1. Proposal for Crowdfunding Amendments
to the Prospectus Directive
Introduction
In the recent years, traditional finance has faced the challenge of adapting its model as a
consequence of the recent crisis. This adaptation has left many actors in the economy, like the SMEs,
in desperate need of an alternate supply of financing.
Simultaneously, the Internet has allowed the creation of new models like crowdfunding (the
financing of projects by a multitude of investors engaging small amounts) that can offer new answers
to meet these needs.
The purpose of this document is to propose amendments to the existing Prospectus Directive, in
order to let these new tools operate in an adequate legal environment.
History of the Prospectus Directive
Purpose of the Directive
The PD aims to improve market efficiency through the issue of a single approved prospectus that will
enable issuers to raise capital across the EU without further approval (the Passport). The aim of the
Passport is to:
- provide cost-effective capital raising for issuers
- enhance investor protection by requiring harmonised high standards of disclosure for issues of
securities that are offered to the public or admitted to trading on a regulated market
The PD is regarded as a key part of the EU Financial Services Action Plan
Source http://www.fsa.gov.uk/pages/about/what/international/pdf/pd.pdf
Part of the “Lamfalussy Directives” (with the MiFID, the Market Abuse and the Transparency
Directives), the Prospectus Directive’s main purpose is to define a common and adequate definition
of the information that issuers (e.g. SMEs) should provide and investors can rely on when deciding to
make an investment decision. This definition should balance the need of investors of receiving
enough information to make the decision, and the cost of producing this information for the issuer.
The role of the Directive is also to agree on a common standard for all the member states so that
offers (public or private) are treated consistently across the EU and allows cross border offering
without any discrepancy in the conditions applied by each member state.
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2. Exemptions
Current exemptions:
Within the Article 3 of the Prospectus Directive, subsection 2 defines the conditions that exempt an
issuer from providing standardised information as specified by a prospectus:
2. The obligation to publish a prospectus shall not apply to the following types of offer:
(a) an offer of securities addressed solely to qualified investors; and/or
(b) an offer of securities addressed to fewer than 100 natural or legal persons per Member State
(amended to 150), other than qualified investors; and/or
(c) an offer of securities addressed to investors who acquire securities for a total consideration of at
least EUR 50 000 (amended to EUR 100 000) per investor, for each separate offer; and/or
(d) an offer of securities whose denomination per unit amounts to at least EUR 50 000 (amended to
EUR 100 000); and/or
(e) an offer of securities with a total consideration of less than EUR 100 000, which limit shall be
calculated over a period of 12 months.
Purpose of exemptions in the original Directive 2003/71/EC
Based on the nature of investors, and/or their number, and/or their capacity to invest important
considerations, and/or the total consideration of the offer, the Directive has defined conditions that
do not require standardised protection of investors and where offers can be done without the cost of
producing a prospectus.
The intent of the exemptions is thus to provide a common view for the securities offers that - for a
reason of efficiency or absence of necessity to protect investors - should not be subject to the
constraints of publishing a prospectus and can be conducted at arm’s length between investors and
issuers.
Purpose of amendments in the amending Directive 2010/73/EC
Revised in 2010, the original text of the Directive 2003/73/EC has seen 3 amendments concerning
the perimeter where exemptions apply.
Amendment to exemption (a)
No real rationale has been provided for the increase from 100 natural or legal persons per Member
State to 150. While this seems common sense - and actually falls short of the implication in the
change of usages with the Internet, there is no mention in the Directive 2010/73/EU of the reasons
that drove the amendment.
Amendment to exemption (c) and (d)
The threshold of EUR 50 000 in Article 3(2)(c) and (d) of Directive 2003/71/EC no longer reflects the
distinction between retail investor and professional investors in terms of investor capacity, since it
appear that even retail investor have recently made investments of more than EUR 50 000 in a single
transaction.
Source http://www.hm-treasury.gov.uk/d/prospectus_directive_amending.pdf
The rationale of this amendment is rather confusing: The legislator states that capacity to invest
important considerations has not proved to be a pertinent yardstick to discriminate investors that
would need information for their own protection, and those that are sufficiently informed to make
decisions without a prospectus. Raising the threshold does not seem to address the problem that the
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3. legislator apparently wants to address: Protect retail investors from taking risks they cannot properly
evaluate. Why risking more important sums would offer a solution?
