Crowdfunding threatens to crowd-out banks

Crowdfunding is an increasingly attractive way of raising money for business ventures.

It took off via the internet in 2006 and eight years later typing ‘crowdfunding’ into Google produces link after link to specialist platforms. 

The links detail schemes that range from raising £15,000 for Chagford Community Farm (Devon) to HK$12.7 million for an off-grid solar farm in Qianhai (China).

Now comes news that the Spanish government plans to restrict total funding to €1 million per project.

Individual contributions will be limited to €3,000, with a €6,000 cap on the amount donated to the same platform. Crowdfunding platforms will need capital of at least €50,000 and insurance of at least €150,000.

“We do not understand these limits,” said Xavier Olivella, president of the Asociacion Española de Crowdfunding (AEC). 

They were fixed without taking the reality of the sector into consideration and without consultation, he complained.

The government is not trying to limit crowdfunding; on the contrary it hopes to boost it, a ministry of Economy spokesman responded.

The formula is conceived for micro-patronage by many small investors, not large-scale investments, he continued.

The proposed law will encourage crowdfunding while offering guarantees to investors.

“It is hard not to come to the conclusion that once again a Spanish government is legislating in favour of business lobbies, in this case, the banks,” said Enrique Dans, a professor at the IE Business School in Madrid.

“Remember that Spain’s banks have effectively frozen lending to small businesses in the wake of a financial crash that they largely brought about in 2008.”

Reading between the lines of a BBVA report, banks clearly fear that crowdfunding could erode their dominance. “There is a real risk that banks could cease to be a principal source for personal loans and small businesses.” the study concluded.