Crowdfunding

Crowdfunding is a collaborative finance system that pools small amounts of money from a lot of people to fund a specific project. It works usually via web platforms facilitating the financial exchange between the investor and the project entrepreneur.

There are different models of crowdfunding investments:

Donation-based crowdfunding:
the investor is not expecting any kind of compensation.

Reward-based crowdfunding:
the investor will receive a non-financial return.

Lending-based crowdfunding:
the investor will expect to get his initial investment back.

Equity-based crowdfunding:
the investor makes his investment in return for a share in the profits or in the income engendered by the project.

Crowdfunding represents a great opportunity for both the investors and the entrepreneurs but it also brings some risks that none of them should underestimate. On the funders’ side some of the risks could be the lack of protection against fraud or an inadequate communication and/or follow-up considering that investors may come from very disparate environments. From the entrepreneurs’ perspective, financial and reputation management might among others be tough challenges.

The relevance of the Working Group for Luxembourg

In the perspective of limiting the risks for the actors, the European Union is currently building the foundations of a European framework for crowdfunding so that its development will be regulated and harmonised in Europe.
In Luxembourg no legal framework is yet available but a national specific law would surely position the country as a first choice jurisdiction for the implementation of crowdfunding platforms.

Concrete objectives of the Working Group

The European Impact Investing Luxembourg working group will decide whether to follow the path of the EU’s works and amplify it by encouraging and helping crowdfunding platforms to move on towards a harmonisation of their own self-regulations. It could bring more structure, transparency, security and professionalism that would benefit all the stakeholders. A common charter would also facilitate the implementation of a national specific legislation later on.

References

“Le crowdfunding, une source de financement alternative crédible pour nos PME – Quel rôle doit jouer le Luxembourg dans ce contexte ? ”

by Laurent Capolaghi and Olivier Coekelbergs – EY Luxembourg