Amendments provide a conflicting view of legislator’s intent
The amendments to the Exemptions’ subsection provide actually a conflicting view. Amendment to
the exemption (a) is offering an extension of the perimeter where retail investors can subscribe to
private offers. On the contrary, exemptions (c) and (d) impose restrictions where retail investors can
participate to such offers. We clearly miss a guiding principle that would have driven a coherent
revision of the Directive with the aim of achieving a social or economic goal: like boosting
employment by easing financing in SMEs.
The JOBS Act
Purpose of the US Crowdfund Act
President Obama signed on April 5th, 2012 the JOBS Act (Jumpstart Our Business Startups) whose
purpose is to boost employment in the United States by freeing financing for SMEs and startups from
several of the legal constraints that built up over the years, and who were adopted to protect
investors from wrong doings by big companies, like Enron for example. These regulations possibly
met their target when applied to big corporations, but they imposed an unnecessary toll for SMEs
and growth companies, compromising their survival in many cases. The JOBS Act was a very extent
modification of the securities laws that covered several stages of development of SMEs, from seeding
to pre-IPO.
In particular, the JOBS Act has been very innovative by introducing a part referenced as the
Crowdfund Act, which created a new form of exemption based on the limited consideration each
investor is engaging:
SEC. 302. CROWDFUNDING EXEMPTION.
(a) Securities Act of 1933- Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended by
adding at the end the following:
‘(6) transactions involving the offer or sale of securities by an issuer (including all entities
controlled by or under common control with the issuer), provided that--
‘(A) the aggregate amount sold to all investors by the issuer, including any amount sold in
reliance on the exemption provided under this paragraph during the 12-month period preceding the
date of such transaction, is not more than $1,000,000;
‘(B) the aggregate amount sold to any investor by an issuer, including any amount sold in
reliance on the exemption provided under this paragraph during the 12-month period preceding the
date of such transaction, does not exceed—
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4. ‘(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor,
as applicable, if either the annual income or the net worth of the investor is less than $100,000; and
(continued)
Source http://www.govtrack.us/congress/bills/112/hr3606/text
Innovations of the Crowdfund Act
Exemption based on the limited amount for investors
The Crowdfund Act is introducing a real innovation in securities law: it is building new regulation
based on the notion that risk for an investor should not be evaluated on its sole nature, but also on
the maximum impact for the investor. It reflects the common sense notion that a potentially risky
investment on a small consideration can have less adverse impact for the investor’s well-being than
an investment considered less risky on an unlimited consideration.
Creation of a new status of “funding portal” corresponding to the development of the
Internet
The Crowdfund Act also introduced a specific status of “funding portal”, acknowledging that
crowdfunding investment will be mainly conducted through, and tanks to, the Internet; creating a
new role, distinct from the one of the usual security broker:
SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.
‘(a) Requirements on Intermediaries- A person acting as an intermediary in a transaction involving the
offer or sale of securities for the account of others pursuant to section 4(6) shall--
‘(1) register with the Commission as--
‘(A) a broker; or
‘(B) a funding portal (as defined in section 3(a)(80) of the Securities Exchange Act of 1934);
(continued)
Source http://www.govtrack.us/congress/bills/112/hr3606/text
The real novelty here is that it introduces the notion that security transactions, conducted on the
Internet for small considerations, shall be regulated with a separate set of regulations to the one
applying to all-purpose security brokers. It recognizes the fact that standard regulations applying to
brokers, make them competent in conducting transactions, but that the approach “he who can do
the most can do the least” is ill-adapted in offering efficient and fluid intermediaries for conducting
small transactions over the Internet.
Proposal
Adapt exemptions to answer the financing needs of our SMEs
SMEs are facing many difficulties in obtaining financing, especially at the beginning of their activity,
when they most need it. Financial crisis and consequent stronger requirements on the banking
system through the Basel III regulation has created a retreat from banking financing for many
categories of SMES.
Modifying exemptions to the Prospectus Directive, with a clear political agenda, offers a way to open
up direct financing from individual investors to our industrial and service economic fabric. It offers
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5. the possibility to supply the necessary funds to support the creation of jobs in the part of the
economy which has always been its main source.
