ECSP Crowdfunding vs. eWpG Bonds: Overcoming SME Financing Limits

The ECSP regulation limits crowdfunding to EUR 5 million annually – eWpG bonds are not.

The call came on Thursday afternoon. Your crowdfunding platform informed you that the second funding round could not proceed. You had already raised €4.2 million last year. The planned additional €6 million would exceed the €5 million limit stipulated by the ECSP regulation. At that point, a securities prospectus is required. Estimated lead time: six months. Your expansion plans for the current quarter have therefore failed.

This scenario is not an isolated case. The European Crowdfunding Service Provider Regulation (ECSP Regulation) has opened up new financing avenues for small and medium-sized enterprises (SMEs) – while simultaneously imposing a strict upper limit. Article 1, paragraph 2, letter c of the ECSP Regulation limits the annual issuance volume per project promoter to a maximum of €5 million. This is sufficient for start-ups with moderate capital requirements.

However, for high-growth SMEs that are converting production lines, financing acquisitions, or expanding into new markets, this limit represents a growth impediment.

What is crowdfunding as defined by the ECSP regulation?

Crowdfunding within the meaning of Article 2(1)(a) of the ECSP Regulation is the bringing together of business financing interests of investors and project promoters through the use of a crowdfunding platform. The platform is operated by a crowdfunding service provider that holds a BaFin license pursuant to Article 12 of the ECSP Regulation. The regulation covers two business models: the brokering of loans between investors and project promoters, and the placement of transferable securities or instruments authorized for crowdfunding purposes without a firm commitment.

The key advantage of the ECSP Regulation lies in its simplified documentation. Instead of a securities prospectus under the EU Prospectus Regulation, a Key Investment Information Sheet (KIIS) is sufficient, as stipulated in Article 23 of the ECSP Regulation. This document comprises a maximum of six A4 pages and does not require approval from BaFin (the German Federal Financial Supervisory Authority). The crowdfunding service provider checks the KIIS for completeness, accuracy, and clarity. This simplification saves issuers time and resources – as long as they remain below the €5 million threshold.

The 5 million mark: Where crowdfunding reaches its limits

The upper limit in Article 1(2)(c) of the ECSP Regulation is non-negotiable. As soon as a project promoter raises more than €5 million via crowdfunding platforms within twelve months, the scope of the regulation ends. The legal consequence is clear: the prospectus requirement under Article 3(1) of the EU Prospectus Regulation (EU) 2017/1129 applies to the excess amount. A full securities prospectus requires detailed information on the business model, risk factors, financial situation, management, and use of the proceeds. BaFin reviews and approves the prospectus. The processing time is several months, and external consulting fees regularly reach six-figure sums.

This limit poses a problem for small and medium-sized enterprises (SMEs). An automotive supplier converting its production to electric components requires investments of €15 to €25 million. A solar park operator developing three projects simultaneously already exceeds €5 million with a single park. A nursing home operator building a new facility can barely finance the construction phase with €5 million. Fragmenting financing over several consecutive years is not a solution – expansion windows close while you wait for the next allocation.

In addition, there is a structural problem: Crowdfunding platforms charge fees of 4 to 10 percent of the issue volume, plus transaction fees of 2 to 4 percent. For a €5 million issue, platform costs can amount to up to €700,000. These fees are avoidable with a self-distributed bond issued by the German Securities Trading Act (WpG).

What is an eWpG bond and why does it not have a 5 million limit?

A crypto security within the meaning of Section 4 Paragraph 3 of the German e-Securities Act (eWpG) is an electronic security that is registered in a crypto security register. Registration replaces the traditional physical certificate. The register is operated by a registrar licensed by the German Federal Financial Supervisory Authority (BaFin) pursuant to Section 1 Paragraph 1a Sentence 2 No. 8 of the German Banking Act (KWG). The legal effect corresponds to Section 2 Paragraph 2 of the eWpG: The electronic security is considered tangible property within the meaning of Section 90 of the German Civil Code (BGB) and has the same legal effect as a physical security.

The crucial difference to crowdfunding: The electronic Securities Act (eWpG) does not have a €5 million upper limit. Prospectus-free issuances are governed by the Securities Prospectus Act. The Location Promotion Act, announced in February 2026, raised the threshold for prospectus-free issuances based on a securities information sheet according to Section 4 of the WpPG to €12 million. At the same time, the individual investment thresholds of Section 6 of the WpPG, which previously limited private investors to maximum investments of €1,000, €10,000, or €25,000, were abolished. For the first time, this makes self-distribution of securities practical.

