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Illustration of how funding reaches inovators by depicitng a crowd, a bag of money, and a lightbulb (ideas).
"Crowdfunding" by Rocío Lara is licensed under CC BY-SA 2.0, https://creativecommons.org/licenses/by-sa/2.0/?ref=openverse.

Empowering Financial Innovation: Regulation of Crowdfunding in the European Union

Posted by: Elin Hofverberg

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The following is a guest post by Eva Dauke, a foreign law intern working with Foreign Law Specialist Jenny Gesley at the Global Legal Research Directorate of the Law Library of Congress. Eva has previously written for In Custodia Legis, including a guest post on the Anniversary of the German Basic Law – German Constitutions in the Course of Time and a post on FALQs: European Parliament Elections.

In the current global context, online platforms have been increasingly used to raise money for various purposes, including small business loans and artistic, social, or humanitarian causes. In 2023, the global transaction value of crowdfunding reached US$1.17 billion. Given that several of these platforms operate within the North American and European regions, I thought it would be interesting to take a closer look at the regulations on crowdfunding within the European Union (EU).

In November 2021, the Regulation on European Crowdfunding Services Providers for Business (ECSPR) entered into force to regulate crowdfunding platforms in the EU. The ECSPR is part of the EU’s FinTech Action Plan of 2018, which aims to enhance the competitiveness and innovativeness of the EU’s financial sector by enabling innovative business models.

Unlike directives, which are only binding concerning the result that must be achieved, regulations are binding and directly applicable in every EU member state. (Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) art. 288, paras. 2, 3.) The deadline to transfer the new ECSPR system ended in November 2023.

Background Information

Crowdfunding is a form of alternative collective financing, whereby many individuals contribute funds to a third party via internet platforms. It is mostly used by (small) business owners (e.g. start-ups). In particular, crowdfunding represents a form of financing, whereby people can provide financial support in the form of donations, loans, or investments to projects or individuals in need of funding. Crowdfunding platforms serve as a medium for connecting businesses and “the crowd.”

In the past, crowdfunding platforms have experienced hurdles when operating on a transnational scale. (ECSPR recital 6.) In particular, the European Commission discovered that the majority of EU member states had either different or no regulations. (Id. recital 6.) Given the growing popularity of crowdfunding as a form of alternative financing for start-ups and small and medium-sized enterprises, which typically rely on small investments, the European Commission aimed to foster cross-border funding of business. (Id. recital 7.) By enacting the ECSPR, the Commission aimed to reduce the obstacles faced by platforms and to increase the possibility of using innovative financial instruments. (Id. recitals 3, 4.)

The ECSPR covers two forms of crowdfunding: lending-based crowdfunding, which facilitates the provision of loans, and investment-based crowdfunding, which involves the placement of transferable securities or instruments. (Id. recital 1.) The ECSPR lays down the requirements for the provision, organization, authorization, and supervision of the providers. (Id. art. 1, para. 1.)

Field of Application

The ECSPR applies to legal persons who provide crowdfunding services (called crowdfunding service providers) using a crowdfunding platform, are established in the EU, and have been authorized as crowdfunding service providers. (Id. arts. 1, para. 1, art. 2, para. 1(a)(e), art. 3, para. 1.) However, the regulation does not apply to services that are provided to protect owners who are consumers. (Id. art. 1, para. 2(a).) Consequently, the regulation only applies to fundraisers as businesses or business owners. The regulation is targeted especially to start-ups and small and medium-sized enterprises. (Id. recital 1.)

Standardized License for Crowdfunding Service Providers

Platforms that fall within the scope of the regulation’s application are required to obtain a license. According to article 12, paragraph 1 of the ECSPR, to obtain authorization as a crowdfunding service provider, the provider must apply for a license (“EU passport”) from the authority of the member state where it is established. Once a license is granted, the European Securities and Markets Authority (ESMA) is informed, and subsequently, creates a public and regularly updated index of all crowdfunding service providers. (Art. 14.) It is not necessary to obtain further authorization in another EU member state. (Id. art. 18 paras. 1, 4.) However, in the case of cross-border activities, it is still necessary to inform the authority responsible for the authorization to update the ESMA’s index. (Id. art. 18, para. 2.)

Protection of Investors

One of the main objectives of the ECSPR is to ensure consumer protection. Therefore, the European Commission has included many rules to reduce the risks associated with crowdfunding. As crowdfunding is a form of financial instrument, there may be a risk of losing money or of the service being exposed to money laundering and terrorist financing. (Id. recital 32.) To avoid this, crowdfunding service providers must perform a minimum level of due diligence concerning project owners, which may include criminal background checks. (Id. art. 5.) The platform must further follow the principles of fairness and clarity, and ensure that all information provided is not misleading. (Art. 19, para. 1.) Before the transaction, the platform must provide specific information to its clients, including details regarding associated costs, financial risks, and other pertinent factors. (Id. art. 19, paras. 1, 4.)

To protect investors, the service provider must differentiate between sophisticated and non-sophisticated investors. Those lacking the requisite knowledge and resources to assess the risks associated with capital market investments and to manage them effectively are considered non-sophisticated investors. (Id. art. 2, para. 1(j)(k), annex II, para. 1.) To facilitate this process, the service provider must also assess the prospective investor’s experience. This assessment helps determine which services offered are most suitable for the investor. (Id. art. 21, paras. 1, 2.)

If the investor is non-sophisticated, the ECSPR grants a pre-contractual reflection period during which the investor may withdraw from his or her “offer to invest” or “expression of interest” without providing a reason and without penalty. (Id. art. 22, para. 2.) The pre-contractual reflection period commences upon the investor’s offer to invest or the expression of interest by the investor and expires after four days. (Id. art. 22, para. 3.)

Anecdote from Crowdfunding the Past

Crowdfunding is not a financial innovation based on modern technology. In 1885, when the Statue of Liberty was presented to the United States as a gift from the French government, the governor of New York refused the use of city funds to pay for the pedestal of a statue. However, a collective initiated a fundraising campaign published in the newspaper “The New York World” to complete the pedestal. In only a few months, the campaign succeeded in raising US$ 100.000 (equivalent to nearly US$2 million today) from donations.

Additional Resources

The Library of Congress holds several print and online sources on crowdfunding including:

Law Library of Congress online resources on EU law:

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