Raising threshold in exemption (e) from €100K to €1M to address the
“funding gap” facing SMEs
Modification
We propose to modify exemption (e) as follows:
(e) an offer of securities with a total consideration of less than EUR 100 000 [1 million], which limit
shall be calculated over a period of 12 months.
Purpose
The current €100K threshold has proved to be too limitative and does not correspond to the reality
facing growth companies in Europe at the beginning of their development. Financing needs in capital
in the range of €500,000 to €1.5 million sit in-between bank and VC financing. Raising the threshold
to €1 million will allow individual investors to freely mutualize their investment capacities through
business angels clubs or crowdfunding platforms, in order to obtain the level of investment necessary
for the growth stage of our SMEs.
Modify exemption (b) to adapt to the Internet and SMEs’ new
communication environment
Modification
We propose to modify exemption (b) as follows:
(b) an offer of securities addressed to fewer than 150 [1 000] natural or legal persons per Member
State, other than qualified investors;
Purpose
The number of individual receiving an offer is no longer a stable criterion in a world where the
Internet means potential instant access to information for everyone. The number of 150 proves to be
a too stringent limit that potentially can endanger any offer initially targeted at a restricted circle of
investors to be reclassified as a public offer during the course of the fund raising process.
Replacing the antiquated notion of protecting investors by preventing them from receiving financial
information will free business angel clubs and crowdfunding platforms from unnecessary and costly
contortions in their communication, at a time where any word can potentially reach the whole planet
in a matter of seconds.
Creation of exemption (f) to allow crowdfunding for SMEs
With the rise of the use of the Internet, a new way to transact between an issuer and a multitude of
cooperating investors has been made possible, while each investor can be participating through a
very small amount.
Addition to the list of exemptions
We propose to create an exemption (f) as follows:
(f) An offer of securities addressed to investors who cannot acquire more than a total consideration of
EUR 2 000 per investor, for each separate offer.
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6. Purpose
This exemption would build on the novel notions introduced in the Crowdfund section in the JOBS
Act: That risk should no longer be assessed by its intrinsic nature, but by the absolute impact it can
have on an investor.
It will allow letting the general public recreate a financial relationship with the ecosystem of our
SMEs, through direct and transparent investments, while being protected by the limited amount that
each investor could put on each project.
About Crowdfunding France
Crowdfunding France (a.k.a. Financement Participatif France in French) is the French professional
association representing and defending the interests of all forms of crowdfunding (donations, loans
and equities) in France:
 official web site is accessible at http://www.crowdfundingfrance.org
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7. Content
Introduction ............................................................................................................................................................ 1
History of the Prospectus Directive ........................................................................................................................ 1
Purpose of the Directive ..................................................................................................................................... 1
Exemptions ......................................................................................................................................................... 2
Current exemptions: ...................................................................................................................................... 2
Purpose of exemptions in the original Directive 2003/71/EC ........................................................................ 2
Purpose of amendments in the amending Directive 2010/73/EC ................................................................. 2
The JOBS Act ........................................................................................................................................................... 3
Purpose of the US Crowdfund Act ...................................................................................................................... 3
Innovations of the Crowdfund Act ...................................................................................................................... 4
Exemption based on the limited amount for investors .................................................................................. 4
Creation of a new status of “funding portal” corresponding to the development of the Internet ............... 4
Proposal .................................................................................................................................................................. 4
Adapt exemptions to answer the financing needs of our SMEs ......................................................................... 4
Raising threshold in exemption (e) from €100K to €1M to address the “funding gap” facing SMEs ................. 5
Modification ................................................................................................................................................... 5
Purpose .......................................................................................................................................................... 5
Modify exemption (b) to adapt to the Internet and SMEs’ new communication environment......................... 5
Modification ................................................................................................................................................... 5
Purpose .......................................................................................................................................................... 5
Creation of exemption (f) to allow crowdfunding for SMEs ............................................................................... 5
Addition to the list of exemptions .................................................................................................................. 5
Purpose .......................................................................................................................................................... 6
About Crowdfunding France ................................................................................................................................... 6
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