CROWDFUNDING – PROPOSED AMENDMENTS TO DUTCH LEGISLATION
The Netherlands Authority for the Financial Markets (AFM) stated in its recent report ‘Crowdfunding – Towards a sustainable sector’ that the crowdfunding sector is developing rapidly. In 2014, 24 crowdfunding platforms were added to the AFM’s registers and the financial size of crowdfunding has doubled to €37 million compared to 2013.
The AFM has taken the opportunity to look more closely at the supervisory regime of this growing market, and concluded that current legislation and regulation do not sufficiently accommodate sustainable and responsible growth of the crowdfunding sector. Accordingly, the AFM proposed a number of recommendations to adjust the current legislation. Based on these recommendations, the Dutch government published a consultation paper (Consultatie Wijzigingsbesluit financiele markten 2016) to introduce an appropriate supervisory regime for crowdfunding. The consultation paper proposes the following key changes:
Ban on inducements for investment firms
If a crowdfunding platform is involved in raising capital via the issuance of financial instruments (e.g. bonds or equity), such a platform may qualify as an investment firm within the meaning of the Markets in Financial Instruments Directive (MiFID). This is due to the fact that the crowdfunding platform is likely to provide the service of transmission of orders in financial instruments.
If the crowdfunding platform qualifies as an investment firm, the Dutch ban on commission payments is likely to apply to the crowdfunding platform. As a result, the crowdfunding platform would not be allowed to charge a fee from their clients related to transmission of the order. Needless to say, this entails a significant restriction on crowdfunding platforms, as such fees often form the most important source of income.
In the explanatory memorandum accompanying the consultation paper, the Dutch government states that the ban on inducements could be an imperative restriction for crowdfunding platforms which qualify as an investment firm. According to the Dutch government, this justifies an exemption to the ban on commission payments for crowdfunding platforms which qualify as an investment firm. The consultation paper introduces this exemption.
To prevent improper use of the aforementioned exemption, the Dutch government proposes the following additional conditions to make sure that the exemption aligns with the nature of crowdfunding and not with other services:
- The exemption applies only to crowdfunding platforms that “receive and forward, in the pursuit of a profession or business, client orders with regard to financial instruments” (and not in relation to other MiFID services which fall under the scope of the ban on commission payments);
- The provision of service applies only to financial instruments that are not concluded on a regulated trading platform such as a regulated market;
- The financial instruments involved are offered by the company itself, to make sure that the exemption does not apply equally to the secondary market of issued securities; and
- If a crowdfunding platform wishes to make use of the exemption, it needs to inform the AFM about the intention to perform services that are subject to the exemption.
Reinforcement of the exemption regime for intermediation in callable funds
In the Netherlands, a prohibition applies to (intermediate in) attracting, receiving or holding callable funds from the public (the Prohibition). Lending based crowdfunding platforms most often fall within the scope of the Prohibition. However, it is possible to apply for an exemption from the Prohibition (the Exemption Regime). Most crowdfunding platforms have hence applied for and obtained such exemption.
The AFM and the Dutch government are of the opinion that the current Exemption Regime is too lenient, and that certain additional requirements should be added in the areas of properness, business conduct and certain prudential requirements.
Accordingly, the Dutch government proposes that more ongoing statutory obligations are applicable to crowdfunding platforms making use of the Exemption Regime. A crowdfunding platform that wants to rely on the Exemption Regime must comply with, among others, the following requirements:
- day-to-day policymakers of crowdfunding platforms should be tested on suitability;
- employees of crowdfunding platforms should be reliable;
- crowdfunding platforms must ensure that proper administration and financial settlement of projects is guaranteed in a situation in which the platform ceases to operate (for instance due to bankruptcy);
- crowdfunding platforms must ensure that proper procedures are in place related to the handling of incidents;
- crowdfunding platforms must inform the AFM of any incidents; and
- crowdfunding platforms should have an internal complaints procedure, aimed at prompt and careful handling of complaints.