Report on Crowdfunding Survey Finland

8/12/2019 Report on Crowdfunding Survey Finland

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Report on Crowdfunding Survey

13 March 2014


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MINISTRY OF FINANCE

PO Box 28 (Snellmaninkatu 1 A) FI-00023 GOVERNMENT

FINLAND

Tel. +358 295 16001

Internet: www.financeministry.fi

Layout: Pirkko Ala-Marttila

Writers of the Report: Aki Kallio/Ministry of Finance, Valtteri Vento/Ministry of Employment and the Economy


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Contents

What is crowdfunding?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1 Opportunities of crowdfunding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2 Problems associated with crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3 Summary of survey responses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

4 Conclusions on the survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

5 Possible further measures by authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25


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What is crowdfunding?

Crowdunding is a method o raising unds or the projects o individuals and organisations

and the activities o companies. Te unding is collected rom a group o individuals, most

commonly via Internet service platorms. Te idea is to reach the targeted amount by col-

lecting relatively small sums rom a large group o people.

Crowdunding is not a new way to collect unds, but wider use o the Internet has ena-bled its utilisation in a ar more broad-based way. According to the European Commission,

in 2012 crowdunding was used to collect a total o EUR 735 million or a variety o targets.

Te growth rom 2011 was 65 per cent. Te growth o the sector is expected to accelerate ur-

ther, but even today its size is significant compared to the shrinking venture capital market

o European start-ups, which in the whole o 2012 amounted to approximately EUR 3 billion.

Conversely, the share o crowdunding as a orm o financing or companies remains modest

compared to, or example, the initial public offering (IPO) market, the value o which in 2012

was approximately EUR 16.5 billion.

Te value o the Finnish crowdunding market in 2013 is estimated at EUR 2 million.

Te value o the global crowdunding market in 2012 has been estimated at USD 2.7 bil-lion. Growth in the sector is expected to be ast, and it has been estimated that in the United

States, the value o equity-based crowdunding alone in 2013 would have reached USD 3 bil-

lion. For the moment the US and Europe make up the rontline o the phenomenon, but its

popularity is increasing rapidly on the global scale. So ar, companies offering crowdunding

services have emerged in approximately 45 countries. In Finland, the growth o the sector

has been relatively ast, considering the size o the market, even though so ar, the amounts

raised have been moderate.

Te rapid increase in the popularity o crowdunding has raised a number o questions con-

cerning legislative measures both in Europe and on a global scale. On the EU-level, a central

problem is that no separate or specific regulations exist or the sector, but provisions concerning

the sector can be ound in a number o different directives and regulations. As a result o this,national-level regulatory projects accounting or the special characteristics o crowdunding

have been launched and completed in a variety o different orms in countries such as Italy,

the United Kingdom, Germany and France. Overall, regulation in the sector is undergoing

significant differentiation between EU member states, a actor to be taken into account when

assessing the unctionality o the single market and the competitiveness o national operators.

Elsewhere, too, crowdunding has drawn the attention o legislators. In the US, the Jump-

start Our Business Startups Act (the JOBS Act) aiming at a significant improvement o the

operating environment or crowdunding is about to enter into orce, and in Australia the

Australian Securities and Investment Commission (ASIC) published a ree-orm guideline

entitled Guidance on Crowd Funding. ASIC has also drawn the attention o consumer-inves-

tors to crowdunding and the risks associated with it by publishing a guide to crowdunding

on its website.


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6

Crowdunding is an umbrella term or several orms o unding that differ rom one

another in terms how they operate and financial characteristics. Te list is not exhaustive, but

is intended to describe orms o crowdunding currently available on the market.

Form of funding Form of refund Motivation for

funding

Examples of

service providers

Domestic

legislation

Donation-based crowd-funding

Donation No refund Social - Money Collection Act

Reward-based crowfunding Donation,pre-purchase

Reward, produc t Social, bu t alsoreward-based

Mesenaatti.me (FI)Kickstarter (US)Indiegogo (US)

Money Collection Act;Consumer ProtectionAct; Sale of Goods Act(incl. supplementarydecrees)

Peer-to-peer lending Loan Loan with interest,but social lendinggenerally withoutinterest

E conomical, s oc ia l L ainaaja.fi (FI )Fixura (FI)Kiva (US)

Legislation on finan-cial markets(e.g. AIFML, AML,LLL, SIPAL, MLL)1

Equity-based crowdfunding Investment

(often in shares)

Appreciation of the

investment if thecompany is successfuland/or dividend

Economic , soc ial Invesdor Oy (FI)

Venture Bonsai (FI)KansalaisrahoitusOy (FI)FundedByMe (SE)

Legislation on finan-

cial markets(e.g. AIFML, AML, LLL,SIPAL, MLL)

1Significance of the abbreviations: AIFML: Act on Alternative Inves tment Fund Managers (162/2014),AML : Securiti es Markets Act (746/2012),LLL : Act on Credit Institutions

(121/2007, thorough reform u nder prep aration), SIPAL: Act on Inves tment Ser vices (747/2012) andMLL : Payment Institu tions Act (297/2010)


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Introduction

A survey conducted by the Ministry o Employment and the Economy and the Ministry o

Finance was used to explore the current status o crowdunding in Finland and to obtain a

broader perspective to support the policies to be adopted. In its structural policy programme

published at the end o 2013, the Finnish Government decided to chart the needs to develop

crowdunding activities in the orm o peer-to-peer lending and equity-based crowdund-ing and to assess the need to speciy national-level regulation particularly as concerns effi-

cient unctioning o markets and investor protection. Te survey was sent to a wide variety

o operators and authorities associated with the market.

