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The so-called crowdfunding is a very popular form of financing renewable energy projects. On 8 March 2018, the European Commission published a proposal for a regulation on EU-level uniform crowdfunding rules. What does this proposal mean for project initiators and crowdfunding platform operators? Below, please find a summary of the major novelties.
With crowdfunding, project initiators have the possibility to contact a large number of investors (crowd), to present new business concepts and raise funds via online crowdfunding platforms. Basically, four models can be distinguished: donation-based crowdfunding, reward-based crowdfunding, debt crowdfunding (also called crowdlending), and equity crowdfunding (also called crowdinvesting).
In practice – especially with energy projects – crowdlending and crowdinvesting are the prevalent models. With crowdlending, a project developer is granted a common bank loan via a crowdfunding platform. Subsequently, the bank splits the repayment claim arising from the loan into partial claims and sells them to individual investors. With crowdinvesting, however, in return for the provided capital the lender normally receives an interest in the future result of the borrowing company. Moreover, with crowdinvesting, project initiators and investors often conclude agreements on the so-called subordinated loans. Here, it is agreed that the investor’s claims will be satisfied only after the senior claims of other creditors are satisfied. They agree that the granted capital will be repaid on condition that this does not result in the opening of insolvency proceedings (the so-called qualified subordination).
The regulatory regulations on crowdfunding are mainly enshrined in the German Investment Act (VermAnlG). This form of financing is privileged insofar as no prospectus publishing obligations exist as long as the prescribed thresholds are observed. The financing volume is, however, limited to EUR 2.5 million.
Initially, the crowdfunding model was intended for the financing of start-ups. But also long-established companies make use of this source of finance. This applies in particular to the implementation of projects in the area of renewable energies, e.g. solar, wind and biogas projects. As manifold as the projects are the project initiators on the market. They range from sole trader business ideas to small and medium-sized enterprises to utilities organised as limited liability companies. According to the ”Crowdinvesting Marktreport 2017” [crowdfunding market report 2017] by the crowdfunding.de information portal, the volume of energy projects implemented in 2017 was EUR 6.1 million. Compared to the previous year, this corresponded to a growth of 63%.
So far, crowdfunding has been regulated individually in the 28 EU member states, thus creating many divergent regulatory frameworks. So far, crowdfunding platforms that wish to offer their services in other member states must obtain a permit from such states and comply with the national crowdfunding laws applicable in such states. In practice, this means that a crowdfunding platform that wishes to provide services on a cross-border basis must comply with multiple national regulatory frameworks at the same time and must respectively adjust its business model. Thus, expanding business on EU level requires quite significant effort. Given this background, on 8 March 2018 the European Commission published a proposal for the regulation on EU-level uniform crowdfunding rules. The proposal mainly ensures the possibility of granting crowdfunding platforms an ”EU passport” enabling the EU-wide provision of services.
But the proposal for the regulation is not intended to replace national crowdfunding provisions. The proposal rather gives platform operators the choice between (continuing) providing services under applicable national law and applying for an authorisation under the new Regulation. In the case of an authorisation under EU rules, such an authorisation will cover the provision of services both in the home member state and on a cross-border basis. ESMA will be the central regulatory authority and will be given comprehensive powers (e.g. withdrawal of authorisations, on-site inspections, rights to request information and impose fines).
Similar to the investment information document (VIB) in the meaning of the German Investment Act, the proposal for the regulation provides for the preparation of a key investment information sheet which will include key details of the investment project. The main difference that should be emphasised compared to the German regulatory regime is that the EU proposal sets a EUR 1 million cap on the financing volume (German Investment Act: EUR 2.5 million).
In today’s digital era it is not surprising that online crowdfunding is becoming more and more popular with energy project developers. The EU proposal for introducing an ”EU passport” for platform operators enables such operators to reduce their market entry costs if they wish to offer their services in other EU countries. But the EUR 1 million cap on the financing volume might constitute a disadvantage compared to the German regulatory regime that should not be underestimated. Especially in the case of energy projects this cap might quickly be reached so that the European solution seems to be not very attractive here and investors will be likely to opt for and continue with the national solution.
Christian Conreder
Partner
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Fabian Hausemann
Manager
Renewable energy consulting
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