According to the European Commission, crowdfunding has the potential to be a key source of financing for SMEs over the long term.28
Crowdfunding is a relatively young form of financing – especially for not-for-profit projects – that has a potential to be developing fast in Europe. Among the benefits belong for example the facts the project owners have greater control and financial risk is spread among a larger number of people, there are also some drawbacks which may include a high cost of capital, occasional displays of a 'herd mentality', capable of depriving potentially worthier projects of adequate funding and risks for investors from incompetence or fraud on the part of the project owners.
The European Commission and the European Parliament have taken an active interest in this form of financing. As a result, the Commission conducted a study on the state of the European crowdfunding market. It found that, while crowdfunding is developing fast, it is still concentrated in a few countries (the United Kingdom, France, Germany, Italy and the Netherlands), which have introduced tailored domestic regimes, and that it remains, for the time being, a national phenomenon with limited cross-border activity. The study therefore concluded that for the moment there is no strong case for EU-level policy intervention. Nonetheless, given the encouraging trends and the potential of crowdfunding to become a key source of financing for SMEs over the long term, the Commission noted that it will maintain regular dialogue with European supervisory authorities, Member States and the crowdfunding sector to monitor and review its development. 28
Crowdfunding can be defined as an open call for 'the collecting of resources (funds, money, tangible goods, time) from the population at large through an Internet platform. In return for their contributions, the crowd can receive a number of tangibles or intangibles, which depend on the type of crowdfunding'. It generally takes place on crowdfunding platforms, that is, internet-based platforms that link fundraisers to funders. Crowdfunding campaigns can raise funds for not-for-profit and for-profit projects or organisations.
Commonly used classification distinguishes between four categories of campaigns:
- donation-based- contributors don´t receive any reward for their contributions
- reward-based- people receive goods or services in exchange for their contributions
- lending-based- contributors receive interest payments in exchange for financing a project with an associated rate of return and maturity date
- equity-based- contributors receive shares in the venture, in exchange for their contributions.
The International Organization of Securities Commissions (IOSCO) refers to the first two categories as 'crowd sponsoring' and the latter two as 'crowd investing'.
Unlike traditional financial intermediaries, crowdfunding platforms do not borrow, pool, or lend money on their own account. Instead, they focus on matching project owners and backers, providing information about the projects and advice (for instance, on how to reduce investment risks).29
*Crowdfunding platforms vs. citizen cooperatives
Basic difference between crowdfunding platforms and citizen cooperatives is in the structure. While crowdfunding platforms focussing on sustainable energy may have multiple different projects in different countries and may offer various types of participation (loan, donation, etc.), an energy cooperative is a single organisation typically raising money to fund its own projects.
Increasingly though, the lines are becoming blurred: cooperatives can make their own investment offers or can even make use of crowdfunding platforms to fund part of their goals.9
Crowdfunding transactions value in Europe (excluding the UK) in 2016, by type
For a further comprehensive reading on crowdfunding see for example CF4EE - Crowdfunding for Energy Efficiency by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.7