A total o 36 responses were received or the survey conducted in December 2013. Te

majority o organisations operating in the Finnish financial markets rom both private and

public sectors were represented in the survey. Te respondents were mainly directors or high-

level experts. Te respondents included representatives o companies offering crowdunding

services, government authorities, interest groups and other companies operating in the sec-

tor. Te majority (N=27) o the respondents organisations were directly involved with crowd-

unding. Despite the relatively low number o respondents, the coverage o the survey can beconsidered good.

Responses to the survey were also used as a oundation or contributions by the Ministry

o Employment and the Economy and the Ministry o Finance to a public consultation on the

topic o crowdunding organised by the European Commission at the end o 2013, the results

o which will be published in early 2014. Te results rom the survey will also be utilised more

broadly in the national statement o views to be presented to the European Commission, in case

the European Commission decides to initiate an EU-level regulatory project on this orm o

unding. Te European Commission has given a preliminary announcement that it will issue

a communication on crowdunding beore the European parliamentary elections in 2014. Te

communication will be based on the above-mentioned public consultation on crowdunding.

o gain as objective a picture as possible on the views o the respondents, with the excep-tion o the summary, all responses to the survey are discussed in this report in a manner that

will not allow readers to associate them to a specific organisation or person. Yet, to clariy the

interests o respondents, a division into our groups according to the respondents background

organisation has been made in the summary o the report. (i) government authorities (incl.

ministries, government agencies acting in different roles and other government-led institu-

tions and units under public administration), (ii) interest groups, (iii) providers o crowd-

unding services (iv) others (incl. legal firms, investment companies and other private actors).


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1 Opportunities of crowdfunding

Crowdunding has increased its popularity at a rapid pace. Reasons or the rapid growth o

the sector have been identified in the 2008 crisis o the financial markets, one o the con-

sequences o which was the tightening o requirements on the solvency and liquidity o the

credit institutions. ighter regulation has increased banks requirements concerning sol-

vency and increased the costs o und raising, thereby reducing the opportunities o creditinstitutions to respond to the unding needs o companies operating on the market. Moreo-

ver, the poor and insecure financial situation that has now endured or a significant period

o time has increased the risk o credit losses and reduced banks willingness to take risks.

Te situation has had a particular impact on small and medium-sized companies that due

to the circumstances have been orced to seek alternatives to financing provided by banks.

Crowdunding takes several different orms, and, as a field, it is not yet ully stabilised.

Crowdunding has been used to collect unds or private persons, artists, athletes as well as

high-tech companies via lending, donations and investments. Crowdunding has been esti-

mated to possess particular potential as a orm o unding or startups and, as a result, it has

been considered to hold a particular role in the creation o new jobs.For the survey respondents and their background organisations, equity-based crowdund-

ing was the most central o the orms discussed. Equity-based crowdunding has been per-

ceived as the least developed orm o crowdunding so ar. At the same time, it has also been

considered to possess the greatest potential to grow into a significant orm o financing. Peer-

to-peer lending has been conducted in Finland or a long time already, considering the rela-

tive newness o the sector. Tis orm o crowdunding, however, was not highlighted in the

responses provided by the organisations in any significant way.

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Donation-based crowfunding

Crowdfunding based on rewardsor pre-orders

Peer-to-peer lending

Equity-based crowdfunding

FIGURE 1. Which form of crowdfunding has been central from the viewpoint of your

organization (you may choose more than one option)?


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10Te respondents generally perceived investing and lending perormed by a larger group o

individuals or communities in a manner that so ar has been available only to the ew as the

most central opportunity provided by crowdunding. Greater popularity o crowdunding

was expected to lead to a aster pace o collecting the unds and an increase in the amount o

financing available. In particular, the orm o unding was hoped to activate lazy money sit-

ting in bank accounts. Te willingness o individuals to support projects important to themor to invest in young Finnish companies directly appeared to be there, and crowdunding

was considered to provide a new instrument or this. Partly or this reason, crowdunding

was considered to provide opportunities or more efficient utilisation o capital compared to

other orms o unding. Crowdunding encourages people to engage in investment activities,

while simultaneously providing an opportunity to be part o social development in a manner

undefined by traditional institutions.

Crowdunding was also seen to possess an opportunity to impact business lie in Finland

on a broad spectrum. In particular, participation by large groups o people, specific to this

method o unding, was perceived to create an opportunity to develop and expand the opera-

tions o companies in a new way. Te international aspect o crowdunding also emerged as

an important perspective. Te orm o unding provides Finnish companies an opportunityto obtain customers rom outside o Finland and to advertise their products in a new way

already at an early stage in a low-risk and cost-efficient manner. Crowdunding was also seen

as a orm o unding that supplements the financial markets. It was also considered to act as a

actor increasing competition between orms o financing and, in this way, to reduce the price

o unding needed or investments on a more general level. Tere are many good business

ideas and businesses on the market that may find it difficult to obtain unding rom traditional

sources. At the same time, a number o investors might be interested in investing in a busi-

ness in its early or growth stage, but cannot find a unctional channel or this. Crowdunding

was also perceived to provide a new means o financing a companys research and develop-

ment activities, in a manner that also promotes the companys efforts at internationalisation.For proessional investors, crowdunding was perceived to offer a new method o diversiy-

ing investments. Based on the survey, cooperation between proessional investors and crowd-

unding platorms was perceived more as a actor to benefit both parties rather than one that

might pose a threat to the other side. Crowdunding was seen to provide investors with new,

transparent and easily understandable ways to invest in unlisted companies in a responsible

manner in this way supporting employment in Finland. Due to the large group o investors

involved, crowdunding was also considered to provide the business with an opportunity to

benefit rom broader knowledge and expertise compared to those offered by a more limited

group o investors. At the same time, the method o unding was also seen to allow businesses

to benefit rom the expertise o proessional investors in a new way.

