Alternative Finance in Croatia

Review FCA Sandbox | Crowdfunding master course


Last 2 weeks were very busy with our yearly academic event at the European Centre for Alternative Finance and the launch of a new alternative finance association (Dutch) in the Netherlands, representing all types of alternative finance providers.

This week I’ll be in Vienna discussing Alternative Finance trends in Europe at a workshop of the European Commission and the CrowdDialog Europe event.

This week I’ve asked Damir Šoh to provide an overview of the status of Alternative Finance in Croatia

Further news this week:

  • Norwegian University launches Crowdfunding Master course
  • A journey through the FCA regulatory sandbox
  • Will the EC Pass Pan European Crowdfunding Regulations, Including Initial Coin Offerings? 
  • EU regulation for business insolvency: promoting early restructuring to support growth and protect jobs
  • Austria issued €1,15 billion in Government Bond on Blockchain
  • Expert of the week : Damir Šoh (Croatia)

Norwegian University launches Crowdfunding Master course

Innovation Norway and the School of Business and Law at the University of Adger (UiA) have partnered to offer a master’s course in crowdfunding. In addition to lectures and teaching, participating students will be working with real campaigns from real companies. Reportedly, more than 20 companies and organisations have agreed to take part in the Crowdfunding Lab course.

The project is initiated by Rotem Schneor. Earlier this year he participated as expert in this newsletter to provide an insight on the status of Alternative Finance in Norway. His view on this project:

“We started research of, and education in, crowdfunding in 2012, and we decided early on that we wanted to develop a great expertise in this area. Nowadays, we are at an international level, and we want to provide master’s students with better insight into the different sides of crowdfunding.”

More information about the course: https://www.uia.no/en/studieplaner/topic/ORG457-1

A journey through the FCA regulatory sandbox

Since its inception, the Financial Conduct Authority (FCA)’s regulatory sandbox has continued to draw in innovative firms keen to test their business models, products and services in the market. But how has the experience of firms who have been through the sandbox journey been?

In collaboration with Innovate Finance, the FinTech team in Deloitte’s EMEA Centre for Regulatory Strategy have interviewed several firms across the spectrum of the first four sandbox intakes to seek their views on their sandbox journeys.

Added value for business models and credibility

Overall, it is very clear that the FCA sandbox has delivered real value to firms. In particular, being accepted into the sandbox and proving the underlying technology in a live environment has helped firms to better understand and fine tune their business models. Many also believe that the sandbox journey increased their credibility with both investors and customers.

Improvements for Sandbox

When asked how the FCA sandbox could evolve further, firms highlighted a number of areas for potential improvement or development.

  • Navigation of rules – An easier way to navigate the FCA handbook was a recurring point of feedback. In particular, several firms suggested that the FCA could develop a “Financial Regulation 101” starter-pack for firms and people with limited financial services sector experience, as well as more guidance on the FCA’s expectation in relation to the sandbox application forms. Some firms also thought that the FCA could consider extending the time firms are allowed to stay in the sandbox, or starting the “timer” after the necessary authorisations have been obtained.
  • Facilitating cohort interaction – Many firms also felt that the FCA could do more to facilitate the creation of a network, or “cohort feel”, amongst the firms accepted into the regulatory sandbox, especially those participating in the same cohort. While a number of issues may be too confidential to share, several firms would have welcomed the opportunity to discuss broader challenges and approaches with their peers, enabling them to learn from each other.
  • Sharing lessons learned – Another view was that the FCA should share the lessons learned in the sandbox with the wider industry. Sharing the guidance (in anonymised form) given to the firms in the sandbox more publicly and transparently would also help alleviate the risk which we flagged earlier in this article: that the sandbox could be seen to provide, albeit unintentionally, a certain competitive advantage to the firms that are allowed to participate in it.
  • Global reach – Firms with international operations or ambitions were very supportive of the FCA’s proposals for a global regulatory sandbox and regulatory network. However, as one firm remarked, in order to be truly effective, a global sandbox would need a very clear structure, including a single application process and, in all likelihood, a central team to manage co-ordination with firms and regulators. Nevertheless, a global sandbox should facilitate cross jurisdictional referral systems, promote regulatory convergence, and help firms understand the regulatory environment in selected key markets. 

