EU Looks To CrowdInvesting To Plug Post-Brexit SME Capital Gap

The European Securities and Markets Authority (ESMA) has responded to an EU consultation on capital markets with a plea for the European Commission to focus on small businesses and investment-based crowdfunding; as well as more joined up regulatory supervision and more efficient collection of financial reporting data.

Recommendations include lighter information and reporting requirements for SMEs seeking to raise money; and EU regulation of crowd-investing to enable cross-border funding on a consistent basis.

ESMA says that only 10 of the 28 current EU member states reported the existence of regulated investment-based crowdfunding (in debt securities and equities/shares) in their territory - 99 platforms (up from 46 in 2014), of which 30 are based in the UK (up from 26 in 2014). France (23), Italy (17) and Germany (13) are fast followers. Only 12 platforms use a passport - based in either the UK or Finland (which has a total of 5 platforms). 

The various platforms are listed in the Appendix to the ESMA response. There is also a high level comparison of the various differences in terms of initial capital requirements; instruments and structures; remuneration models/levels and how these align with the interests of fundraisers/investors.

Volumes are not mentioned, but given that over half the platforms in 2014 were based in the UK, then it's likely they are still responsible for most of the volume. And the fact that ESMA bothers to push the sector at all suggests that those volumes are significant.

So this focus is not only an admission that Brexit creates a big and important capital-raising gap to fill, but it's also a big endorsement of the UK crowd-investment sector.  

UK Government: Gamble All You Like, But Don't Invest

You've got to wonder about priorities at the Department of Culture Media and Sport. They allowed UK bookmakers to harvest £46 billion through betting machines last year - not to mention the bingo and lotteries freely advertised on TV - while computer games companies complained they can't offer shares to fans who crowdfund games development. 

Consider this from today's Telegraph:

• Britons gambled £46 billion on betting terminals last year, an increase of almost 50% in four years.

• Gamblers lose up to £100 every 20 seconds on the fixed odds machines.

• 588,000 under-18s were stopped when they tried to enter a betting shop last year, six times as many as 2009, and 27,000 people were challenged once they had placed a bet.

• Bookmakers made profits of £1.55 billion from the terminals between April 2012 and March 2013.

Meanwhile, even though the FCA has said that ordinary folk will be able to invest to fund the development of a computer game, for example, they must first certify that they will not invest more than 10% of their 'net investible portfolio' and either seek financial advice or satisfy an "appropriateness test". That's because they say investing is risky for consumers... 

Compared to what?!

Image from RoehamptonStudent.com. 

Do TV Advertising Rules Limit Economic Growth?

There has been plenty of research into the alleged effect of TV sex and violence on human behaviour, but how does TV adversely impact our economic behaviour? 

This issue was recently highlighted by the FCA's proposed new rules on crowdfunding. Left in isolation, the current restrictions on financial promotions suggest the State would prefer us to play bingo or buy lottery tickets than invest the same small amounts in funding the growth of each other's businesses. 

The FCA is right to point out the risks of investing in start-ups, but it should compare those risks to the risks consumers face when putting their money into other products that are more freely advertised.

We rely on small businesses for over half of all new jobs and a third of private sector turnover. Yet, those small businesses struggle for funding while over half of the UK's adults engage in regulated gambling that is designed to cost consumers far more than they 'win'.

It may be true that over half of business start-ups fail within 3 years, but they still employ at least one person in the meantime. And maybe more of those businesses would survive if we lent them some of our bingo money, or bought their shares with at least some of the money we chuck away on the ponies. Better that the money goes in wages, and the goods and services that small businesses typically buy, rather than simply to line the pockets of the bookies - and you have the chance of getting a decent return on small business loans, or if you happen to invest in the businesses that succeed in the longer term. 

No doubt someone will raise the moral panic about 'good causes' being starved of lottery money if we don't allow the promotion of that form of gambling. But I'm not talking about any ban on advertising lottery or bingo etc., just a relaxation of rules on the promotion of productive financial instruments (though it would be more efficient to simply donate a third of your lottery money directly to good causes on a crowdfunding platform than to wait for it to filter through the books of a lottery operator).

Ads for apparently 'safe' bank savings products are not helpful here, since savings rates are low and banks are not focused on lending to small businesses. We have over £200bn sitting passively in low interest bank deposits, yet banks' savings rates are below the rate of inflation, and banks only lend £1 in very £10 to SMEs. The Financial Services Compensation Scheme might protect your deposit if the bank goes under, but that's another cost that consumers end up paying for, and it won't protect the value of those deposits against inflation. Stocks and shares ISAs and pensions are similarly 'passive' investments in financial assets, rather than productive ones.

The highly restrictive approach to financial promotions has neither prevented financial scandals nor created a sound financial system - two of many reasons why people have resorted to lending directly to each other, or investing directly in each others' projects and businesses. So why not allow these new alternatives to be promoted more openly - at least to the same extent as riskier, non-productive activities like playing bingo or buying lottery tickets?

We need to move away from rules that dictate what we can do with our money, to rules that enable a fully informed choice from amongst all the options. 

At any rate, the State should certainly not create a situation where the money-related messages which the average TV viewer receives do not include investing directly in the productive economy.

Image from RoehamptonStudent.com.

Crowdfunding Regulatory Arbitrage - Updated

October is 'crowdfunding month' out there in the regulatory world. The European Commission is consulting. The SEC is consulting. Some US states are consulting. The French are consulting. And today, the FCA is consulting.

The European Commission is still in fact-finding mode, so should have the luxury of plucking all the good bits out of the US and UK approaches.

Ironically, the SEC's approach looks too much like small beer to enable fund-raisers to take on the entire US market, but enabling them to raise $1m every 12 months could be really helpful on an intra-state basis (and, indeed, possibly for many EU-based start-ups). On the other hand, it would probably be tough to market anywhere the investor limit of $2,000 or 5 percent of annual income or net worth, for those with annual income/net worth of less than $100,000.

On some ground the FCA's approach might look somewhat better, but in my view, the FCA has not struck the right balance in its proposals to regulated peer-to-peer lending and crowd-investment. 

Loan-based crowdfunding platforms should be regulated more like payment platforms rather than like investment firms, as the FCA proposes. As a result, it will be substantially more expensive to establish and operate a platform with no real change in how operational risks are managed. Businesses and institutions may also be put off, both by the need to be authorised just to invest in the loans, as well as uncertainty as to their compliance obligations given that their own systems aren't even involved. The good news here is that the FCA advocates 'secondary market' for loans. 

The good news for investment-based crowdfunding is that the FCA supports wider 'retail' participation than it has to date. But people will still be asked to certify that they will not invest more than 10% of their 'net investible portfolio' and face an 'appropriateness test' if they do not get advice. In other words, it will still be much easier to stick a tenner on a pony, where the bookmaker wins, rather than to back a local business in support of the economy. No one seems to take responsibility for these strange inconsistencies in the way we are allowed to use our money...

The French proposals have the benefit of adopting the approach, called for by the industry last December, of effectively regulating loan-based platforms as payment service providers. However, as Aurélie Daniel has pointed out the proposals also contain controversial "upper limits for loan-based crowdfunding... a maximum loan amount around €250 per individual per project and a global maximum loan amount around €300,000 per project." While this might not trouble consumer loan-based platforms, it would negatively impact platforms that facilitate loans to businesses and for the purchase or development of larger assets such as commercial property. Ironically, the French appear to have reserved such loans for banks, and in this respect the FCA's proposals are of course more helpful. The limits apparently do not apply in relation to investment-based crowdfunding.

At any rate, I guess entrepreneurs may be able to take their pick as to the most suitable fundraising regime.