Peer-to-peer lending, in particular, was perceived to answer to a specific need. It was con-sidered to increase opportunities or assistance between people taking place on social grounds,

both in Finland and abroad. For organisations, crowdunding was deemed to provide a new

opportunity or und raising and involving a new brand o supporters in their activities. Con-

versely, crowdunding was seen to enable projects also or companies and individuals that are

not within the reach o traditional unding channels and to increase the vitality o cultural

and social lie and to strengthen independent activities by citizens. Crowdunding was also

seen as a new opportunity or activities in the orm o a cooperative.

Even though the respondents represented broad range o different organisations rom the

public and the private sector, and only a ew o them were directly involved in investment

activities, the responses still showed an interest in investing in companies through the means

offered by crowdunding. From the perspective o proessional investors, the current options


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11and opportunities or the making o investments were deemed sufficient, so an actual need

or the new channel o investment was not perceived. Moreover, rather than using service

platorms, proessional investors may be more interested in investing directly in corporations

seeking unding. Tey may also preer operating through a amiliar group o investors. Invest-

ments via crowdunding may not necessarily offer an opportunity or such active cooperation

with the company that may be the goal o qualified private investors.

Based on responses to the survey, the attitude o proessional investors towards crowd-

unding was cautious. Based on the responses, it was clear that in crowdunding proessional

investors do not constitute the main target group rom whom unding is sought. Tis means

that the nature o the investment is different compared to traditional investment activities.

Yet, crowdunding does not exclude proessional investment activities and may, in certain

cases even provide a useul tool also or proessional investors. Te novel investment channel

is, however, still finding its orm, and, as a result, attitudes towards it vary. Even though ser-

vice platorms are not a prerequisite or crowdunding, it is likely that investors in the sectorwill be expected to deal with them. Te utilisation o service platorms may be practical or a

company, as they acilitate the paperwork necessary when seeking unding, but or qualified

investors, they may appear as an undesired actor.

When the respondents were asked about the most central actor affecting investment deci-

sions in crowdunding, the responses resembled the conditions placed or traditional invest-

ments: individuals experienced as competent behind the company, a good idea or a good prod-

uct, the availability o good-quality and reliable inormation on the company and expected

return o a sufficient level. Some o the respondents stressed that crowdunding is not about

charity, but its purpose is to generate profit or investors. However, some o the respondents

stressed the ethical nature o the activities, the significance o participation and involvement

and the purpose behind the activities o the companies, with possible profit as a secondarymotivation. Also the benefits granted to the investor through the investment were seen as a

possible actor affecting the investment decision. One respondent had divided the motiva-

tions or investments made via crowdunding into three categories: 1) profit seeking, 2) status

seeking (increasing personal status e.g. as a co-owner o a pub that brews its own beer), and

3) investments based on personal values (investments to promote activities such as recycling

or supporting a local company).

As concerns equity-based crowdunding, the majority o respondents perceived it as posi-

tive i one proessional investor contributes to a given crowdunding round with a significant

amount o money. Tis was considered to promote the reliability o the round o investments

in the eyes o non-proessional investors, as in a case like this, one party would be likely to

have carried out a more thorough due diligence check on the company and viability or invest-

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Yes

No (why?)

FIGURE 2. Would the organisation you represent be interested in investing in companies

soliciting funding via service platforms offering crowdfunding? (N=27)


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12ment. In a more evolved scenario, the more significant investor could act as a spokesperson

and a supervisor o interests or the more passive investors, in this way improving the posi-

tion o the smaller investors in the process. Tis so-called anchor investor could also attract

more persons to invest in the company and thus help the company reach its unding target.

On the other hand, emphasis on the role o the anchor investor was eared to diminish the

responsibilities o the others and lead to unequal treatment o investors.

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0 5 10 15 20 25

Yes(Please describe concrete benefits)

No

(Please describe concrete disadvantages)

FIGURE 3. Would you consider it useful if at least one larger actor would contribute to

an investment target in crowdfunding in the role of an 'anchor investor'

(with a share of 5 to 10 per cent, for example)? (N=25)

One o the corner stones o the development o equity-based crowdunding has been con-

sidered to be the existence o a unctional secondary market where shares received in exchange

or investments made via crowdunding could be openly traded in. Te opportunity or trade

was also considered to enhance investor protection, e.g. through the price ormation ena-

bled by the market, and to increase interest in the activities in general. Private actors can be

expected to establish secondary markets or crowdunding in the near uture. ransparency

and operations similar to the market or listed companies were considered o particular impor-

tance as concerns the unctioning and credibility o the market. However, several issues yetto be resolved were perceived as obstacles or the establishment o the market: how to main-

tain a register containing inormation on the group o shareholders, how to ensure the value

ormation o the investments, how to account or the international nature o the activities in

cases where crowdunding takes place over national boundaries and how should regulation

and supervision be carried out. Issues related to taxation must also be taken into account. Te

requirement o being able to trade in shares issued via crowdunding on a secondary market

was eared to lead to additional costs in the early stages o crowd-financed companies. Te

relationship o the bond market envisioned or small and medium-sized companies recently

discussed on the Finnish national level to the secondary market or crowdunding must also

be taken into account.

It should also be noted that some o the respondents did not perceive the lack o a unc-tioning secondary market as an obstacle or the development o crowdunding. Te alterna-

tives proposed included the temporary nature o investments, e.g. by adopting terms or the

reacquisition or redemption o shares or limited company shares issued via crowdunding.


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2 Problems associated withcrowdfunding

Based on the survey, a number o problems are currently associated with crowdunding.

Problems were perceived, or example, in relation to the Money Collection Act and ques-

tions pertaining to investor protection and regulation associated with the sector. Problemsassociated with taxation did not emerge in the survey in any significant way. In general, the

respondents attitudes to crowdunding were positive, and issues identified as problems were

ofen associated with a concern or the development o the orm o unding in Finland and

its potential misuse.