The full report can be downloaded here: “A journey through the FCA regulatory sandbox – The benefits, challenges, and next steps“.

Will the EC Pass Pan European Crowdfunding Regulations, Including Initial Coin Offerings?

For quite some time now, the European Commission has been discussing creating a pan-European approach to investment crowdfunding. This policy absolutely makes sense and clearly aligns with the Fintech Action Plan and Capital Markets Union.

Current regulation is not working

In the years since the emergence of online capital formation, many EU member states have created their own regulation to facilitate crowdfunding within their borders. Some countries have been more effective in creating a robust crowdfunding market than others. There is also the European Passporting option but until now this is not used very often and not very effective.

New pan-European crowdfunding regulation

Implementation of the new regulation is now being discussed. The first proposal from the European Commission received a lot of critique from the industry, for example because of the low threshold of €1 million for financing, making it not a good alternative to national regulations.

Earlier this month, the European Parliament Innovation group, chaired by MEP Ashley Fox, held a discussion on crowdfunding in general, and discussed the need to include initial coin offerings (ICOs) as part of a regulatory proposal. The draft report is available here.

Voting possible in November

Most likely the EC is willing to move the funding cap higher, based on feedback on the initial proposal to €5-8 million. The main European stakeholders are the Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), the ECON committee in the Parliament, which will prepare the EP proposal to be voted on in the full parliament in November, and the European Council.

It is the Council which will defend member states interests and is usually heavily reliant upon national regulators, treasuries, or finance ministries, for qualified input. One of the lawyers who took part of drafting the current proposals mentions:

John Salmon: “[…] you never really know what is going to happen in the passage of European legislation between the Parliament and Commission,”. “However, personally I think there is a desire for a pan-European approach and I think the prospects are good. I think there is also a good chance that ICOs will be included within the new framework. I think there are details still to be worked out though.”

Some additional takeaways from individuals close to the discussion that need to be decided on:

  • The role of ESMA vs national regulators: On the issue of supervision and authorisation, some advocate for national regulators to hold primary supervisory responsibility, while others believe the ESMA ought to play an instrumental role in ensuring the harmonised application of the regulation.
  • Inclusion of ICOs: Regarded as the single most significant change, stakeholders are divided on this issue. For instance, while one group strongly supports this initiative and wants a more detailed discussion, another segment is much more skeptical and considers this not to be the right time to regulate ICOs.
  • Third-country platforms: Most agree in principle with the intention to open the framework to non-EU platforms, though one sector casts doubt upon the need for a third-country provision in the first place and another is asking for details on how the proposal would work in practice.
  • Other issues: One proponent believes in the need for greater transparency and investor protection. One party advocates for platforms to be able to financially contribute to their own projects (having skin in the game) as long as interests are aligned.

Interesting months coming up to see how the proposal will be completed.

EU regulation for business insolvency: promoting early restructuring to support growth and protect jobs

The European Commission is presenting a set of European rules on business insolvency. Well-functioning insolvency and restructuring systems are key to supporting economic growth and job creation.

Restructure early to prevent bankruptcy

Well-functioning insolvency and restructuring systems are key to supporting economic growth and job creation. The initiative will increase the opportunities for companies in financial difficulties to restructure early on so as to prevent bankruptcy and avoid laying off staff.

The proposed Directive focuses on three key elements:

  • Common principles on the use of early restructuring frameworks, which will help companies continue their activity and preserve jobs.
  • Rules to allow entrepreneurs to benefit from a second chance, as they will be fully discharged of their debt after a maximum period of 3 years.
  • Targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures.

Alternative finance

In the proposal is currently mostly focused on banks and reducing the number of non-performing loans at banks. It also reduces the influence of minority creditors and shareholders who will not be able to block restructuring plans anymore. For businesses this is good news, but proper safe guarding for their rights should also be implemented.

Austria issued €1,15 billion in Government Bond on Blockchain

Austria became the first European country to issue a government bond using blockchain technology. The Austrian government auctioned €1.15 billion in Bonds using Ethereum to manage the security issuance.

