December 18, 2014 / 12:53 PM / in 3 years

EU markets watchdog says crowdfunding needs regulating

People walk past the new ECB headquarters in Frankfurt December 4, 2014.Kai Pfaffenbach

LONDON (Reuters) - New European Union rules are needed to supervise crowdfunding and protect investors who face significant risks from the evolving sector, the bloc's markets watchdog said on Thursday.

Crowdfunding, often hosted on online platforms such as Crowdcube, Funding Circle and Kickstarter, allows individuals and small businesses to raise finance from pools of investors who put money into peer-to-peer schemes or securities such as unlisted shares.

But by limiting the type and number of investors in projects, platforms can skirt requirements on businesses to publish a prospectus, meaning investors have little information and face high failure rates. Platforms are also able to avoid holding enough capital to keep themselves solvent, the European Securities and Markets Authority (ESMA) said.

This young industry, which raises a billion euros in alternative financing a year, falls between the cracks of existing regulation, the watchdog said on Thursday.

"ESMA's aim is to enable crowdfunding to reach its potential as a source of finance, while ensuring that risks to users of crowdfunding platforms are identified and addressed in a proportionate and convergent way across the EU," ESMA Chairman Steven Maijoor said.

"We believe that there are benefits both for investors as well as for platforms by operating inside rather than outside the regulated space," Maijoor said.

Coming under EU rules would allow platforms authorized in one member state to operate across the whole bloc and achieve the critical mass of investors they need, ESMA said.

Action by the EU appears likely as one of the bloc's core aims is to set up a capital markets union to encourage more financing like crowdfunding backed by safeguards for investors, after they were burned by the 2007-09 financial crisis.

Reporting by Huw Jones; Editing by Elaine Hardcastle

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