Te most central cause or concern was related to the amount o inormation available as

concerns companies offering crowdunding services, companies collecting unds as well as the

investors contributing to the process. Tis was also related to a concern or a low level o super-

vision by the authorities, which is largely due to the diversity o the field, its not-yet-stabilised

status and positioning in an area where, in terms o regulation, instead o the applicability o

a single statute, it is necessary to consider each crowdunding service on a case-by-case basisrom the perspective o several statutes that may potentially apply to it. Tese two concerns,

the amount o inormation and the low level o supervision are combined in the obligation to

provide inormation, in investor protection as well as in issues pertaining to potential mis-

conduct. One central problem or the development o crowdunding was perceived to be its

relative unamiliarity to the general public.

In the survey, the risk o misconduct emerged as one o the most common causes o concern

associated with crowdunding. Te respondents ound the current criminal and tort liabil-

ity legislation an insufficient deterrent to prevent misconduct associated with crowdunding.

Money laundering and raising unds or criminal activities via crowdunding also emerged

as risks to be taken into account in the development o the sector. o enable efficient preven-

tion o money laundering, the respondents hoped or clearer instructions rom authorities.Also the technological solutions used in crowdunding were perceived to involve risks. As,

by definition, crowdunding constitutes und raising taking place via the Internet, the threat

o a security breach is a valid one. Te service providers were expected to acknowledge these

risks and to protect themselves against them.

Regulation

One o the most important motivations or the implementation o the survey in the min-

istries was the need to determine the relevance and comprehensiveness o regulation on

crowdunding. Questions pertaining to regulation elicited especially active responses. A cer-


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14tain duality could be detected in the responses. Te majority o respondents hoped that pos-

sible regulation would be as light as possible to ensure avourable development o the sec-

tor, but at the same time sufficiently extensive to prevent misconduct particularly in the field

o consumer protection and money laundering. Further, the respondents also hoped or the

abolishment o unnecessary regulation that unctions to prevent development in the sector.

Crowdunding in its different orms has links to several different areas o legislation. Anumber o open questions were identified in the interpretation o these laws. Different author-

ities and judicial advisers were said to offer conflicting views as concerns the details o pro-

visions related to the area in question. Defining the roles and responsibilities o the parties

offering crowdunding services and guaranteeing investor protection o sufficient level to par-

ties contributing to crowdunding rounds was seen as one o the main tasks o government

authorities. Te adoption o a penalty or the violation o possible rules and the content o this

penalty were proposed or consideration. In this vein, a wish to restrict possible legislation to

the prevention o misconduct in the context o the orm o unding only was also expressed.

Regulation or the purpose o ensuring investor protection was deemed to be o particu-

lar importance. One o the respondents perceived regulation to hold central importance also

as an element to secure equal prerequisites or competition. It was also stated that regulationalways generates costs, and one o the concerns to emerge was that parties offering crowd-

unding services largely uncovered by regulation on the financial markets may obtain a better

competitive position compared to the parties covered by current legislation. Moreover, inves-

tors - usually small investors - contributing to crowdunding rounds should enjoy protection

o a level comparable to that offered by other orms o investment available on the market. Te

respondents ound it important that the investors should be able to make investment deci-

sions based on sufficiently extensive and correct inormation to avoid the underestimation,

and the resulting underpricing, o risks. Other problems in investment activities related to

the unregulated status o the sector were perceived in the availability o inormation afer the

share issue and in the use o sales organisations in the marketing and collection o investments.Te international nature o crowdunding was perceived as an opportunity, but it was also

considered to pose hindrances or supervision in the sector. Crowdunding is not limited by

national borders, and the taxation and authorisation practices o different countries vary

greatly. Tis is problematic particularly rom the perspective o the growth o the business o

service providers and the development o the EUs single market. Te role o the European

Union was perceived as central in the issue o regulation. Any final ramework conditions or

regulation and supervision in the sector were thought to come rom the EU level.

Finland was considered to have kept abreast with the general development o the sector

relatively well. However, awareness o the activities remains at a low level particularly in the

ranks o potential investors, and the danger is that parties seeking unding wil l go directly to

international operators, which would not contribute to the growth o the sector in Finland.Some o the respondents perceived regulation concerning the sector to be sufficient as it

is, but it was hoped to cover the different orms o crowdunding in a more effective manner.

Te current legislation was considered mainly to guarantee sufficient protection or consum-

ers and investors and ex post supervision by authorities. Conversely, some respondents elt

that the current situation where companies offering crowdunding services are not obliged to

seek, or example, authorisation or investment firms, weakens the credible development o

the sector. From the perspective o companies soliciting unding, the potential dispersion o

securities to a large number o investors was deemed problematic. Te chances o obtaining

urther unding may be greatly hindered by a situation where, or example, the ownership o

a company has been divided between a large number o people and even the identity o the

owners may be unknown.


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15Te respondents are clearly divided over the issue o obstacles caused by regulation. Te

most significant problem was perceived in the act that collecting money without compensa-

tion remains illegal unless the necessary permit is obtained rom the National Police Board

or, in local cases, granted by the local police department. Despite the reorm o the Money

Collection Act, rom the perspective o crowdunding, it is stil l perceived to contain the same

problems as beore. At the same time, the respondents stated in the open-ended responses thatstronger regulation o crowdunding would also bring credibility and clarity to the orm o

unding. Some respondents specified that good regulation supports the activities regulated.

Also, the need or common rules in the sector was brought up.