For small and medium-sized enterprises (SMEs), this means they can raise up to €12 million without a prospectus, are not tied to a specific platform, and can directly address their investors. The eWpG bond, as a form of SME financing without banks, opens up financing possibilities that are unattainable with traditional crowdfunding.

ECSP crowdfunding versus eWpG bond: A structural comparison

The differences between the two financing methods are structural and relate to volume, documentation, distribution, and liability. For the issuance volume, the ECSP limit is €5 million per twelve months, while eWpG bonds with WIB can be placed without a prospectus up to €12 million. Regarding documentation, crowdfunding requires an investment information sheet without BaFin approval, while the eWpG bond requires a securities information sheet with BaFin approval. Approval takes two to six weeks with complete documentation.

There is a fundamental difference in distribution. The ECSP regulation mandates the use of a licensed crowdfunding platform. The platform handles investor identification, suitability assessment, and payment processing – and charges fees for these services. With the eWpG bond, the distribution channel is freely selectable. You can collaborate with platforms like Invesdor or Tokenize.it , approach family offices directly, or establish your own sales force. The registrar is responsible for the technical management of the register, not for distribution.

Regarding liability, the Future Financing Act raised the standard for ECSP-compliant offerings from simple to gross negligence and eliminated direct liability of company officers. For eWpG bonds, liability under Section 9 of the German Securities Prospectus Act (WpPG) applies to the WIB (Wirtschaftsinformationsbrief – securities information database). Additionally, the registrar assumes due diligence obligations under Section 7 of the eWpG for registration and safekeeping. This additional layer of liability provides investors with a level of security not found in pure crowdfunding structures.

Tax and accounting treatment: What issuers should know

The tax treatment of an eWpG bond is the same as that of a traditional corporate bond. Interest payments to investors are deductible as business expenses for the issuer and reduce their tax burden. For the investor, the interest income is subject to capital gains tax of 25 percent, plus a solidarity surcharge and, if applicable, church tax. Pursuant to Section 44 Paragraph 1 of the German Income Tax Act (EStG), the issuer is obligated to withhold and remit the capital gains tax. This obligation applies regardless of whether the bond is issued in physical form or electronically. Tokenization does not alter the tax classification.

On the balance sheet, the bond is recorded as a liability. Issuance costs can be capitalized as deferred expenses and amortized over the term. Variable interest rates or profit-dependent components may necessitate classification as a hybrid financial instrument, which raises additional accounting considerations. The specific treatment depends on the terms of the issuance and should be discussed with the auditor at an early stage. Subordinated crowdfunding loans are subject to somewhat different regulations, particularly regarding whether the funds should be classified as equity or debt.

From failed crowdfunding campaign to eWpG issuance: The path

If your crowdfunding campaign failed to reach its €5 million target, you’re not left with nothing. The funds already raised remain yours. You can leverage your existing investor relationships to attract these investors to the eWpG bond as well. The question is how to cover the remaining capital requirement. The eWpG bond isn’t a replacement for what you’ve already achieved, but rather a complement to fill the gap. You can combine both instruments: the first tranche via crowdfunding, the second tranche as a crypto security. This combination allows you to leverage the advantages of both worlds: the community benefits of crowdfunding and the scalability of the eWpG bond.

The structuring process begins with defining the terms of issue in accordance with the German Bond Act. Structuring the bond terms includes the interest rate, maturity, redemption rights, negative pledges, and creditor protection clauses. The choice between a fixed and a variable interest rate depends on your interest rate expectations and the preferences of your target investors. Simultaneously, the registrar is selected. Providers such as NYALA, Cashlink, or Tangany operate BaFin-licensed crypto securities registries and handle the technical aspects of registration. Registrars differ in their pricing structure, technical infrastructure, and additional services. A careful comparison is recommended.

The securities information sheet (WIB) is prepared in accordance with the requirements of Section 4 of the German Securities Prospectus Act (WpPG) and submitted to BaFin for approval. Processing time is between two and six weeks for complete documentation. Once approved, the placement can begin. Preparing the WIB requires precise information on the issuer, product, risks, and use of the proceeds. Internal preparation for a token issuance should be completed before engaging external advisors to expedite the process.

Investor outreach: From platform crowd to targeted sales

A common argument in favor of crowdfunding platforms is their existing investor infrastructure. Platforms like Seedmatch, Econeers, or Exporo have built up an investor base over the years that actively seeks investment opportunities. However, this advantage is less significant when you consider the composition of their investors. Crowdfunding investors typically invest small amounts and expect intensive communication. Managing hundreds of small investors ties up resources.

