Crowdfunding has become an increasingly popular form of technology-enabled financing, allowing to make capital calls to a very large community of investors via the internet, social and investor networks. As there is no harmonised European legal framework currently in place, crowdfunding is regulated at national level, if at all, and in very different ways across the EU Member States.
Providing solutions to crowdfunding business is an opportunity for Luxembourg and highly relevant in the context of Luxembourg as a global leader in investment solutions. Luxembourg is currently offering providers of crowdfunding services a range of structures to best address their target investor base.
Terminology
In the absence of a common EU definition, crowdfunding may be referred to as the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount.
Crowdfunding platforms, typically accessed via a website or an app for mobile devices, can be used to finance projects, products, start-ups and much more. Often a predefined minimum amount of money has to be collected within a fixed period of time in order for the crowdfunding to be successful and the project to be realised.
There are four categories of crowdfunding:
- Donation-based crowdfunding, where the funders do not receive any consideration, except, in some cases, non-material benefits such as a public acknowledgement. This form of crowdfunding is particularly suitable for financing social and non-profit projects.
- Reward-based crowdfunding, where the funders receive a non-financial consideration, like a copy of the project result. This form of crowdfunding is almost universally applicable and is particularly suitable for financing cultural and artistic projects and for the implementation of new product ideas.
- Equity-based crowdfunding, where the crowd aims to receive a return on investment based on the project's success. Since the micro-investments made by the funders have a quasi-equity character, this form of crowdfunding is suitable for supporting start-ups, small and medium-sized companies, real estate projects, and film projects.
- Peer-to-peer lending, where the funders issue a loan at an agreed interest rate over a fixed term, with or without security, or via an invoice finance-like structure as opposed to “vanilla” loan This alternative to the traditional bank loan is primarily used by private individuals, self-employed persons and small and medium-sized companies.
Crowdfunding involves three types of participants:
- The project owner that proposes the project to be funded,
- Investors who support the proposed project through funding, and
- An intermediating organisation, typically in the form of an online platform, that brings together project owners and investors.