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Yes

(Please describe the obstacles in question)

No

FIGURE 4. Does the organisation you represent perceive regulatory obstacles that should

be abolished in order for you to be able to utilise crowdfunding or to allow the sector to

grow in a credible manner? (N=31)

Te majority o respondents ound that the current regulation o the financial markets

does not account or the different orms o crowdunding to a sufficient degree. Some o the

respondents demanded the clarification o regulation concerning crowdunding, while oth-

ers perceived that the current regulation could act as a oundation or the definition o rules

or the different orms o crowdunding. Lack o regulation concerning the different ormso crowdunding was also seen to pose a threat to the development o the orm o unding as

a whole. Te respondents eared that the method o unding cannot increase its popularity

as long as regulation remains ragmented and unclear. Tis was seen as a particular concern

or small investors. Some o the respondents ound it important that possible new regulation

account or the diverse objectives o the different orms o crowdunding. On the other hand,

the creation o uniorm operating models to cover all activities within crowdunding was con-

sidered recommendable. Also in matters concerning regulation, equity-based crowd-unding

emerged as a central topic. For example, the boundary between crowdunding and investment

services as well as the one between operators offering crowdunding services and investment

firms was perceived to be vague in parts, and a more specific definition o the boundary would

be necessary rom the perspective o investor protection, or example.Slightly less than a third o all respondents were o the opinion that current regulation

accounts or the different orms o crowdunding to a sufficient degree. In this group, a single

set o instructions or businesses and consumers and a coherent interpretation o existing leg-

islation were seen as sufficient tools or the regulation o the different orms o crowdunding.

Among the perspectives that emerged in the survey was the uture role o EU-level regulation.


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16

Te sel-regulation o operators offering crowdunding services has been seen as a central

part o development in the sector. Among the respondents, too, the sel-regulation o the sec-

tor and instructions provided by authorities were seen as a good way to develop the sector

through light regulation. Te role o the Financial Supervisory Authority was widely consid-

ered as important, however, despite the act that sel-regulation created by operators in the sec-

tor could be used to provide an effective ramework or the activities. Te role o the Financial

Supervisory Authority is also based on its statutory task to educate citizens towards the endo promoting compliance with good practices in the financial markets and enhancing public

knowledge concerning the financial markets. Yet, the majority o the respondents perceived

the benefits o sel-regulation as undeniable irrespective o the situation. In addition to cred-

ibility and more stable development, it was also seen to promote the organisation o the sector.

A small minority o respondents perceived sel-regulation alone as insufficient, particularly

as the sector is still young and the number o operators within it low.

Te responses also included a suggestion that operators in the field join orces and them-

selves produce guidelines or the sector. One practical level suggestion was that actors in the

field could standardise central investment documents, requirements or collecting and pro-

viding inormation and prepare a plan or the equal treatment o investors. According to therespondents, the production o guidelines and sel-regulation within the sector should, how-

ever, take place within a relatively short space o time. Learning rom the examples o other

countries was also deemed important.

10

21

0 5 10 15 20 25

Yes (In what way?)

No (How should the nationallegislation be amended in your opinion?)

FIGURE 5. Does the existing regulation of the financial markets in Finland account for

the different forms of crowdfunding in a sufficient manner? (N=31)

22

7

0 5 10 15 20 25

Yes (How should thisbe implemented in practice?)

No

FIGURE 6. Instead of additional regulation, should crowdfunding be steered through

the self-regulation of the sector and general instructions (targeted at investors and

service providers) issued by the Financial Supervisory Authority? (N=29)

Detailed regulation o crowdunding through legislation divided opinions among respond-

ents. One reason or this could be the way in which the questions were posed, i.e. enquir-

ing about the need or detailed regulation specifically concerning crowdunding. Based on

answers to the open-ended questions, ew were directly in avour o increasing regulation, but

the respondents hoped that possible regulation would be kept as light and clear as possible.

Generally, authorisation sought rom the Financial Supervisory Authority was considered a

possible solution, provided that the application process can be kept light. It was considered

important, however, to first determine the status o current legislation rom the perspective


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17o crowdunding and to take action only when clear problem areas are identified. Tose in

avour o strict and detailed regulation based their view on more effective prevention o mis-

conduct and increasing the credibility o the sector.

15

16

0 2 4 6 8 10 12 14 16 18

Yes (What would be thepreferred legislative framework?)

No

FIGURE 7. Should crowdfunding be regulated via detailed legislation

(e.g. registration/authorisation obligation for all operators in the sector)? (N=31)

Investor protection

Problems concerning sufficient investor protection and investors understanding o the risks

o investment activities were highlighted in the survey. Investor protection was perceived to

be closely associated with the adequacy o inormation provided by the companies soliciting

unding and the evaluation o the value o the company. In some realised cases o equity-

based crowdunding, the determining actor was said to have been emotion, rather than

actual inormation. Tis is a eature that also leaves room or raud, an aspect that has the

potential to damage the reputation o the sector. Some respondents ound it possible that an

insincere entrepreneur could attract small investors without a viable business plan or even

actual business activity. Conversely, the right o a business to adequate inormation on inves-

tors and the legal certainty o ownership were deemed important. Te realisation o inves-tor protection in possible subsequent investment rounds was also perceived as a challenge in

situations where the group did not have an active representative.

Te respondents ound it problematic that compliance with the obligation to report and

provide inormation is not supervised in any way. Also the responsibilities o the party mak-

ing the investment and, correspondingly, those o the other parties involved were experienced

as problematic, depending on the unding method chosen. Particularly rom the viewpoint

o small investors, investor protection based on existing regulation was perceived as unclear

and problematic. Investors contributing to equity-based crowdunding may find it difficult

to obtain adequate inormation to support their decisions. Tis can hinder the assessment o

risks associated with the activities. Operators providing crowdunding services may find it

difficult to grasp the regulation or restrictions placed or the sector, particularly as concernsthe regulation o the financial markets.

