The crowdfunding capital of Europe

Virtuous circle:

Lithuania already has a well-developed peer-to-business lending regime

That’s what Lithuania, which has created an enabling environment for peer-to-business lending, aspires to be – and Jovita Aleksiu¯ ne˙ from the Bank of Lithuania, Vytautas Šenavicˇius, Chair of the country’s Crowdfunding Association, and Invest Lithuania’s Gintare˙

Bacˇiuliene˙

believe it’s entirely possible

Collecting money from a large number of small retail investors via online platforms is seen by an increasingly number of startup and scaleup businesses as a good way to secure finance and build loyalty with customer stakeholders.

But mainland Europe has lagged behind the rest of the world in using this type of investment vehicle. According to crowdfunder Fundly, in 2020 European businesses raised $6.48billion in crowdfunded revenues, compared to $10.54billion in Asia, $17.2billion in North America; $24.16billion in Africa; $68.8billion in Oceania; and $85.74billion in South America.

The problem was seen as divergent regulation in different EU member states, which restricted a fundraiser’s ability to seek cross-border cash. But we could be about to see a crowdfunding boom in the European Union, thanks to the new Regulation on European Crowdfunding Service Providers, which came into force in November. It seeks to super-charge peer-to-business lending by creating uniform rules for platforms, which can then ‘passport’ services across the bloc.

One country already poised to make the most of the new regime is the small-but-fintech-mighty Lithuania. With an already well-developed digital finance ecosystem, including 18 crowdfunding platforms, it will, in all likelihood, be the first country to offer passporting for licensed platforms and looks well-placed to become the crowdfunding hub of Europe.

What places the Baltic state of Lithuania, with a population of just 2.8 million, at the forefront of this revolution, is an established crowdfunding regulatory regime, inspired in part by the mature UK market.

“In Lithuania, we chose to create a legal system for this sector in 2016, to enable firms to work in a regulated and safe environment, but It has not [had] any unanimous regulation in the whole EU. Some countries had their own bespoke regimes, others didn’t or still don’t – it was a very fragmented legal system,” explains Jovita Aleksiūnė, a lawyer specialising in investment services at Bank of Lithuania.

The country started looking at crowdfunding as an alternative form of finance due to circumstance.

“Finance was very concentrated,” explains Vytautas Šenavičius, chairman of the Crowdfunding Association of Lithuania, “in that only a few per cent of all lending could come from alternative sources. A few large banks had the majority of the lending market. While there are a lot of different ways you could solve that, in Lithuania the idea was to do it through alternative finance by creating a bespoke regime.”

Gintarė Bačiulienė, head of the technology team at government agency Invest Lithuania, said the government was very aware of the value of crowdfunding for small and medium-sized businesses.

“Across the EU, we still see that the sector lacks access to funding from traditional sources,” she says.

“I think, from an economic perspective, there is agreement that we have to grow this sector of alternative funding, to ensure that companies have better access to finance.”

The country’s fintech sector has seen a stellar rise. There were just 55 fintech companies in Lithuania in 2014; by the end of 2020, there were 230 registered and licensed firms.

Many of the 18 crowdfounding platforms have carved out a very specific niche. Among them are Vilnius-based InRento, that enables people, including those on lower incomes, to invest in rental properties across Europe. InRento itself recently received €530,000 for market expansion, in a round led by the Lithuanian Business

Small but influential: Lithuania is a global fintech trendsetter

Angel Fund, along with traders and executives from investment banks. Profitus is another real estate-focussed platform offering investments from €100. It claims to have already invested in about 300 projects, crowdfunding more than €41million and earning about €2million for its investors.

HeavyFinance, meanwhile, raises capital principally for businesses in farming and forestry. Anyone can invest in loans to the sector that are secured by heavy equipment, the benefit being that heavy machines are easier to sell than real estate and don’t lose as much value during periods of uncertainty. The company has already facilitated loans for more than 300 farmers, helping them modernise their farms, and this year it added Poland to the EU countries it operates in. The platform claims that, since June 2020, its investor community has contributed to improving the efficiency of 20,000h of farmland.

Following the UK’s example has also created what you might call a ‘Brexit dividend’ for Lithuania.

Šenavičius reveals that several British companies are talking to the Crowdfunding Association of Lithuania and the regulatory supervisor about plans to move there, as a result of challenges posed by the UK leaving the EU.

“On one side, they have their huge market, so they don’t want to adapt and amend a lot of what they do now in the UK,” he explains. “However, on the other hand, Lithuania also understands and works in the European regime. So maybe that’s why they are coming to Lithuania and considering this as their headquarters for crowdfunding in Europe.”

The UK’s loss might be Lithuania’s gain.

Government support for crowdfunding has been behind much of the sector’s growth in LIthuania – a trend further accelerated by COVID-19. Any crowdfunding players with an idea, even a more unconventional one, can arrange to speak to the regulator or the Ministry of Finance within weeks, according to the Crowdfunding Association of Lithuania’s Šenavičius.

“We have open dialogue and open communication about how to make crowdfunding even better, even more flexible, even more modern,” he explains. “You don’t have to wait for six months to get the first introductory meeting and introduce your new crowdfunding idea.”

The sector is also helped by Lithuania’s high ranking as an easy place to do business, with the World Bank placing it 11th out of 190 economies for having business-friendly regulations – a reputation the government is clearly keen to maintain.

“There’s a lot of effort that goes towards ensuring that we continuously work on improving the business environment,” says Bačiulienė, of Invest Lithuania. This includes a world-class digital infrastructure with fast internet speeds and a willingness to bring in skilled non-EU workers, if required.

Lithuania also benefits from a multilingual talent pool, she adds. Some 85 per cent of young professionals are fluent in English, with more than half of the population fluent in two foreign languages. In addition, there is a thriving and growing IT talent pool for the skills required by fintechs, as well as anti-money laundering and compliance specialists.

The decision to look to the UK – as well as France, Italy and Spain’s jurisdictions – to inform its regulatory regime around crowdfunding, has clearly paid off and puts it in a prime position.

“We have a not-very-large but mature market where, for our stakeholders, it will be really easy to adapt to the European regime,” says Šenavičius, “because they know the rules, they know that they have to avoid the conflict of interest, they know they have to acquaint the investors with the risks, they have to do the appropriateness tests, etc.”

The Bank of Lithuania’s Aleksiūnė also welcomes the EU’s harmonisation of crowdfunding regulation and passporting rights, as it will help its domestic companies thrive across the bloc in a way not previously possible for those operating in such a small market.

“Even having its own regulation, and having created a safe environment for crowdfunding to bloom, it was hard for our service providers because they were mostly limited to our market,” she says. “Now they will be free to go anywhere they like.”

We have open dialogue and open communication about how to make crowdfunding even better, even more flexible, even more modern

Vytautas Šenavičius, Crowdfunding Association of Lithuania