Crowdfunding from an investor perspective Final report Prepared for the European Commission Financial Services User Group 17 July 2015 www.oxera.com Crowdfunding from an investor perspective Oxera The information and views set out in this study are those of the authors and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein. DOI: 10.2874/61896 ISBN: 978-92-79-46659-5 © European Union, 2015. Reproduction is authorised provided the source is acknowledged. Crowdfunding from an investor perspective Oxera Contents Executive summary 1 1 Introduction 7 1.1 Background to the study 7 1.2 Objectives and scope 8 1.3 Overview of methodology 8 1.4 Structure of this report 9 2 Review of existing literature 10 2.1 Introduction 10 2.2 Recent developments in crowdfunding 10 2.3 Awareness of crowdfunding 18 2.4 Benefits and risks of crowdfunding 22 2.5 Summary 33 3 Market research 35 3.1 Methodology 35 3.2 Results on awareness 38 3.3 Results on usage and perception of crowdfunding 45 3.4 Summary of results 55 4 Discussions with crowdfunding platforms 57 4.1 Crowdfunding platforms 57 4.2 Size and investment patterns 57 4.3 Awareness of crowdfunding 63 4.4 Riskiness of investments 64 4.5 Complaints 65 4.6 Information from platform websites 66 4.7 Summary of results 80 A1 Bibliography 82 A2 Awareness of crowdfunding by regions 85 A3 Questions sent to platforms for discussion 86 Figure 2.1 Volume of crowdfunding, 2014 (€m) 14 Figure 2.2 Number of crowdfunding platforms, 2013 15 Figure 2.3 P2P business lending volume, 2014 (€m) 15 Figure 2.4 P2P consumer lending volume, 2014 (€m) 16 Figure 2.5 Equity crowdfunding volume, 2014 (€m) 16 Figure 2.6 P2P business lending volume per capita, 2014 (€) 17 Oxera Consulting LLP is a limited liability partnership registered in England No. OC392464, registered office: Park Central, 40/41 Park End Street, Oxford, OX1 1JD, UK. The Brussels office, trading as Oxera Brussels, is registered in Belgium, SETR Oxera Consulting Limited 0883 432 547, registered office: Stephanie Square Centre, Avenue Louise 65, Box 11, 1050 Brussels, Belgium. Oxera Consulting GmbH is registered in Germany, no. HRB 148781 B (Local Court of Charlottenburg), registered office: Torstraße 138, Berlin 10119, Germany. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. No Oxera entity is either authorised or regulated by the Financial Conduct Authority or the Prudential Regulation Authority. Anyone considering a specific investment should consult their own broker or other investment adviser. We accept no liability for any specific investment decision, which must be at the investor’s own risk. © Oxera 2015. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission. Crowdfunding from an investor perspective Oxera Figure 2.7 P2P consumer lending volume per capita, 2014 (€) 17 Figure 2.8 Equity crowdfunding volume per capita, 2014 (€) 18 Figure 2.9 Germany: relative search volume for the term ‘crowdfunding’ 19 Figure 2.10 Poland: relative search volume for the term ‘crowdfunding’ 19 Figure 2.11 Spain: relative search volume for the term ‘crowdfunding’ 20 Figure 2.12 UK: relative search volume for the term ‘crowdfunding’ 20 Figure 3.1 General awareness by country 39 Figure 3.2 Awareness rate by country and by methodology 39 Figure 3.3 Source of awareness by country 41 Figure 3.4 Awareness by country and gender 42 Figure 3.5 Awareness by country according to age range (percentage of respondents) 42 Figure 3.6 Awareness by country and highest level of education achieved 43 Figure 3.7 Awareness in Germany by monthly household net income level 44 Figure 3.8 Awareness in Poland by respondent monthly net income level 44 Figure 3.9 Awareness in Spain according to social class 45 Figure 3.10 Respondents who have invested by type of crowdfunding 46 Figure 3.11 Proportion of savings invested by type of crowdfunding for Germany, Poland and Spain combined 47 Figure 3.12 Average rating (with confidence interval) of each reason to invest in equity crowdfunding across the three countries 48 Figure 3.13 Average rating (with confidence interval) of each reason to invest in P2P lending across the three countries 49 Figure 3.14 Average rating (with confidence interval) of each reason not to invest in either form of crowdfunding across the three countries 51 Figure 3.15 Average rating (with confidence interval) of each risk type associated with equity crowdfunding across the three countries 52 Figure 3.16 Average rating (with confidence interval) of each risk type associated with P2P lending across the three countries 54 Figure 4.1 