Spain aims to kill crowdfunding
Crowdfunding, understood as collective cooperation to raise money and other resources to finance business initiatives by individuals or organizations, is a relatively recent phenomenon, but one that I have written about extensively. Examples of this kind of financing can be found going back decades (the basement of the Statue of Liberty was partially funded by an early version of crowdfunding in 1884), the first use of the term dates back to 2006, since when, thanks to a number of well-known websites, its popularity has skyrocketed.
This is a complex phenomenon that includes a wide range of varieties from microdonations (contributions with no specific return), models based on prizes (that can include anything from t-shirts, to the opportunity to pre-purchase the product), or even capital input (equity crowdfunding).
As an ecosystem, crowdfunding is an alternative and emerging way of financing ideas, projects, and companies, and is estimated to have generated some $5 billion globally last year. In Spain, data for the most recent year, 2012, puts the figure at around €10 million.
On Friday, online Spanish-language news site El Confidencial revealed that the Spanish government is considering regulating crowdfunding. The news prompted significant comment within the country’s business and technological sector, as can be seen on local crowdfunding sites such as Lánzanos or in Comunitae, a P2P credit union. The main concerns about proposed laws in Spain are about the limit of €1 million per project, and the maximum of €3,000 per individual per project, with a maximum of €6,000 in total), along with requirements for crowdfunding websites to registers with the Stock Market Commission and the Bank of Spain. Such sites would be required to have a minimum capital of €50,000, and civil responsibility insurance of €150,000 per year.
Regulating crowdfunding is a complex question. A degree of control is obviously necessary; but excessive rules and regulations could hinder the growth of a system with enormous potential to develop new ideas, projects, and businesses. To date, there are few rules as such on crowdfunding in Spain. Neighbors such as the United Kingdom, Germany, and Italy have already implemented regulations.
Crowdfunding in Spain is a growing phenomenon. The biggest project so far closed a few weeks ago after raising €680,000 from some 5,000 people to develop a version of the legendary computer game Heroquest. This pales into insignificance compared to the more than $10 million generated in the United States to develop the Pebble smartwatch, the $8 million for the Ouya video console, or the movie follow-up for the TV series Veronica Mars (almost $6 million). Sadly, there have been a few isolated cases of fraud in the United States, but so far, there have been no scandals in Spain.
Germany has established a limit of €100,000 per year for equity crowdfunding (and excludes limits on other contributions in prize-oriented crowdfunding sites, which are not considered investments); Italy and the United Kingdom, €5 million euros a year; Spain’s €3,000 per project, and a total of €6,000 per person per year, will effectively relegate crowdfunding to the lower ranks of business financing, appealing only to dilettantes and amateur investors. It is hard not to draw the conclusion that once again, a Spanish government is legislating in favor of business lobbies, in this case, the banks, who had already called for regulations to be imposed on crowdfunding sites.
Let’s not forget that Spain’s banks have effectively frozen lending to small businesses in the wake of the financial crash that they largely brought about in 2008 due to a decade of excessive lending to the property sector.
What effect could regulation of this type have on Spain? In the first place, it will block the possible potential and development of a financial ecosystem, forcing entrepreneurs (from small-scale projects to established businesses looking to generate capital) to work much harder to achieve very limited goals, or simply to resort to the banks.
In the second place, it will reduce the appeal of Spain for overseas crowdfunding sites, which will likely leave the country out of a global phenomenon of growing importance, and one where major consolidation is likely to take place in the coming years. Needless to say, these proposed laws will also stifle creativity and new ideas, in all likelihood prompting a brain drain to other countries with more enlightened approaches to encouraging business.
Finally, it is worth noting that the Spanish government’s proposed regulations on crowdfunding are extremely vague. At a press conference on Friday, it was not even possible to work out from the economy minister’s comments whether the rules would apply to equity funding only, or include models based on prizes, the former radically different to the latter. This looks to be yet another case of ill-conceived legislation being rushed through with little idea of what it is supposed to regulate exactly; or worse, who it intends to protect.
Crowdfunding represents an extremely interesting alternative for financing projects and business at the current time, and although regulation is clearly required to protect investors, great attention has to be paid to not stifle entrepreneurial initiative. In the United States, the SEC is being called on to lower the limits it wants to impose on crowdfunding for fear they will suffocate this nascent financing phenomenon. In Spain, everything seems to suggest that the idea is simply to kill it.
Miguel de Unamuno, one of the country’s best-known writers and thinkers in the early 20th century, expressing his horror that Spain would become “Japanized”, famously wrote: “Let others invent”. Sadly, Spain’s long-standing distaste of innovation, commerce, science, and technology lives on into the 21st century under a government whose philosophy seems to be, “Let others do business.”
(En español, aquí)