At the same time, some o the respondents declined to even discuss investor protection

in this context, as they considered high risk to be a central element o crowdunding. Some

stated that direct investment in companies is always risky. Te responsibilities o the service

providers were considered to be limited to passing on the unding as promised, and not extend

to protecting the investors rom the risks involved. According to the respondents, investors

should bear responsibility or their investments, provided that other obligations related to

the crowdunding service had been ulfilled. Some o the respondents wished or a lighter

orm o investor protection compared to the more established orms o investment. Tis view

was based on the small average size o the investments, as a result o which the investors own

responsibility or the risk should be sufficiently large.


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18Te existence o a market or trading in shares issued via crowdunding was deemed cen-

tral or the uture o the sector as concerns the realisation o investor protection and ensur-

ing the realistic valuation o businesses. According to the respondents, in some cases, shares

had been issued as compensation to as many as several hundreds o shareholders. Tis poses

the risk that the investor is not able to sell his or her shares or the potential buyer o shares is

not able to ascertain the sellers ownership o the shares. Another problem identified was theinability o a company to maintain its share register and shareholder register up-to-date, lead-

ing to a situation where the shareholders will not be able to exert their rights as shareholders

under the Limited Liability Companies Act.

Particular attention focused on the Money Collection Act

When discussing crowdunding in Finland, questions related to the Money Collection Act

are ofen raised. Te Money Collection Act is applicable to activities where money is col-

lected without compensation. Such collections may not be arranged without a due money

collection permit. Te objectives o the act are to make it possible to organize money col-lections in order to und non-profit activities and to prevent dishonest activity in connec-

tion with money collection. Tis type o system or money collection is not very common

in Europe, and many countries have instead opted or a system with a lighter administra-

tive procedure, involving, or example, an advance notification to authorities required rom

actors engaging in money collection activities. Some o the respondents elt that the most

significant problems in crowdunding were associated with the Money Collection Act and,

in particular, the rigid interpretation and application o the act. Te majority o the respond-

ents who drew particular attention to the Money Collection Act perceived needs or reorm

in the existing Money Collection Act so that in the uture the act would allow or the collec-

tion o crowdunding without compensation in Finland.When asked a specific question, the majority o the respondents however perceived the

current policy outlined in the Money Collection Act as a necessary and unctional one. As

a rule, the Money Collection Act does not apply to activities where a compensation is pro-

vided. I any object with independent economic exchange value is offered as a compensation,

the activity is not considered money collection but regular business activities. In practice,

drawing the line between the two may be difficult, however. Determining exchange value or

a share in a growth company or a pre-ordered consumer goods item can be determined so

that the crucial actor are the nominal value o the share and the expected value o the pre-

ordered consumer goods item. Te room or interpretation in the way in which compensa-

tion is defined and the rational application o the act were highlighted in the comments. Te

suggestions made also included abandoning ex ante supervision implemented via the moneycollection permit and shifing to post-supervision.

19

7

0 5 10 15 20

Yes

No (Please describe the typeof division you would prefer)

FIGURE 8. Is the division between the provision and non-provision of compensation applied

in the Money Collection Act (i.e. whether the object funded has independent economic

exchange value or not) necessary and functional for the purposes of crowdfunding? (N=26)


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19

3 Summary of survey responses

Based on the survey, the expectations directed towards crowdunding are high. In gen-

eral, the method o unding was considered cost-efficient, rapid and flexible. Crowdund-

ing was perceived to enable more effective utilisation o the deposited unds o private citi-

zens and an increase in the availability o unding and, in particular, to acilitate the entry

o start-ups and new innovations into the market. In several o the responses, crowdundingwas described as an alternative or a supplementary channel o unding. On the other hand,

some respondents perceived crowdunding more as a marketing or communications chan-

nel, rather than a unding source per se. Te realisation o investor protection, the indefinite

nature o regulation, lack o supervision by authorities and issues to do with providing and

receiving inormation emerged as the most central problems.

Te respondents background organisations had an impact on their responses. o urther

clariy interests o the respondents, we have, in the ollowing, divided the responses into our

groups based on the background organisations o the respondents: (i) authorities (incl. min-

istries, government agencies acting in different roles, and other government-led institutions

and units under public administration, (ii) interest groups, (iii) providers o crowdundingservices (iv) others (incl. legal firms, investment companies and other private actors).

(i) Government authorities (N=12)

Te largest group o respondents unconnected to crowdunding was detected among the

representatives o government authorities (N=4). Te officials drew particular attention to

the lack o sel-regulation in the sector, the possibility o misconduct, investor protection and

lack o clarity in legislation, case-law and the practice o authorities.

Te majority o the officials elt that the regulation o the financial markets currently in

orce in Finland did not adequately cover the different orms o crowdunding. Te responsesby the officials highlighted the need to speciy existing regulation so that crowdunding in

its various orms would be better accounted or in legislation. Also, difficulties in the super-

vision o crowdunding and the roles and responsibilities o operators offering crowdund-

ing services and regulation related thereto emerged in the responses o government officials.

Based on the survey, the authorities themselves do not support detailed regulation. A model

based on sel-regulation and instructions provided by authorities or, alternatively, light regu-

lation, received support rom authorities. Te representatives o government authorities were

generally positive about the ormation o a unctional market or trading in shares issued via

crowdunding and perceived this as central or the growth o the sector.

Out o individual authorities, ax Administration perceived that matters related to the tax-

ation o crowdunding require active monitoring. Te Bank o Finland perceived the regula-


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20tion o the financial markets to be up-to-date and, on a general note, to also cover problems

associated with crowdunding activities. From the viewpoint o the Bank o Finland, possi-

ble new regulation, i it is perceived as necessary, should constitute EU-level regulation and

national legislative projects should not be undertaken.