With an eWpG bond, you can strategically structure your investor base. Family offices, pension funds, and institutional investors invest larger tranches and expect professional reporting rather than platform updates. A solar park operator can target impact investors who want to participate in the energy transition. A mechanical engineering company can reach industry investors who understand its business model. A nursing home operator can approach foundations and church-affiliated investors for whom social returns are important.

The abolition of individual investment thresholds through the Location Promotion Act also opens up, for the first time, the possibility of genuine direct sales by private investors. Previously, WIB-based offerings required the involvement of a securities services company through investment advice or brokerage. This requirement no longer applies. You can now sell your bond directly to private investors, provided you comply with the communication requirements of the German Securities Trading Act (WpHG).

Secondary market and liquidity: The advantage of the crypto securities register

One criticism of crowdfunding investments is their limited tradability during the term. Subordinated loans and profit-sharing loans, which are brokered through many platforms, are not fungible. The investor is bound until maturity. The situation is different with crypto securities under the German Securities Trading Act (eWpG). Electronic securities are transferable, and the transfer is effected by registration in the crypto securities register according to Section 24 of the eWpG.

In 2025, the trading platform 21X received BaFin approval as a Multilateral Trading Facility (MTF) for crypto securities. This established the first regulated secondary market for tokenized bonds. Investors can sell their positions during the bond’s term, provided a buyer is available. This liquidity option increases its attractiveness for institutional investors who require exit opportunities. Participation in the trading platform is optional and subject to the issuer’s approval.

The strategic perspective: Bonds today, stocks tomorrow

The Future Financing Act has extended the scope of the German Securities Trading Act (eWpG) to include electronic shares. Since the amendment, registered shares can be entered in a crypto securities register; bearer shares will follow after a technical adaptation phase. This opens up a strategic option for medium-sized companies: those issuing an eWpG bond today gain experience with the register infrastructure and build relationships with register operators and distribution partners. This experience is valuable if equity financing via electronic shares is planned later.

Regulatory developments point to a further opening of the capital market to electronic securities. The MiCAR Regulation establishes a European framework for crypto-asset services, and the Crypto Markets Supervision Act transposes these requirements into German law. BaFin has signaled its support for the development of tokenized financial instruments, provided that investor protection and market integrity requirements are met. Early positioning pays off.

Risk factors and investor protection: What you should communicate to your investors

Transparency towards your investors is not only a legal obligation, but also a strategic advantage. The securities information sheet pursuant to Section 4 of the German Securities Prospectus Act (WpPG) requires the disclosure of the material risks. These include issuer risk, i.e., the possibility of your company becoming insolvent; interest rate risk in the case of variable interest rates; liquidity risk if a functioning secondary market does not exist; and the operational risk of the registrar. Honest risk communication builds trust and protects you from subsequent liability claims under Section 9 of the WpPG.

Compared to subordinated crowdfunding loans, eWpG bonds offer structural advantages in terms of investor protection. The registrar is subject to due diligence obligations under Section 7 of the eWpG regarding registration and custody. Incorrect registrations can give rise to claims for damages against the registrar. Furthermore, crypto securities are protected as segregated assets in the event of the registrar’s insolvency, provided the registration was carried out correctly. This additional layer of protection does not exist for subordinated crowdfunding loans, which can be completely lost in the event of the issuer’s insolvency.

Conclusion: The 5 million mark is not an end point

The ECSP Regulation has opened up new financing avenues for SMEs, but it has also imposed a strict upper limit. Article 1, paragraph 2, letter c of the ECSP Regulation limits crowdfunding to €5 million per twelve months. For high-growth companies, this limit is an obstacle, not a hurdle. The eWpG bond offers a solution: prospectus-free issuances up to €12 million, no platform dependency, no individual investment thresholds, and free choice of distribution channel. The combination of regulatory flexibility and technological innovation makes this crypto security the natural successor to crowdfunding for upper mid-sized companies.

The decision between crowdfunding and an e-Securities Act (eWpG) bond is not an either-or question. Both instruments can be combined. Those who have started with a crowdfunding campaign and are approaching the €5 million mark can cover the remaining capital requirement through a crypto securities issuance. Those planning larger volumes from the outset should opt directly for the eWpG route. Structuring this requires legal and tax expertise – investing in thorough preparation pays off in the form of a more efficient issuance and a perfectly tailored investor structure. The capital market is open. The question is no longer whether you gain access, but how you can best utilize it.

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(Featured image by Markus Winkler via Unsplash)

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