have the Commission raised around the crowdfunding model?
The Commission’s main concern is to ensure the protection of investors. Internet promotions that offer no potential for dialogue are limited in their ability to provide a full and accurate description of an investment opportunity in a way that is capable of being understood by a retail audience. On the other hand, it is easy for interactive dialogue to stray into the territory of investment advice, which is not a service crowdfunding enthusiasts would typically want to pay for.
The Commission has also considered the perspective of the investment recipient. It is difficult for cash-strapped start-ups to strike a balance between providing comprehensive public investor disclosure without giving away their intellectual property.
The Commission notes that existing European regulation in the fields of e-commerce, intellectual property and anti-money laundering (not to mention distance marketing) already address many of the key identified risks.
What are the risks for individuals who engage in crowdfunding?
Crowdfunding presents the same risks that are inherent in trusting a third party to have day-to-day control of one’s money. These risks include the ‘unacceptable’ risks of misrepresentation, fraud or incompetence on the part of the investee or the
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