Crowdfunding is a technology-enabled financial service often used by start-up companies or growing businesses as a way of accessing alternative financing. It is an innovative way of sourcing funding for new projects, businesses or ideas. The main types of crowdfunding include peer-to-peer lending, equity crowdfunding and rewards-based crowdfunding.
Until recently, EU crowdfunding markets for business finance were largely underdeveloped compared to other major economies. Most importantly, this market was unable to properly operate across borders. Hence, in an effort to provide legal certainty for investors and promote common rules across the EU for crowdfunding, the European Commission presented a proposal to regulate crowdfunding and peer-to-peer lending in Europe during the first quarter of 2018.
On 5 October 2020, the European Parliament adopted the final text for a “Regulation on European Crowdfunding Service Providers for Business” (Regulation 2020/1503 or the “Regulation”). The Regulation comes into effect on 10 November 2021 and aims to help crowdfunding service providers function smoothly in the internal market and foster cross-border business funding in the EU.
The scope of the Regulation captures both lending-based crowdfunding and investment-based crowdfunding. In relation to investment-based crowdfunding, the Regulation will apply to all crowdfunding service providers facilitating investment-based platforms dealing with transferable securities for campaigns raising up to €5 million. Larger operations will be regulated by the Markets in Financial Instruments Directive (MiFID II Directive) and the Prospectus Regulation (EU) 2017/1129.
In relation to lending-based crowdfunding, the Regulation applies to crowdfunding services that consist of the facilitation of granting of loans, including services such as presenting crowdfunding offers to clients and pricing or assessing the credit risk of crowdfunding projects or project owners.
Lending to consumers is not covered by the Regulation, while reward and donation-based crowdfunding also fall outside the scope of the rules.
The European Parliament also adopted Directive (EU) 2020/1504 (the “Directive”), which amends Directive 2014/65/EU (MiFID II Directive). The Directive exempts crowdfunding service providers falling under the scope of the aforementioned Regulation from the application of the MiFID II Directive. Member states are required to transpose the provisions of the relevant Directive into their national laws by 10 May 2021.
The Regulation has two specific objectives. First, it seeks to enable platforms to scale cross-border, namely by creating a licensing regime that can be used across the EU without requiring further authorisation in each EU country. Second, the Regulation wants to guarantee that these platforms are subject to a framework that ensures their proper management and the protection of fund providers by focusing on sound risk management and adequate information disclosure.
A prospective crowdfunding platform will need to request authorisation from the national competent authority of the member state where it is established. Further to notification, the crowdfunding service provider can also offer its services in other EU member states. Supervision will be carried out by the national competent authorities with ESMA facilitating cooperation between the member states.
The Regulation introduces certain provisions that:
- Impose a total threshold for crowdfunding offers made by a particular project owner. This threshold is set at €5 million and calculated over a period of 12 months.
- Provide for authorisation and supervision of crowdfunding service providers.
- Provide for the establishment of a European register to include all crowdfunding service providers.
- Include organisational, operational requirements and provisions for the effective and prudent management of crowdfunding service providers.
- Include provisions for complaints handling, conflicts of interest and outsourcing.
- Impose requirements concerning the safekeeping of assets in relation to investors receiving crowdfunding services.
- Impose requirements applicable to the marketing communications of crowdfunding service providers.
- Set rules for investor projection, including:
- Distinguishing between sophisticated and non-sophisticated investors and introducing different levels of investor protection safeguards applicable to each of those categories.
- Requiring crowdfunding service providers to provide clients (i.e. investors or project owners) fair, clear and non-misleading information concerning the company, associated costs, financial risks and charges related to crowdfunding services or investments. This also applies to the provision of information on the crowdfunding project selection criteria and the nature of and risks associated with their crowdfunding services.
- Laying down the content of the Key Investment Information Sheet (KIIS) that will be provided by the crowdfunding service providers to prospective investors for every crowdfunding offer in order for them to make an informed investment decision.
- Introduce due diligence requirements for project owners that would like their projects to be funded via the crowdfunding service provider’s platform.
Furthermore, the Regulation takes into consideration the fact that several member states have already introduced domestic bespoke regimes on crowdfunding and national rules that diverge across the European Union (see for example, CySEC Directive DI87-10 and Policy Statement PS-01-2020). The Regulation provides for transitional arrangements so that persons providing crowdfunding services in accordance with their national law now fall within the scope of the Regulation and can adapt their business activities to comply with the Regulation. Such persons may continue to provide crowdfunding services that are included within the scope of the Regulation in accordance with the applicable national law until 10 November 2022.
Our multidisciplinary team can provide comprehensive and holistic solutions tailored to each client’s individual needs, including:
- Assistance in obtaining relevant authorisation for entities that wish to act as crowdfunding service providers under the scope of the Regulation;
- Consulting services and guidance to authorised crowdfunding service providers in order to comply with the provisions of the Regulation;
- Money laundering compliance;
- Assistance in preparing the Key Investment Information Sheet (KIIS);
- Provision of answers to relevant queries (Q&A Service), and;
- Regulatory updates.
MAP S.Platis closely monitors this industry and our team of seasoned specialists is always standing ready to assist clients adapt and prepare for any new and challenging regulatory developments.
For more information, please feel free to contact us.
