Regulatory and legal frameworks in Europe:ignition or burn out?

Crowddialog 2015Umberto Piattelli

Crowdfunding, Crowdinnovation, Crowdsourcing

“I never think of the future. It comes soon enough.”

Albert Einstein

Private & Confidential 2

Worldwide Crowdfunding trends 1/2More than $20 billion in funding transactions will occur globally throughcrowdfunding in 2015 based on trends from the past three years.

This represents a 100 percent increase from $10 billion in 2014, $5.1 billionin 2013, and $2.6 billion in 2012.

Estimates from a variety of sources indicate that the yearly total marketpotential of the entire crowdfunding industry could average around $300billion by 2025.

So enforcement of regulations across the world countries does not seem tohave a material impact on the growth ….

Private & Confidential 3Source: EquityNet January 2015

Worldwide Crowdfunding trends 2/2Growth Rates By Models in 2014The growth in funding volumes continued to be primarily driven by lending-based crowdfunding, but significant annual growth in equity-basedcrowdfunding and increased adoption of newer hybrid and royalty-basedmodels indicates that the allocation of funding volume across differentmodels will be more highly distributed over the coming years …

- Lending-based crowdfunding grew 223% to $11.08 billion- Equity-based crowdfunding grew 182% to $1.1 billion- Hybrid-based crowdfunding grew 290% to $487 million- Royalty-based crowdfunding grew 336% to $273 million- Donation and Reward based crowdfunding grew 45% and 84% respectively.

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Source: Massolution Report 2015

Overview of the European market on lending CF

2014 (million €) UK Nordic France Germany Netherlands Italy Spain

P2P Consumer lending 752 87 80 80 0 15,5* 0

P2P Business lending 998 28 8 6 35 0 14

Invoice trading 354 0 6 0 0 1,5** 1

Total 2104 115 94 86 35 17 15

Private & Confidential 5

Source: The European Alternative Finance Benchmarking Report, Cambridge University; */** Source: Prestiamoci/Workinvoice

Overview of the European market on equity CF

2014 (million €) UK Nordic France Germany Netherlands Spain Italy*

2014 111 3,7 18,9 29,8 11,2 10,5 8.9

2013 37 2,9 9,5 17,3 6,2 6.2 6

Total 148 6.6 20,4 47,1 17,4 16,7 14,9

Private & Confidential

Source: The European Alternative Finance Benchmarking Report, Cambridge University; * Source: MIP and local platform

Italy: a regulated market for equity CF. Can tell a story?

Private & Confidential 7

Authorised Platforms: 15 (operating 8)

Other equity crowdfunding platform (club deal model): 1 (operating 1)

Projects launched by authorised platforms (from 1/1/2014 to 30/6/2015): 25

Projects launched by other platforms (from 1/1/2014 to 30/6/2015): 100

Projects completion (authorised platforms): successful 7, unsuccessful 14, ongoing 4

Average equity collected: 342.000,00 EUR (available only for authorised platforms)

Total equity raised by authorised platforms (from 1/1/2014 to 30/6/2015): 2,3 ml EUR

Total equity raised by authorised platforms in 2015 (first half): 1,4 ml EUR

Total equity raised by other platforms (from 1/1/2012 to 30/6/2015): 20 ml EUR

Countries with a specific crowdfunding regulation (equity and/or lending)

Private & Confidential 8Source: Review of Crowdfunding regulation, 2014, ECN

DG

CONNECTINTERNAL MARKET

SANCOECFIN

ENTERPRISESRTD

Public Bodies

ESMA (EU)EBA (EU)

BAFIN (DE)CONSOB (IT)

AFM (NL)AMF (FR)FSM (BEL)DBA (DK)

Min. Finance (IRL)Min. Finance (FR)Min. Finance (FIN)

Member States

ES ITDE IRLFRA BELDK FRPOL LATES GREHU ATNL CZEROM

European Crowdfunding Stakeholder Forum of experts … no material impact so far

ESMA and EBA opinion issued in 2015

Crowdfunding, Crowdinnovation, Crowdsourcing

«We are slave of the laws to be free”

Marco Tullio Cicero(ne)

Private & Confidential 10

ESMA opinion on applicable European regulation to equity CF (ESMA/2014/1378)

EU financial rules were not designed with CF industry in mind

ESMA has identified issues for consideration of policymakers

Lack of passport make it harder to platform to achieve scalability

ESMA has analysed potential risks linked to equity CF

Several EU Directives apply to equity based CF

Risk and issues for consideration by regulators (ESMA/2014/1378)

