CMA's FinTech focus continues

The proposed merger between crowdfunding platforms Crowdcube and Seedrs has been abandoned following the publication of the CMA's provisional findings, which indicated that the UK's competition regulator was minded to block the merger. In a case that shows that mergers in the world of FinTech remain firmly under the CMA's spotlight, what lessons can be learned?

What happened?

Crowdcube and Seedrs are both equity crowdfunding platforms in the UK, which connect small and medium-sized enterprises (SMEs) seeking to raise investment with investors willing to provide funds in exchange for a stake in the business.

With the CMA ultimately finding that the deal was set to result in the parties having a 90% share of the UK crowdfunding market (well in excess of the 25% combined market share that the CMA needs to establish jurisdiction to investigate a merger), its interest in the transaction was unsurprising, not least given the CMA's continuing focus on transactions in the FinTech sector.

Indeed, the parties themselves – anticipating the CMA's concerns from such a tie-up – requested that the CMA's merger be fast-tracked to a detailed examination at Phase II. This fast-track process is only available to parties where it is clear from an early stage that there is a risk of the transaction substantially lessening competition, and which therefore justifies an in-depth examination.

Provisional findings

In its provisional findings, the CMA:

• found that the merger was likely to substantially reduce competition, leading to less innovation and worse outcomes for SMEs and investors;
• considered that structural prohibition of the merger would be the only effective remedy;
• rejected the parties' argument that, absent the merger, one or both firms might exit and/or re-orientate its business strategy. Instead, it considered that absent the merger both parties would continue to compete for the business of all types of SME customers; and
• adopted a narrow market definition, finding equity crowdfunding platforms to SMEs and investors constituted a distinct market.

Following the provisional findings, the parties announced the deal had been abandoned.

Key takeaways

To the CMA, a significant reduction in competition is likely to outweigh other potential benefits of a merger

In its findings, the CMA noted that it had received submissions in support of the merger, which suggested that the merger would bring about a stronger FinTech and equity funding environment for SMEs. Indeed, the CMA found that of the third-party respondants it approached for comment, four gave responses which were clearly supportive of the merger while the others did not state a clear position.

However, the CMA's view in this case is that its role is to assess the impact of potential mergers on competition and that ultimately, protecting competition will result in better outcomes for SMEs. While consistent with its statutory duty to "promote competition for the benefit of consumers", this case is a pertinent reminder that the CMA's focus on competition at the expense of other factors may result in a situation where the regulator is at odds with prevailing industry views about whether a merger is, or is not, in the interests of the sector.

FinTech mergers remain under the spotlight

As we have previously reported, mergers in the FinTech sector are under the spotlight of the UK's competition authority; this inquiry follows a number of other Phase II referrals for mergers in the sector in recent years. Parties considering mergers in the sector will need to consider carefully whether the deal should be notified for clearance; although the UK operates a "voluntary" system, the CMA is interventionist, and - as this case shows‚ not afraid to derail a transaction, even where it has general industry support.

It can be hard to persuade the CMA to "widen" the market

While the CMA can get creative in defining markets for the purposes of the jurisdiction, merging parties should be aware that the CMA will typically seek to define the market narrowly. This case hinged on market definition‚ while the CMA ultimately considered that the market was appropriately limited to equity crowdfunding platforms, the parties argued for a wider definition. They submitted that the market consisted of venture capital firms (including public sector bodies), and formal and informal angel investor groups alongside equity crowd funding platforms. They also argued that the market increasingly included financial institutions and blockchain-technology platforms.

The adoption of a narrow market definition proved fatal to the merging parties' case. Under the parties' definition, they together face competitive constraints from a number of significant rivals, but under the CMA's definition, each party's only real constraint is the other. The CMA would only approve a merger which resulted in such a significant combined market share for exceptional reasons, that is because the alternative was market exit.

"Failing firm" arguments remain hard to run

While the CMA may approve a merger it would otherwise block if it is persuaded that market exit will be the outcome if a merger does not proceed, convincing the CMA that this is the appropriate counterfactual is no easy task, with the regulator typically sceptical of these arguments. Crowdcube and Seedrs join a long line of merging parties that been unable to satisfy the CMA's strict "failing firm" test. While the CMA's uncharacteristically charitable approach in initially accepting the "failing firm" defence in respect of Amazon's investment in Deliveroo at the height of the Covid-19 pandemic last year was highly publicised, this was a notable exception to the CMA's usual approach; not the rule.

Osborne Clarke view

FinTech deals remain under close scrutiny by the CMA. This reflects that these deals typically affect large numbers of consumers (and hence have the potential to cause direct and potentially significant consumer detriment) and often involve the acquisition of innovative technology firms.

The lesson for any FinTech companies looking to merge is to consider the potential application of UK merger control at an early stage. The CMA is creative in finding ways to assert jurisdiction and, if there are grounds for it to do so, a merger clearance strategy needs to be discussed. In addition, as demonstrated in this case, even if the parties can see clear benefits for the sector and third parties are supportive of the merger, for the CMA, it may not outweigh the merger's restrictive effect on competition. Potential competition concerns need to be carefully considered.

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