(ii) Interest groups (N=13)

Te responses given by interest groups contained variation. Some o the representatives o

interest groups were o the opinion that existing regulation on the financial markets does

not account or the various orms o crowdunding to a sufficient degree. Some o the organ-

isations also perceived deficiencies specifically in the Money Collection Act and hoped that

the unctionality o current legislation in relation to crowdunding would be analysed. Te

majority o interest groups hoped or more supervision and obligations to provide inor-

mation or businesses soliciting unding. Te respondents were not, however, in avour o

detailed regulation, but perceived sel-regulation as a good alternative. Instructions issued by

the Financial Supervisory Authority were also mentioned. Moreover, some o the respond-ents supported a light version o an authorisation process or the sector, and separate and

specific legislation or the sector was also proposed.

More than the other groups o respondents, the interest groups stressed the social signifi-

cance o crowdunding and its significance in the ormation o communities. Crowdunding

was perceived as a new, potential channel or raising unds. As or problems, the same issues

emerged as in the responses in general: investor protection, lack o supervision, possible mis-

conduct, lack o clarity concerning the division o responsibilities between authorities and

lack o regulation in the sector.

Out o all background organisations, the responses o interest groups indicated the most

dissatisaction with the unctioning o the current Money Collection Act rom the perspectiveo crowdunding. In particular Kepa, the Council o Finnish Foundations, and the Finnish

Fundraising Association stressed the poor unctioning o the Money Collection Act stating

that it is unflexible and prevents innovation in requests or donations presented to the general

public. A central wish was a reorm o the Money Collection Act in a way that would enable

community unding without compensation also in Finland in the uture.

Te interest groups stressed the role o the anchor investor in equity-based crowdund-

ing or the purposes o increasing the credibility o the investment target, acting as the super-

visor o the interests o the group o investors and as a party inspiring confidence. All o the

representatives o interest groups who responded to the question (N=8) supported the intro-

duction o a so-called anchor investor in crowdunding investments. A unctional secondary

market also gained unreserved support rom the interest groups and were seen, almost with-out exception, as an important aspect o development in the sector.

Responses by the Federation o Finnish Financial Services differed rom those provided by

other interest groups. Te Federation o Finnish Financial Services stressed the significance

o equal regulation and the prerequisites or competition. Central elements in the regula-

tion would have to be the requirement or authorisation and supervision by authorities, but

requirements could, according to the Federation o Finnish Financial Services, also be posed

or aspects such as the size o the businesses to be unded, the preparation o financial state-

ments and the responsibilities o the party providing the crowdunding service. At the same

time, the Federation o Finnish Financial Services also stated that it takes a positive view to

the development o different orms o unding, improving the availability o unding and sup-

porting the growth o the economy by encouraging entrepreneurship.


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21(iii) Providers of crowdfunding services (N=6)

Te providers o crowdunding services saw great potential in crowdunding. Among the

examples mentioned were better use o unds deposited in bank accounts, the reduction

o unemployment and increase in exports. Service providers, too, brought up raising gen-

eral awareness on crowdunding and the creation o common rules as actors central or thedevelopment o the sector. Te majority o service providers supported the development o

sel-regulation in the sector.

In the opinion o service providers, central problems in the sector included the unclarity

o legislation and the aggressive marketing o some operators in the sector. A ew respond-

ents mentioned disruptive operators with the intention to deceive customers, particularly lay

investors with no expertise in investing, as one o the problems o the crowdunding sector.

Te majority o service providers were o the opinion that existing regulation on the finan-

cial markets in Finland does not account or the different orms o crowdunding to a suffi-

cient degree. Te service providers wished, however, that any new regulation would be based

on existing legislation. Despite the above, hal o the service providers covered by the survey

supported detailed regulation. Te suggestions provided included limited application o theAct on Investment Services and the creation o a separate legislation on crowdunding.

Out o the service providers, all were prepared and willing to invest in companies solic-

iting unding via crowdunding activities. Te sums reported by the respondents varied on

an annual level rom EUR 100,000 to a ew million. All service providers also supported the

introduction o an anchor investor or investment targets financed through crowdunding.

(iv) Others (N=5)

Te group o five respondents was a mixed sample o businesses (also including investmentcompanies), market operators and legal firms. Crowdunding was seen as a new and innova-

tive unding channel, important particularly in the early stages o small companies.

In terms o problems, the same topics emerged as with other groups o respondents. Risks

related to inormation security and investor protection, risk o raud and embezzlement,

unclarity o regulatory ramework, laws governing different orms o crowdunding and the

lack o clear rules governing the sector were perceived as central problems in crowdunding.

Also in this group o respondents, the majority was o the opinion that existing regulation

on the financial markets in Finland does not account or the different orms o crowdunding

in a sufficient way. Te respondents considered sel-regulation and instructions issued by the

Financial Supervisory Authority as the best way to proceed in the task o creating a shared

set o rules or the sector but, paradoxically, the majority was also in avour o detailed regu-lation. In this context, some o the respondents reerred to the possibility o a light registra-

tion duty with the associated conditions.

Te secondary market, deemed important, was hoped to resemble the market or listed

companies. Tis would allow or market-based price ormation or the shares. Te option

where the shares o crowd-financed companies could also be traded in a suitable secondary

market, such as the First North market, was also considered. Linking the secondary markets

to the crowdunding platorms in some appropriate manner was also perceived as useul. As

or the sum to be invested, the respondents were prepared to invest amounts rom EUR 10,000

to hundreds o thousands. At the same time, the point was made that rom the perspective o

a proessional investor, also more established methods o investing are available.


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22


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23

4 Conclusions on the survey

Based on the survey, crowdunding has potential to become a significant promoter o citi-

zen participation and a source o unding or business lie also in Finland. Te growth o

crowdunding must be promoted, at the same time ensuring the avoidance o misconduct.

