According to the EU Commission, crowdfunding improves access to funding especially for start-ups and other small businesses. The concept is actually quite simple: a start-up can present its project on an online platform and call for support in the form of a loan (peer-to-peer lending) or equity, and investors receive a financial return for their investment.

What regulations already exist in France?

In France, depending on the nature of the proposed financing, crowdfunding platforms need to be regulated in order to conduct their activity. Such regulation has applied in France since 2014.

A platform for crowdfunding via the subscription of financial securities issued by an unlisted company must be registered with the ORIAS register as a crowdfunding advisor (conseiller en investissement participatif, CIP). Such a platform may also opt for the status of investment services provider (ISP) providing consulting services, in which case it must be approved by the French Banking Authority (Autorité de contrôle prudentiel et de résolution, ACPR). CIPs are regulated only by the French Financial Markets Authority (Autorité des marchés financiers, the AMF) and ISPs by the AMF and the ACPR jointly. Obtaining ISP status also means that the crowdfunding platform is entitled to offer all categories of financial instruments and may passport its investment services across the EEA.

If the platform intends to fund projects in the form of a loan with or without interest, or in the form of donations, it must be registered with the ORIAS register as a crowdfunding intermediary (intermédiaire en financement participatif).

The growth of crowdfunding in France

In 2019, crowdfunding platforms represented a meaningful part of the financing landscape in France, with growth of 33% between 2018 and 2019. Since 2015, and in just five years, the amounts collected via such platforms have increased more than eightfold, from €169 million collected in 2015 to €1.4 billion collected in 2019. Today, all sectors of activity are concerned, from the most traditional providers to the most innovative ones. In just a few years, crowdfunding has thereby become a popular form of financing.

Several reasons in particular explain this success. First, crowdfunding represents a way of operating that is more in line with the aspirations of sponsors, lenders and both institutional and individual investors, who want greater transparency, traceability and greater proximity to the projects in which they are involved.

In addition, it is the result of a gradual reconfiguration of financing models and related support. The triptych bank / funds / crowdfunding platform model has gradually developed and is now well-established, and its respective importance will continue to evolve in the future. The popularity of crowdfunding is also a reflection of the rise of the ‘collaborative economy’ and the technology which facilitates it.

A European harmonized regulation?

Currently, it is difficult for many crowdfunding platforms to expand into other EU countries, largely due to the lack of common rules across the EU. This is why crowdfunding in the EU is relatively underdeveloped as compared to other major world economies.

In December 2019, the European Parliament and the Council reached a provisional political agreement on a new Regulation which permits crowdfunding platforms to apply for an EU label based on a single set of rules, which will enable them to offer their services across the EU (the ‘Agreed Rules’). The Regulation is yet to be adopted by the European Parliament and Council, a process which is likely to be delayed given COVID-19. If and when the Regulation is adopted, there will be a twelve-month transitional period, after which platforms will have six months in which to comply with it.

The Agreed Rules are based on three principal axes, which may be considered in the light of the French crowdfunding regime.

1. A uniform and mandatory European status

The new European crowdfunding service provider status provided for under the Agreed Rules, once adopted, will provide passporting rights across the EU and facilitate the development of cross-border crowdfunding activities. This will extend the possibility for France service providers to passport their services, that is, as mentioned above, only available to crowdfunding platforms registered under the stringent ISP regime.

Obtaininga ‘crowdfunding service provider’ status will be mandatory for all crowdfunding platforms. It will, however, only cover the financing of businesses through loans and equity, which is narrower than the scope of the French regime, under which crowdfunding based on rewards or loans to individuals is also permitted. French crowdfunding platforms will therefore have to adopt this new regime in place of their current status as crowdfunding intermediary or CIP in order to benefit from passporting.

2. What thresholds apply?

The Agreed Rules recommend that each project should be eligible for funding of up to €5 million over 12 months. One of the main consequences of such harmonisation for the French crowdfunding platforms is the reduction of the collection threshold, which is currently €8 million. While, this will, of course, be somewhat of a setback for the development and growth of French platforms, it is positive that the threshold has been increased from the €1 million threshold originally proposed.

3. New distinction between investors: Non-sophisticated and Sophisticated investors

The Agreed Rules also propose a new status, which does not exist in France: sophisticated and non-sophisticated investors who have different rights on the platform. French platforms will need to adapt to both.

Sophisticated investors will have no investment limit, whereas under the French crowdfunding regime all lenders are subject to a limit of €2,000 per project (although no limit on the total amount they lend).

Non-sophisticated investors will not be entitled to provide financing for a project of more than €1,000 or 5% of their assets (whichever is the greater). Their knowledge of the risks of the transaction will be assessed by a test. Crowdfunding service providers will need to alert such investors to these risks and investors will need to accept them explicitly. They will have a 4-day cooling-off period in which to withdraw their investment or loans.