Number of registered members, P2P lending platforms 59 Figure 4.2 Number of registered members, equity crowdfunding platforms 59 Figure 4.3 2014 volume, P2P lending platforms 60 Figure 4.4 2014 volume, equity crowdfunding platforms 60 Figure 4.5 2014 number of projects/borrowers, P2P lending platforms 61 Figure 4.6 2014 number of projects/fundraisers, equity crowdfunding platforms 61 Figure 4.7 Number of active investors, P2P lending platforms 62 Figure 4.8 Number of active investors, equity crowdfunding platforms 62 Figure 4.9 Auxmoney’s total lending volume (€m per year) 67 Figure 4.10 Companisto project volume (€) 69 Figure 4.11 Companisto number of investors for each project 70 Figure 4.12 Companisto average investment per investor for each project 70 Figure 4.13 Project volume 71 Figure 4.14 Number of investors per project 72 Figure 4.15 Size of investment per investor per project 72 Figure 4.16 Arboribus lending supply curves 73 Crowdfunding from an investor perspective Oxera Figure 4.17 Interest earned by risk band before fees and bad debts for the last 100 loans 74 Figure 4.18 Distribution of net returns for investors who have lent to at least 100 businesses with a maximum exposure of 1% 74 Figure 4.19 Distribution of net returns for investors who have lent to at least 50 businesses with a maximum exposure of 1% 75 Figure 4.20 Distribution of net returns for investors who have lent to at least 10 businesses with a maximum exposure of 1% 75 Figure 4.21 Ratesetter lending rates 77 Table 3.1 CATI questionnaire 36 Table 3.2 CAWI questionnaire 36 Table 3.3 Correlation coefficients within question 5 49 Table 3.4 Correlation coefficients within question 8 50 Table 3.5 Correlation coefficients within question 9 52 Table 3.6 Correlation coefficients within question 10 53 Table 3.7 Correlation coefficients within question 11 54 Table 4.1 P2P lending platforms 57 Table 4.2 Equity crowdfunding platforms 58 Table 4.3 Auxmoney top 50 investors 67 Table 4.4 Auxmoney nominal interest rates and historical returns 69 Table 4.5 Funding Circle bad debt 76 Table 4.6 Funding Circle bad debt performance over time 76 Table 4.7 Selection of past projects 78 Table A2.1 Awareness by region (percentage of respondents) 85 Crowdfunding from an investor perspective 1 Oxera Executive summary The Directorate General for Internal Market and Services and the Financial Services User Group (FSUG) commissioned Oxera to conduct a study on crowdfunding with financial returns in Europe. We were requested to undertake the study from the perspective of the user—the investor, rather than the fundraiser—and to include equity crowdfunding and peer-to-peer (P2P) lending. This report presents the findings of the study. It includes a literature review (section 2), the results of market research into levels of awareness (section 3), and discussions with crowdfunding platforms (section 4). In this executive summary, we present an overview of these findings. Introduction The aim of this study, as commissioned by the FSUG, was to examine two areas to help inform the regulatory debate: 1. the level of existing awareness among the general population of potential (and actual) users of crowdfunding as a form of seeking a financial return; 2. among those who are aware of crowdfunding, the level of awareness of the risks associated with it. The key questions for the study were as follows. How does awareness of crowdfunding vary among selected countries1 and across the general population? Where have people heard about crowdfunding? What proportion of those who are aware of crowdfunding are registered on platforms and/or actively use crowdfunding as a form of seeking a financial return? What are the main reasons for people deciding to use or not use crowdfunding as a form of seeking a financial return? How well informed are potential and actual users about the risks associated with crowdfunding as a form of seeking a financial return? In what ways are crowdfunding platforms helping to inform their users about the nature and risks of crowdfunding as a form of seeking a financial return? Data was collected from existing public sources, primary research into the general population of potential and actual users, and directly from crowdfunding platforms. Review of existing literature (section 2) There is a growing body of literature on the rapid growth of crowdfunding in recent years. This literature provides insights into the growing awareness and use of crowdfunding, as well as a conceptual framework for understanding the nature of the risks involved.