New Crowdfunding Regulation and the amendments in the existing national legal framework
The crowdfunding finance model has been proven particularly practical for start-ups and small and mediumsized enterprises (SMEs), which have increasingly relied upon crowdfunding services to materialise their business projects. Nevertheless, the risk associated with this type of investment and the discrepancies observed in Member States’ domestic provisions on crowdfunding, often precluding the cross-border provision of such services, led to the adoption of Regulation (EU) 2020/1503 (Crowdfunding Regulation), entered into force on 10 November 2021.
Aim of the Crowdfunding Regulation
Constituting part of the framework of EU Fintech Action Plan 2020, the Regulation introduces uniform rules for the provision of investment-based and lending-based crowdfunding services related to business financing. Its objective focuses on establishing a single market with regard to said alternative sources of financing, while further contributing to the establishment of the Capital Markets Union (CMU).
Scope of application
The Regulation applies to crowdfunding service providers (CSP) for offers exceeding EUR 5,000,000, calculated over a period of 12 months per project owner and covers the following crowdfunding activities:
lending-based crowdfunding, consisting of a conclusion of a loan agreement between individual investors and the project owner;
investment-based crowdfunding, consisting of the issuance by project owners or special purpose vehicles of transferable securities and admitted instruments for crowdfunding purposes (i.e. shares of a private limited liability company which are not subject to transferability restrictions under national law).
It follows that lending to consumers as well as other types of crowdfunding practices, namely donation-based or reward-based crowdfunding, where investors receive a nonfinancial consideration for their investment, fall outside the scope of the Regulation.
Key provisions of the Crowdfunding Regulation
Authorisation requirements. The legal person seeking to undertake crowdfunding services needs to receive the respective authorisation from the competent authority in the Member State where it is established. In case the authorisation is granted, the authority notifies the European Securities and Markets Agency (ESMA), which maintains a register of authorised CSPs. An authorised CSP may expand its services into other EU Member States by taking advantage of the passporting regime. It should be noted that an authorisation to provide crowdfunding services does not equate to an authorisation to provide payment services. Hence, CSPs that wish so should further obtain an authorisation as a payment service provider according to Directive (EU) 2015/2366 on payment services in the internal market. Whereas, for entities that are already authorised as an investment firm, payment institution, electronic money institution or credit institution and seek to obtain authorisation for the provision of crowdfunding services, a simplified procedure applies.
Organisational and operational requirements. The Regulation sets forth a series of requirements relating to the organisation and operation of crowdfunding platforms, aiming to guarantee a high level of consumer protection, mitigate the risks related to crowdfunding services and ensure fair treatment of clients. More precisely, CPSs must assume the obligation to exercise effective and prudent management, including the implementation of adequate policies and procedures ensuring the segregation of duties, business continuity and the prevention of conflicts of interest. Particularly for lendingbased crowdfunding, the CSP must also establish appropriate overview systems and controls to assess the risks associated with loans intermediated via its platform. CSPs shall further undertake a minimum level of due diligence regarding project owners, ascertaining their credibility, as well as adopt effective and transparent procedures in relation to complaints handling lodged by clients.
Investors’ protection. The Regulation distinguishes between “sophisticated” and “nonsophisticated investors” and provides for different levels of safeguards.1 For instance, non-sophisticated investors are subject to an “entry knowledge test” and should receive explicit warning when accepting an offer higher than EUR 1,000 or 5% of their net worth. Moreover, a cooling-off period (“pre-contractual reflection period”) of four days is provided, during which non-sophisticated investors may revoke their investment offer or interest in the crowdfunding offer without providing a reason and without incurring a penalty.
While crowdfunding offers are exempt from the obligation to publish a prospectus under the Regulation, CSPs need to provide a key investment information sheet (KIIS) for each crowdfunding offer, drafted by the project owner. The KISS must contain details of the investment project, a responsibility statement by the project owner, details of the crowdfunding process and a description of risk factors and investors’ rights. CSPs have the responsibility of providing the KIIS to prospective investors and should therefore establish the necessary procedures to verify its accuracy.
In case the CPS provides individual portfolio management of loans, the Regulation prescribes for additional information that should be disclosed at platform level, inter alia, the minimum and maximum interest rate payable under each loan and the range and the distribution of any risk categories applicable to the loans.
Prudential requirements. The Regulation further provides for prudential safeguards of crowdfunding platforms of a minimum capital of (a) EUR 25.000 and (b) one quarter of the previous year’s fixed overheads reviewed annually (including the cost of servicing loans if the CSP facilitates the granting of loans). The prudential safeguards need to take the form of available funds consisting of Common Equity Tier 1 items according to Regulation (EU) 575/2021 (Capital Requirements Regulation), insurance policy or a combination of both.
Key differences with the existing national framework
The existing national legal framework for crowdfunding services consists of Law 4706/2020, implementing Regulation (EU) 2017/1129 “on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market” and the Hellenic Capital Market Commission Decision 1/893/16.10.2020, stipulating the requirement of an information sheet for public offering of securities between EUR 500,000 and EUR 5,000,000.
According to the existing regulatory regime, an exemption from the publication of an information sheet for the public offering of securities made exclusively through crowdfunding platforms is introduced, provided the following conditions were cumulatively met:
a. The offer was made via the platform of an authorised investment services firm, an alternative investment fund manager or a credit institution.
b. The total value of the securities offered did not exceed the amount of EUR 1,000,000 calculated over a period of 12 months per issuer.
c. The participation of retail clients (individuals) did not exceed the amount of EUR 10,000 and in any case 10% of the income declared in the tax return of the previous three years and the total annual investment per individual did not exceed the amount of EUR 50,000.
It is evident that the Regulation significantly increases the funding threshold (EUR 5,000,000) and expands the pool of prospective entities interested in undertaking crowdfunding services, since it repeals the requirement of provision of such services exclusively by certain supervised financial institutions.
Next steps for CSPs
The Regulation provides for a transitional period of one year, during which CSPs may continue to operate in accordance with the applicable national law and provide crowdfunding services included within the scope of Crowdfunding Regulation until 10 November 2022 or until they are granted an authorisation.
It further sets specific deadlines for ESMA to develop a set of regulatory and implementing technical standards, including the authorisation of providers, the handling of complaints, conflict of interest, the assessment of knowledge of non-sophisticated investors, and the KIIS. Indeed, on the same date the Regulation entered into force, the ESMA published a final report under the Crowdfunding Regulation, taking a step forward for the harmonisation of crowdfunding services regime. The draft standards are submitted to the European Commission, which shall decide on their adoption within 3 months.
Overall, the Crowdfunding Regulation constitutes a promising regulatory development to redress the reluctancy of CSPs to expand their services at cross-border level due to the divergences of national legal frameworks and the often-stringent regulatory requirements. By promoting the integration of crowdfunding services across EU Member States, the Regulation is expected to contribute to the growth of the crowdfunding market in the EU and to provide viable access to financing for start-ups and SMEs.
1 The classification is similar to the distinction between professional clients and retail clients by authorised invest ment firms under the Directive 2014/65/EU on markets in financial instruments (MiFID II).
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