Loss of capital

Dilution through further rounds of capital

Conflict of interest where platform is paid by issuers

Failure of the platform

Illiquidity of the investment

Limited information available to investors

Potentially applicable EU-level regulatory regime (ESMA/2014/1378)

Prospectus Directive [2003/71/EC] unless exceptions apply (country specific)

Market in Financial Instruments Directive [2004/39/EC]: offering of financial instruments,execution of orders, managing of MTF

Alternative Investment Fund Managers Directive [2011/61/CE]: applicable if “collectiveinvestment undertaking” do not have general commercial or industrial purpose (includingholding)

3rd Anti-Money Laundering Directive [2005/60/EC]

Distance Marketing of Financial Service Directive [2002/65/EC]

European Venture Capital Funds Regulation [EU 345/2013] funds investing at least 70% insmall firm not listed, marketed only to investors treated as professional clients

Market Abuse Directive [2003/6/EC] not applicable until financial instruments are admitted totrading on a regulated market

EBA opinion on applicable European regulation to lending CF (EBA/2015/03)

EBA task is to monitor new and existing financial activities

Establishment of high quality common regulatory and supervisorystandards and practices

Convergence of practices across the EU to avoid regulatory arbitrageand create level-playing field

Lending CF does not fall inside the “credit institutions business model”

Risk and issues for consideration by

regulators (EBA/2015/03) Unrealistic high rate of return

Loss of capital

Lenders not receiving funds from borrowers and vice-versa

CF platforms default

Borrower acts fraudolently

Limited information available to lenders

Illiquidity

Potentially applicable EU-level regulatory regime (EBA/2015/03)

Payment Service Directive [PSD] is regarded as the most relevant applicableDirective since platforms are usually operating as payment service providers

Electronic Money Directive [EMD] is regarded as applicable where electronic walletservices are involved

3rd Anti-Money Laundering Directive [AMLD]

Mortgage Credit Directive [MCD] applicable only if a professional lender is involvedin lending crowdfunding solutions for real estate investments

Consumer Credit Directive [CCD] applicable if creditors grant credit in the course oftheir business or profession

Operating models are developing across Europe 1/2

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IP rights &Platform

management

Embedded license to operate as Investment firm, EMI, PSP, Bank, Financial Institutions

Platforms operating under an “investment”/“banking” license (higher investments)

Legal Entity

Operating models are developing across Europe 2/2

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Entity owning IP rights & managing the platform (without the license) The Alternativa case. Two companies dealing with into two different businesses:

AM France: an Investment Services Provider which enables SMEs to raise equity quitelike an equity crowdfunding platform regulated as suchALTERNATIVA France: a Multilateral Trading Facility (MTF) enabling investors to tradeshares on a secondary market.

Entity authorised to operate as Investment Firm, EMI, PSP, Bank, Financial Institutions

Platforms operating without a license and as a “service provider”/“agent” of a licensed entity (lower investments)

Crowdfunding, Crowdinnovation, Crowdsourcing

“It is not a faith in technology. It’s faith in people.”

Steve Jobs

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Some final thoughts to help regulators to support rather than block the crowdfunding business …

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Investor protections is crucial but the crowdfunding business is not (yet) famous for frauds.

Avoid excess of Regulation (UK leads …) and listen to the market players.

Rather than adopting new laws and regulations, introduce exemptions to the existing ones regarded as applicable (EU directives and relevant local enforcement provisions).

Apply clear and simple rules avoiding “grey areas”.

Amend existing regulations or implement new regulations to timely address new crowdfunding business model needs.

Allow the development of a secondary market as far as equity crowdfunding market is concerned.

Harmonise national regulations to allow EU platform to scale their business.

Thanks – Mercy – Dank – Gracias - Cпасибо

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Avv. Umberto PiattelliPartner, T + 39 02 5413 1762 umberto.piattelli@osborneclarke.com

Osborne Clarke is an international law firm withover 650 lawyers. Over the past 3 years we haverepresented more than 5,000 clients in 70 differentjurisdictions. Our offices:

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*

• Member of the European Stakeholder Crowdfunding Forum(representing Italy), the group of experts appointed by the EuropeanCommission

• Member of the Assolombarda committee within the ambit of the“FARVOLAREMILANO” project that deals with the development ofcrowdfunding

* OC has a strategic alliance with John Co & Koh