Crowdfunding has become a segment with real impacts on capital markets. Filippo Morello, who joins us as Land Steiermark fellow this fall, dedicates his current research to the regulation of platforms providing crowdfunding services, e.g., Kickstarter and Indiegogo, at the EU level. Read below what he has to say about the status quo of European crowdfunding platform legislation as well as about the Schlossberg.
Mr. Morello, you are working on the regulation of crowdfunding, specifically on the EU’s efforts to harmonize the norms to be adhered to by crowdfunding platforms. Have Kickstarter, Indiegogo and Patreon gained so much momentum that they need their own set of EU norms?
This is the view of the European legislator. However, I believe that the motives behind Regulation 1503/2020 can be better understood by looking beyond the industry momentum and the market figures. Significant determinants for the European intervention can be found within EU law and policy, in particular its expansive power and pro-competitive rationale. On the one hand, EU law tends towards greater harmonisation in the financial sector in order to create integrated capital markets. In line with the political project of the single market, EU regulation is gradually bringing new and peripheral sectors, such as crowdfunding, within its scope. On the other hand, a single regime for crowdfunding would create a level playing field for national operators and stimulate competition between them. The aim is to promote a healthy and profitable crowdfunding market for European businesses and consumers. Overall, these motives have little to do with the growth of crowdfunding platforms per se or the urgent need to address the risks they raise.
As these platforms have significant market power, do they have to be regulated like banks?
This is a very topical question. Different legal perspectives would probably lead to conflicting answers. From a private law perspective, the sensible answer would be in the affirmative. The transactions and risks that consumers and investors face when dealing with a platform are similar to those of banking services. Platforms present themselves as commercial substitutes for banks, with lower intermediation fees and costs. However, a financial regulation perspective would caution against treating platforms as full-fledged banks: they manage financial assets and risks differently, and banking regulation would be too burdensome for agile intermediaries that rely only on a digital interface for users. The debate is stimulating because it epitomises the regulatory trade-off between limiting and preventing risk and not stifling technological innovation. I think the EU regulation strikes a fair balance between these objectives.
In a nutshell, what does the present EU regulation entail for businesses and consumers?
The Regulation recognises that crowdfunding platforms are new intermediaries that deserve tailored rules. It covers service providers that channel capital to companies in the form of debt or equity financing and sets out a single regime of authorisation, organisation and supervision requirements. The most important part, at least for a private lawyer like me, is the regulation of investment intermediation. When offering debt or equity instruments issued by a firm to clients, the service provider is subject to strict transparency and marketing requirements, which are even stricter when the intermediation takes the form of individual portfolio management. In addition to this, specific provisions safeguard investors’ assets on the platform and allow them to trade the purchased instruments in secondary markets run by the crowdfunding provider itself.
While at Uni Graz, I will specifically focus on the investor protection provisions of the Regulation. In detail, where investors are not sophisticated, the service provider must carry out an entry test and a simulation of the loss capacity before granting access to trading. Non-sophisticated traders also benefit from a pre-contractual cooling-off period during which they can reconsider their investments.
If you had one wish to the European lawmakers, what would you change in the present regulation of crowdfunding platforms?
Allow me to clarify that my research perspective is not directly concerned with policy in the sense of assessing the merits and shortcomings of the new legal instrument. Instead, I am more concerned with identifying the boundaries and unveiling the legal and regulatory approach of the Regulation. My research hypothesis is that although the Regulation is not a consumer law statute, it draws heavily on the consumer toolkit and thus marks a new stage in the convergence of investor and consumer protection law in the EU.
However, if I were to change anything, I would certainly broaden the scope of application. Article 1, para. 2, exempts consumer-owned projects, with the result that peer-to-peer consumer lending platforms are outside the scope of the regulation. I find this exclusion unconvincing in view of the risks inherent in lending operations where natural persons lend capital to other natural persons.
Have you already found the time to explore Graz and its surroundings? If so, what do you like most?
I moved to Graz two weeks ago and I am enjoying the city and the REWI environment. I have had a few opportunities to visit the city, especially the Stadtpark and the Schlossberg in the city centre. I haven't visited any museums yet - the weather has been (alarmingly) warm so far and I've preferred to spend time outside. I also plan to see as much of the Steiermark countryside as possible and, if I have time, organise a trip to the Austrian mountains.
I must say that I have had the warmest welcome at the University. I am deeply grateful for the opportunity to be here and for the careful consideration of the administrative and academic bodies.