The European Commission is weighing whether a common framework is needed to regulate crowdfunding, the growing trend of raising small amounts of capital from a large number of individuals typically via the Internet.

The commission opened a consultation last week to get opinions regarding the potential benefits and risks of crowdfunding, and how to design “an optimal policy framework” for the alternative method of funding projects and ventures.

Commissioner for Internal Market and Services Michel Barnier said crowdfunding is becoming increasingly important.

“It has the potential to bridge the financing gap many start-ups face and to stimulate entrepreneurship,” Barnier said in a statement. “Considering the development of crowdfunding and the diversity of regulatory, supervisory, fiscal, and social frameworks for it across the EU, do we need a single European framework to support both those who develop crowdfunding platforms and to reduce the risks to those who make use of such platforms to finance projects? That is what I am asking.”

The commission believes the funding method may benefit from enhanced access to financing through a single European market, as well as safeguards to enable the mechanism to become a “sustainable source of financing” for European ventures rather than a passing fad. The commission said in its statement regarding the consultation that it is hoping to gather information on the needs of market participants to determine what action is needed, “facilitative, soft-law measures or legislative action.”

All forms of crowdfunding are being studied, including donations, rewards-based arrangements, peer-to-peer lending, and equity investments.  Potential citizen contributors or entrepreneurs, as well as national regulators and crowdfunding platforms, are invited to participate in the consultation and fill out an online questionnaire.

According to figures gathered by the European Commission, crowdfunding in Europe grew by 65 percent from 2011 to 2012, reaching an estimated €735 million. The European venture capital market, which has been decreasing, was a reported €3 billion last year, compared to European IPO markets of around €16.5 billion.

Some of the benefits of crowdfunding cited by the commission include providing access to capital for small start-ups that may not be able to access bank capital or venture funding. Crowdfunding also could provide opportunities for individuals to become entrepreneurs and provide competition for other financing sources. Risks include fraud, misleading advertising or advice, and disparate payment policies from various crowdfunding platforms.

The consultation is scheduled to be open until Dec. 31.

Topics