The EU has approved a new regulation (Regulation (EU) 2020/1503) catering for crowdfunding rules, and applicable to all Member States. The rules are directed to European Crowdfunding Service Providers (ECSP). In a nutshell, crowdfunding services providers operate publicly accessible internet-based platforms that facilitate the funding of projects by raising capital from numerous investors who each contribute a relatively small investment. The main objective of this Regulation is to foster cross-border crowdfunding services and to cater for the freedom to provide and receive such services in the internal market.
The current system encompasses several divergent pieces of domestic legislation, each catering to the needs and features of their own legal system. Such fragmented legislation has created many obstacles for potential investors, who may have found themselves being discouraged from cross-border investing due to the uncertainty of cross border rules or any supplementary costs to remove such uncertainties. As a result, crowd-funding platforms across the Union have, overall, remained national, to the detriment of an EU wide crowdfunding market.
The new Regulation seeks to overcome these obstacles to cater for the proper functioning of the internal market on crowdfunding services and the cross-border funding of businesses. For example, the Regulation holds that Member States will not be allowed to impose additional requirements on crowdfunding service providers that will be authorised under this Regulation. Simultaneously, the Regulation also aims to ensure a high level of investor protection across the Union.
Taking into account the risks associated with crowdfunding investments, the Regulation imposes a threshold of €5,000,000 as the total consideration for crowdfunding offers, calculated over a period of 12 months per project owner.
ECSPs are required to provide their clients with clear and fair information about the risks and charges related to their services. This includes information related to the default rates of loans, as well as insolvency risks and project selection criteria.
The Regulation differentiates between sophisticated and non-sophisticated investors and imposes different levels of protective measures for both categories. The distinction between these two classes of investors should take into account the level of experience of prospective investors in and knowledge of crowdfunding. ECSPs are obliged to run an appropriate knowledge entry test that follows the requirements laid down in the Regulation in order to gage their clients’ level of knowledge. The Regulation then imposes certain obligations on the ECSPs that require them to implement additional protective measures with respect to their non-sophisticated investor clients, such as explicit warnings that their crowdfunding services may be inappropriate for them, and the express acknowledgment from such users that they understand the risks they are taking on.
The Regulation also stipulates the content of a key investment information sheet (KIIS) that ECSPs must provide to their investors for every crowdfunding offer to allow them to make informed decisions. The KIIS must comply with all the requirements set out in the Regulation but, for the sake of efficiency, does not need to be approved by the competent authority.
Additional requirements designed to ensure investor protection include:
- ECSPs shall ensure that projects on their platforms are selected in a professional, fair and transparent manner.
- ECSPs shall have a procedure in place to receive and handle client complaints
- ECSPs shall be subject to prudential requirements
- ECSPs shall be required to develop business continuity plans addressing the risks associated with failure of a crowdfunding service provider.
- ECSPs shall operate as neutral intermediaries between clients on their crowdfunding platform.
- ESMA will establish a public and updated register of all crowdfunding service providers authorised in accordance with this Regulation.
Authorisation and Supervision
Each Member State is required to designate a national competent authority (NCA) that will act as a single point of contact with the European Securities and Markets Authority (ESMA) and other national competent authorities across the Union. The NCAs will have both supervisory and investigatory powers as determined by the Regulation, to be exercised within the limits of their national law. ESMA and the NCAs must act objectively and impartially and must remain autonomous in their decision making. Coordination between different NCAs will be required where ECSPs wish to provide their services in other Member States. In this regard, the different NCAs must follow the procedure set up in the Regulation in order to facilitate the cross-border provision of services. ESMA will be responsible for coordinating cooperation between NCAs and EU member states.
Back in 2018, the MFSA had issued the requirements regarding applications for a licence to carry out Investment-based Crowdfunding under the Investment Services Act. Under the MFSA’s rules, crowdfunding platforms were required to be licensed under the Maltese Investment Services Act, and each individual offer could not exceed €1,000,000 over a period of 12 months. Furthermore, non-professional investors could not invest more than the lowest between €5000 and 20% of their net annual income over a period of 12 months on a specific crowdfunding platform.
The Regulation is intended to apply from 10 November 2021, and we can therefore expect the MFSA to revise its rules on crowdfunding platforms in the coming months.
News update by Dr Gigi Gatt and Dr Cherise Abela Grech.
Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.