Member Article

After the financial crisis hit the markets in 2008, small and medium sized enterprises ("SME") have found themselves at the sharp end of diminished access to credit. In their search for credit, they have turned to alternative forms of financing, such as crowdfunding. Last year around €300 million was raised through different types of crowdfunding. This amount is expected to increase significantly in 2013. Whilst crowdfunding has developed strongly in recent years, legislation on this topic has not. 

What is crowdfunding?

Crowdfunding allows entrepreneurs and SME to solicit capital from funders (both private and legal persons), using social networks and crowdfunding platforms to finance their businesses and projects. The transactions are carried out through a platform on the internet, which platform serves as an intermediary, whereby, for example, money is being lent from the party offering money to a party requesting money. At the end of 2011, there were around 200 crowdfunding platforms active in Europe. Their number is expected to increase by 50% by the end of 2012. Examples of platforms in the Netherlands are www.crowdaboutnow.com andwww.seeds.nl. The mechanisms and purpose of the crowdfunding platforms vary significantly.  

Legal restrictions to crowdfunding

There is no specific legislation on crowdfunding in Europe or the Netherlands yet. However, depending on the structure and purpose of the platform investors, investment recipients and the platform may be confronted with the application of the Dutch Act on Financial Supervision ("FSA"). The FSA strictly regulates crowdfunding transactions, even if the amounts involved seem to be rather low.

For example, investors, acting in the course of their profession, may be confronted with the prohibition to offer credit to recipients who qualify as consumers (not acting in the course of their profession; 2:60 AFS). Recipients may be confronted with the prohibition for parties to, outside of a restricted circle, attract, receive or have at their disposal repayable funds from others than professional market parties (3:5 AFS). Finally, the crowdfunding platform may be confronted with license requirements under the FSA; for example if it takes a role as an intermediary providing credit, insurance or financial services (2:80 FSA) or the platform itself receives funding from investors and on-lends these funds in the Netherlands (2:11 FSA).  

Specific legislation necessary

The abovementioned restrictions are only examples of the many restrictions that may apply to parties involved in crowdfunding. It is clear that the financial market regulations have not yet been adapted to the fairly new phenomenon of crowdfunding. It is expected that in the coming years specific legislation is introduced to support crowdfunding (http://www.crowdfundingframework.eu/). Until specific legislation is introduced, it is highly recommended to obtain legal advice prior to investing on a large scale through crowdfunding or incorporating a crowdfunding platform.