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:
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.
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Complyport 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.
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