Debunking the French Government’s recent proposals to define crowdfunding: What is and isn’t being regulated

Oct 7, 2013
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The following is a guest post by Aurélie Daniel, Cofounder & CEO of Beyond Croissant & blogger at En 20 Lignes, who has a Master’s in Business Law from the Institut d’Etudes Politques de Paris. You can find her on Linkedin or follow her on Twitter @aureliedaniel.

The French Government has recently proposed changes to establish a legal framework for the deployment and development of crowdfunding in France. There are, today, dozens web-based platforms dedicated to projects funding in the country – for a cumulative amount of EUR 40 million in 2012 according to Financement Participatif France – and a new platform seems to be created every week. However, the very restrictive and inadequate existing rules still hold crowdfunding in France back. That’s the reason why French Minister for Small and Medium Enterprise Fleur Pellerin decided to start receiving proposals to adapt these rules to reality.

Background: Legal hurdles needed to be exceeded to make crowdfunding in France more broadly accessible

“Crowdfunding” refers to different ways for individuals to pool their money and support projects of any kind (humanitarian, entrepreneurial, political, artistic, etc.), most of the time using crowdfunding platforms (such as My Major Company, Ulule & KissKissBankBank) to organize deals between these individuals (funders) and projects leaders. In particular, there are different types of crowdfunding;  individuals can either give, lend or invest money. Current discussions in France focus on lending or equity platforms issues, not ‘giving’ platforms like Kickstarter, Reservoir Funds, Ulule & KissKissBankBank.

As explained both by Michel Ivanovsky in his framework of crowdfunding activities in Europe and France published in February 2013 and by FriendsClear whitepaper released in 2012, the prude European and French rules greatly restrict the ability of equity or lending crowdfunding platforms to fulfill funding needs of emerging businesses.

In France, only banks can lend to companies, and French lending platforms need a minimum capital threshold that can run up to €5 million in order to become a credit institution and comply with the regulations established by the control authorities (European Commission, Autorité de Contrôle Prudentiel and Autorité des Marchés financiers), even though they deal with small deals. Equity platforms also need to comply with the Prospectus European Directive and to be an accredited  Investment Service Providers by the Autorité de Contrôle Prudentiel (ACP).

The main legal hurdles for both lending and equity platforms relate to minimum capital requirements (keeping at least €730,000 in equity capital, for example) and highly restrictive rules to prevent money laundering and terrorism financing.

The first step towards more specific regulation was made in May 2013 by the Autorité des Marchés Financiers (AMF) and the ACP when they published guidelines for project managers aiming to inform platforms and projects managers about existing rules based on the form of crowdfunding (rewards, loans and equity).

How can they make things easier for crowdfunding platforms and secured for individuals agreeing to fund projects?

The second step was to create a specific status of conseiller en investissements participatifs (or “crowdfunding investment service provider”) for crowdfunding platforms. Pierre Moscovici, French Minister of Economy and Finance announced this measure on September 4th of this year, with the aim of developing crowdfunding and ensuring the security of funders, in particular giving them the guarantee that the money is going to the project they wanted to support.

Then, on September 30th, Fleur Pellerin presented the French Ministry of Economy and Finance proposals to define regulations on crowdfunding, now followed by a six-week public consultation running until the 15th of November.

Controversy born out of lack of comprehension

The main point of controversy relates to upper limits for loan-based crowdfunding. Indeed, the proposal mentions a maximum loan amount around €250 per individual per project and a global maximum loan amount around €300,000 per project.

However, no upper limit is foreseen for rewards-based crowdfunding and equity-based crowdfunding (i.e: Kickstarter, Indiegogo, Kisskissbankbank, Axanago, Wiseed, Smart Angels, etc.), a point misunderstand by some commentators who worry that crowdfunding “might be nipped in the bud in France”. Let’s try not to forget what we’re talking about and remind that these upper limits only concerns loan-based crowdfunding and are only proposals. These limits could perfectly reach € 1000 per individual per project, for example.

The fact is that a new regulation is unlikely to come into force before 2014, even though we’ll probably know more about the ability of France to create a well-defined regulatory environment for crowdfunding at the end of this year.

Finally, the European Commission also launched a consultation running until the end of the year, inviting stakeholders (“including citizens who might contribute to crowdfunding campaigns and entrepreneurs who might launch such campaigns”) to share their views about crowdfunding. Covering all forms of crowdfunding, the consultation aims to explore the added value of potential EU action.

In short, steps are made towards specific regulation on crowdfunding in France. To date there are only proposals and calls for contributions: nothing is definitive.

However, the stakeholders, especially crowdfunding platforms, seem to be satisfied with the way the French Government listened to their complaints and didn’t try to over govern, in particular with the new status of conseiller en investissements participatifs which is way more flexible than inadequate status of credit institution or investment service providers.

And if you want to contribute to these consultations, you’ll find them here (France) and here (Europe).

Image credit: Publiseek

Edit on October 11th: Benoit Bazzocchi CEO of SmartAngels and some other crowdfunding platforms also underline that the presented status of conseiller en investissements participatifs may not be specific enough to be practicable, especially regarding the affected types of companies (only SA, not SAS) and the considered business models (success fee business model to be banned, even though it is the most common business model of crowdfunding platforms). As said before, the French consultation is still running until the 15th of November.”