How did it all come to this

In Europe, many founders today perceive Equity Crowdfunding as a negative signal - and for good reason as well. A history of poor regulation, mismanagement by (some) domestic platforms, & predatory practices, have left the reputation of the industry badly dented.

Many of these happenings stem from the fact that Equity Crowdfunding is a relatively new concept (the first platform emerged in 2007), so it has taken regulators some time to figure out how to best, well, regulate the industry.

In theory the European Union is one integrated market, but in practice crowdfunding platforms have had to adhere to country-by-country regulation. This was less than optimal for all parties involved (platforms, investors, & founders) and had the following consequences:

• Domestic platforms lacked significant concentration of investors & founders. No single platform was capable of understanding, complying with, and obtaining a license to operate in 27 countries - in fact, most of them were only licensed to operate in a couple of countries. Investors want to go where they can find the greatest selection of start-ups, and founders want to list where they can find the most investors, which the old set of legislation did not solve for.
• Lack of competition & transparency led to predatory practices. Some domestic platforms have been (and continue to) charge founders as much as 15% of funds raised to host their campaign. Others have charged founders money up-front or even in the case they failed to secure a successful campaign. Some platforms have even sold investors pipe dreams like ‘invest in the next Apple’ without adequately informing them about the risks of investing in early-stage start-ups. Low regulation unfortunately attracted bad apples with less than noble intentions.
• Inability to clearly articulate a value proposition for founders. ‘Raise money fast’ or ‘raise money from a lot of investors’ are both bad value propositions in an upbeat economy where raising money (for the best performing companies) has never been the issue to begin with. The industry failed to explain WHY founders should take their money over that of others.

All of this boiled down to an adverse selection problem - meaning that the bulk of start-ups that chose to run an equity crowdfunding campaign did so because they had no other alternatives. This in turn meant that investors got poor returns, which fed a destructive cycle for the industry.

One Law to Rule Them All

It had been a long time in the making when the European Commission finally in November 2021 announced new legislation that harmonizes Crowdfunding across all 27 member states (known as ECSPR - or European Crowdfunding Service Provider Regulation).

This is huge news for founders & investors alike, because it does away with the country-by-country legislation that has historically burdened Equity Crowdfunding. The new legislation:

• Creates one market with 447m potential investors. It no longer matters if your company is located in France or Germany, or whether the platform you are using is in the Netherlands or Spain. As long as the crowdfunding platform holds the ECSPR license, they can accept money from investors anywhere in the world (minus a few jurisdictions) & represent companies from anywhere in the EU. This creates a degree of concentration similar to what we are used to in the United States.
• Promotes competition & transparency. Every start-up that runs a crowdfunding campaign is now obligated to submit the same minimum disclosures in their KIIS (Key Investor Information Sheet). This creates transparency across countries & gives potential investors access to the same information - and for founders it comes with little-to-no extra work, because the minimum disclosures are equivalent to what most submit with their national regulator. An integrated market also promotes competition because start-ups have more choice amongst platforms - paving the way for domestic platforms to either revisit their predatory fees or become obsolete.
• Makes Crowdfunding a competitive supplement- or alternative to traditional capital for the savvy start-up founder. Domestic platforms inability to adequately frame the benefits of crowdfunding, was also partly due to the fact that the benefits under the old regulation were not very big. The benefits now with the new regulation are similar, if not greater, to those we have operated under in the US since 2021.

This new regulation has paved the way for our (Wefunder’s) European expansion, which we happily announced on Thursday the 16th of February 2023, where we went live with 12 companies across 5 European countries.

We are proud to expand our offering to help more founders get funded & to give start-ups an easy way to reward their most loyal fans.

Introducing Community Round by Wefunder

How does Community Round differentiate itself from old-school equity crowdfunding?

Well, firstly we operate under the new ECSPR regulation which allows us to tap a much larger base of investors (US accredited, European, & RoW) & to help start-ups regardless of where they are based in the EU. 

Secondly, our focus is not on the amount of capital you can raise.

Wait, what? You are a platform for equity fundraising, but your focus is not on euros & cents?

Nope, you heard that right. We recognize that as a skilled founder you can get money from lots of places, so what’s really interesting is the benefit that comes with that money. This gets us to the core of what a community round really is:

A Community Round is a way for start-ups to align incentives with their community of fans (customers, users, followers etc.) by offering them the opportunity to co-invest in their business. In turn, founders receive cash & a number of commercial benefits like increased brand awareness, additional commercial traction, increased referrals, & more.

So, a Community Round is as much an undertaking in PR & marketing, as it is a fundraising exercise - in fact, we see more & more founders that choose actively to host a round, not because it gives them a few extra bucks, but because it aligns with their values.

This brings us to the crux of why you might consider hosting a Community Round:

• Because it is the smart thing to do. Align incentives with your greatest fans by offering them the opportunity to co-invest. This drives higher retention, higher consumption, increased word-of-mouth, and a host of other benefits. For more examples, see our case studies here.
• Because it is the right thing to do. 30 years ago, equity ownership was reserved for senior leadership. Today broad-based equity ownership in start-ups is taken for granted. We believe co-ownership amongst fans will soon be commonplace, and we see visionary companies like Replit, Mercury, & more pave the way.

We recognize that raising a Community Round is not right for every type of business - but it is for a much broader range of start-ups than what equity crowdfunding has historically catered to.

If you are out there building a great EU company at Seed, Series-A, or Series-B stage, and you have a community of fans you’d like to reward & include in your journey, we would love to get in touch. You can reach me directly at asbjorn@wefunder.com.