Based on responses to the survey, the ollowing conclusions applicable to each o the differ-

ent orms o crowdunding can be made.

a) Regulation of the sector should be kept light

Based on the survey, the regulation o the orm o unding should be kept as light as

possible. However, supervision o the sector must be increased, and possible mis-

conduct must be addressed in an active manner, which may require clearer regula-

tion. Moreover, the need or the harmonisation o requirements or the provision o

inormation might require more detailed regulation. Te Finnish authorities must be

active as concerns possible regulation to be created on the EU level.

b) Te sector must develop self-regulation and good practiceso ensure the balanced development o crowdunding, operators in the field should

develop sel-regulation and good practices. Operators committed to compliance with

sel-regulation and good practices could be certified, where possible. Dialogue between

different operators in the field is important to prevent misconduct and to enhance the

development o the orm o unding.

c) Guidelines needed for the sector: actors require instructions and education

In addition or instead o regulation and possible sel-regulation concerning the sector,

the authorities should consider the production o additional instructions and educa-

tion to all parties involved in crowdunding activities. At the initial stage, the goal o

the instructions and education would be to describe acceptable practices, to presentviews on adequate investor protection and to establish uniorm requirements or the

provision o inormation.

d) Te general publics knowledge of the sector must be increased

One o the most significant obstacles preventing the growth o the sector is lack o

inormation. Te knowledge o citizens and companies on the different orms o

crowdunding must be increased. Tis promotes wider adoption o the orm o und-

ing and improves the investor protection. Te main responsibility or inorming the

public lies with the operators in the sector.


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24e) Requiring authorisation or registration from operators in the sector should

be considered

Te authorities should consider a registration obligation or an obligatory authorisa-

tion or operators in the sector. Te amount o work required rom service providers

and the costs involved must, however, be kept to a minimum. One option is voluntary

registration o service providers with the Financial Supervisory Authority to deter-mine whether the activities o a certain service provider are covered by the regula-

tion and supervision o the sector.

f) Te roles of the authorities must be clarified

From the viewpoint o the authorities, accounting or the difference between the vari-

ous orms o crowdunding is important. Different orms o unding belong to the

mandate o different authorities, and this division o responsibilities should be clari-

fied.

g) Secondary market would support development of the sector

A unctional secondary market will support the development o equity-based crowd-unding. Te secondary market will also unction to improve investor protection.

Operators in the sector should enhance the ormation o a unctional secondary mar-

ket. However, taking into account the size o the sector, the secondary market should

not place too extensive obligations or the operators in the sector as concerns their

activities or the provision o inormation.

h) Crowdfunding should be more effectively accounted for in the Money Collection

Act

As a orm o collecting unding involving compensation, crowdunding does not all

within the scope o application o the Money Collection Act, but is governed by reg-ulations on consumer protection and the financial markets. In practice, drawing the

boundaries can be difficult, which is why the requirement or a permit or money col-

lection without compensation should be reassessed with a particular eye on crowd-

unding. In the scope o application o the Money Collection Act, instead o the per-

mit procedure, a procedure based on an advance notification should be considered,

thus shifing rom ex ante supervision to ex post supervision.


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25

5 Possible fur ther measures byauthorities

Based on conclusions rom the survey, the Ministry or Employment and the Economy and

the Ministry o Finance perceive five options or urther measures by which to improve the

regulation and supervision o crowdunding and the legal protection o investors. Te meas-ures are not mutually exclusive, and they are not presented here in a manner that accounts

or the differences between the different orms o crowdunding in a detailed manner. Deci-

sions in the matter will be made in the course o spring 2014.

a) Assessment of existing legislation, to be amended where necessary

Te suitability o existing Finnish legislation on consumer protection and the avoid-

ance o misconduct as well as the suitability o corresponding EU regulation or the

different orms o crowdunding will be assessed and the required measures taken.

A potentially applicable regulatory ramework to be assessed should include least

the ollowing acts, under the remit o the Ministry o Finance: (i) Act on AlternativeInvestment Fund Managers (162/2014, AIFML), (ii) Securities Markets Act (746/2012,

AML), (iii) Act on Credit Institutions (121/2007, LLL, thorough reorm under prepara-

tion), (iv) Act on Investment Services (747/2012, SIPAL) and (v) Payment Institutions

Act (297/2010, MLL). Te need to amend the Money Collection Act (255/2006) alling

within the mandate o the Ministry o the Interior must also be assessed.

b) A comprehensive assessment is performed on need to require registration or author-

isation

As part o the assessment o existing legislation, it should be determined whether reg-

istration with the Financial Supervisory Authority or applying or authorisation rom

the Financial Supervisory Authority should be established as a condition or the pro-vision o all types o crowdunding services. Some o the activities perormed within

the orm o crowdunding already require authorisation.

c) Preparation of national legislation should not occur before possible legislative

project by the EU

Te European Commission has given a preliminary announcement that it will issue

a communication on crowdunding beore the European Parliament election in 2014.

Te communication may lead to a subsequent EU-level legislative project on crowd-

unding with the aim o harmonising activities within the sector in the area o the

European Union. Other international actors (IOSCO) have also examined the issue

o crowdunding. Beore amendments to domestic or EU legislation, the activities


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26in Finland will continue as beore, i.e. the Financial Supervisory Authority and the

Finnish Competition and Consumer Authority will supervise the activities o busi-

nesses offering crowdunding services within the limits o their current mandates,

and the businesses will operate within the existing national legislative ramework and

the exceptions contained by it.

d) Financial Supervisory Authority will prepare instructions on crowdfunding

Beore the clarification o legally-binding regulation, the Financial Supervisory

Authority will, within its current mandate, prepare instructions on good practices

in crowdunding and matters to be taken into account or operators in the field, busi-

nesses soliciting unding and investors.

e) Te sector will produce self-regulation for its activities

In cooperation with authorities, operators in the sector will prepare rules or peer-to-

peer lending and equity-based crowdunding that they then undertake to comply with.


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Documents

Report on Crowdfunding Survey Finland