Crowdfunding

Last update 24.06.2022

Crowdfunding (crowd or participatory financing) is a form of alternative financing that allows young entrepreneurs and small and medium-sized enterprises (SMEs) to finance specific small-scale projects.

Crowdfunding generally involves 3 types of actors:

  • the project owner (natural or legal person), who proposes the project to be financed;
  • the investors who finance the project;
  • the operator of a platform that connects project owners and investors through a publicly accessible internet-based information system.

Depending on the nature as well as the scale of the projects marketed via the platform, its operator is subject to Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, applicable in all European Union (EU) Member States.

Who is concerned

Crowdfunding can, for example, concern:

  • companies or entrepreneurs who want to organise a relatively small fundraising event;
  • inventors or developers who wish to remain independent and prefer to market their idea on their own initiative;
  • investors who want to invest in a promising start-up company or in innovative projects.

Costs

Platform operators receive a certain percentage of the funds raised in exchange for making their platform available and publishing the results of the crowdfunding.

The development and publication of advertising and information campaigns may also involve substantial costs.

Other costs may depend on the terms that have been agreed upon in return for the provision of the funds.

How to proceed

How does it work?

The contact between the potential investor and the beneficiary of the capital is established, in general, via the crowdfunding web platform chosen by the project owner.

The beneficiary of the capital will usually set a minimum amount of contributions that are necessary for the project to be launched.

The objective is to raise the expected sum through contributions from investors. The amount of contributions will vary greatly from one project to another. A mandatory minimum amount may be set.

In exchange for their participation in the enterprise, crowdfunders (investors) may receive a consideration such as:

  • exploitation rights;
  • free products; or
  • participation in company profits, etc.

The funds provided:

  • must be used for the published project and may not be diverted to fund other projects;
  • are reimbursed by the platform if the targeted amount of funding is not reached.

During the initial phase, the crowdfunding platform acts as a fiduciary agent for both parties.

Advantages of crowdfunding

The entrepreneur does not have to grant the partners any management oversight rights.

The investor commitment is guided by long-term motives and the business is not under pressure to succeed immediately.

As a general rule, investors cannot request any guarantees in return for their contribution.

Disadvantages of crowdfunding

Capital intensive projects, however, often experience major difficulties in collecting the necessary funds through crowdfunding. In this case, it is still possible to finance the projects through traditional forms of financing.

On the other hand, it is generally very difficult to convince typical investors such as investment funds or professional investors through this type of platform.

In the event the enterprise goes bankrupt, investors risk losing the totality of their investment.

European crowdfunding service providers

The EU Regulation defines the legal status for European crowdfunding service providers (ECSPs).

This EU regulation is directly applicable in each Member State of the European Union since 10 November 2021.

It applies only to crowdfunding services provided to non-consumer project owners for offers up to EUR 5,000,000, calculated over a 12-month period per project owner.

Investors benefit from a strengthened protection regime based on clear rules including:

  • disclosure of information by project owners and crowdfunding platforms in the form of a 'key investment information sheet';
  • marketing communication;
  • governance;
  • risk management;
  • harmonised supervision.

The provision of crowdfunging services is therefore subject to:

  • obtaining a licence as a crowdfunding service provider for entrepreneurs; and
  • supervision by the Financial Sector Supervisory Commission (Commission de Surveillance du Secteur Financier - CSSF).

The European Regulation was incorporated into national law by the Law of 25 February 2022, which entered into force on 8 March 2022.

Good to know

Applications for approval as a crowdfunding service provider as defined in the EU Regulation must be submitted to the CSSF.

Service providers who wish to apply for a licence are invited to consult:

Any contact request concerning crowdfunding within the meaning of the EU Regulation and the authorisation to be issued by the CSSF should be made via the following email address: crowdfunding@cssf.lu.

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