Crowdfunding and the Small Offering Exemption in European and US Prospectus Regulation: Striking a Balance Between Investor Protection and Access to Capital?

Small and medium sized enterprises (SMEs) face proportionally higher costs than larger corporations when offering their shares to the public. An alternative to bank financing or an initial public offering is to raise small amounts of capital from the crowd, i.e. crowdfunding. During the past year, both the European Union (EU) and the United States (US) have either proposed or implemented changes to the regulation of prospectuses. The aim in both jurisdictions is to promote innovative forms of business financing. Changes in prospectus regulation should however not be at the expense of investor protection regulation. Non-qualified investors are generally seen as less sophisticated and in need of more comprehensive investor protection regulation than institutional and other qualified investors. In this article, the proposed changes to the EU prospectus regulation are examined in light of the newly adopted Regulation A and Regulation Crowdfunding in the US, with a focus on how the proposed changes will affect retail investors as well as SMEs and their ability to raise capital through crowdfunding. A conclusion drawn from the comparative study is that several safeguards intended to protect non-qualified investors in crowdfunding offers are present in the US but not in the EU. It is argued in this article that the changes proposed in the EU, making it easier for SMEs to raise capital on the capital markets, should be accompanied by more robust investor protection regulation.