Notarization of government bonds via blockchain

The new technology is used for data notarization for reports from government bond auction onwards. This notarization service provides a trail to verify the authenticity of data, thereby ensuring the greatest possible degree of data security. Notarization is a new additional support element for the auction process. Blockchain technology is used in this particular case as an additional layer of security.

In general blockchain technology has great potential for increasing the efficiency and quality management of banking processes. Numerous applications are emerging, especially in the fields of the digital economy and public administration. Angelika Sommer-Hemetsberger, the OeKB Board Member responsible for IT and Capital Market Service comments:

“We regard the innovative form of blockchain-based data notarization as a logical technological advance in times of digitalization. We are delighted to be able to offer our customers this new blockchain service”

More information regarding the model used can be read here.

Expert of the week : Damir Šoh (Croatia)

What is the current status of Alternative Finance?

More than 2.200 launched crowdfunding campaigns collected 9 million USD in the SE Europe region from 2012 to 2016. During the same period campaigns launched in Croatia collected around 2,5 million USD. That number was reached again during 2017 only. Out of 78 campaigns launched that year, the largest majority (58 campaigns) were launched on Indiegogo as a traditionally dominant platform, while 14 started on Kickstarter and three on Funderbeam SEE.

Latest trends point to the fact that the market is growing and maturing (less campaigns launched, but with a higher rate of success and larger financial goals).

Moreover, in 2017 an equity-based platform Funderbeam SEE was introduced, and this points to a newly emerging trend of investment related to equity and business in Croatian crowdfunding market.

In Croatia there are no regulations (statutes, ordinances or bylaws) specifically addressed to crowdfunding. In the equity model, operations would be characterized as investment within the application of Capital Market Act, which means that incomes meant to be qualified as capital gains. The lending model resembles the classical loan agreement, although the platforms offering this model do not specify whether it includes issuance of bond or other transferable debt securities. Donation and reward-based models are not regulated as well and, considering that they are also excluded from MIFID provision and prospectus requirements, in order to understand the applicable tax regime will be necessary an analysis of the rule settled by contract in each case.

Can you give us an inspiring case from your country?

As already mentioned, the hot topic of Croatian crowdfunding market is the entrance of equity-based model through the Underbeam SEE platform. One year ago it hosted the first Croatian fundraising campaign launched by the technology-based start up Include, a manufacturer of “smart” benches called Steora, which raised around 550.000 USD for further business development.

After Include, a local consultancy company Sense Consulting was also campaigning for around 875.000 euros for business expansion on markets of Southeast Europe. A successful series of campaigns on Funderbeam continued with the IT startups of Aspida and the Brewery Medvedgrad, which at the end of the year opened a new brewery thanks to successfully collecting record-winning 1,25 million USD. Funderbeam SEE thus brought in a new equity crowdfunding revolution in Croatia over the course of one year, with more than 2,5 million USD raised in 2017, and became by far the most successful platform when it comes to crowdfunding in Croatia.

What are the biggest obstacles for growth?

Networking, support, education. There is a necessity to build a more sound support system in Croatia, and there should be a push towards creating a more sustainable legal framework for crowdfunding, which cannot be achieved without national and local government support. There should be a more active role of regional agencies and the potential of digital ecosystem implementation has to be taken into account if there is enough will to build a healthy support system.

Finally, low level of awareness seriously impedes chances for crowdfunding – only 10% of campaigns launched in the region during period 2012-2016 were successful, and merely 0.5% of the population in the region had participated in crowdfunding campaigns. That is simply too low, even if funds raised are increasing, like we have witnessed during 2017. Here education plays a crucial role, and there is a growing need for it.

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Author

Stefan von Imhof

Stefan von Imhof

Stefan von Imhof is the co-founder and CEO of Alts.co.  With a background in alternative asset analysis, valuations, and due diligence, Stefan was born for this world. His alternative investing  newsletter has grown into Alts.co — the world's largest alt investing community, with over 230,000 investors. Originally from Boston and later Santa Barbara, CA, he now lives in Melbourne, Australia with his beautiful wife.

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