This is the fourth and final article in our four-part series covering UK and EU crowdfunding regulation. Part 1 considered how crowdfunding is regulated in the UK, Part 2 looked more closely at peer-to-peer (P2P) lending, Part 3 explored how crowdfunding is regulated across the EU, and this Part 4 will look at the effects of the new EU regulation on European crowdfunding service providers.
What does the new regulation mean for crowdfunding platforms in the EU?
Crowdfunding platforms which launch P2P and equity based crowdfunding campaigns of up to €5 million over a 12-month period, will be subject to Regulation (EU) 2020/1503 (the Regulation) from 10 November 2021.
If a platform does not want to operate in multiple member states throughout the EU, the Regulation allows it to freely choose to remain within the existing national framework.
Under the Regulation, obtaining the "EU label" will require a crowdfunding platform to meet certain prudential, organisational and consumer protection requirements. Amongst other requirements, the Regulation requires crowdfunding service providers to:
- act honestly, fairly and professionally in accordance with the best interests of their clients
- have in place and publish descriptions of effective and transparent procedures for the prompt, fair and consistent handling of complaints
- provide prospective lenders with a “Key Investment Information Sheet”, which has been prepared by the borrower in accordance with prescriptive requirements
- categorise potential investors as either "sophisticated" or "non-sophisticated", and in the case of "non-sophisticated" investors, implement entry knowledge tests, assessing their understanding of financial products and ability to bear financial losses
- conduct due diligence in respect of project owners, including criminal record checks
- provide information about financial risks and charges, including insolvency risks and project selection criteria, to prospective project owners
- abide by certain prudential requirements
- retain appropriate records related to services and transactions for at least five years
- ensure that all payment services for crowdfunding transactions take place through entities authorised under the Payment Services Directive (PSD2).
Applicants for authorisation must apply to the competent authority in the Member State of their establishment, providing certain prescribed information, and competent authorities are to assess whether the application is complete within 25 working days of receipt. When deemed complete, the competent authority must then decide whether to grant authorisation and will specify which services the provider is authorised to provide.
If authorised as a "crowdfunding service provider" under the Regulation, the platform will be able to provide its services throughout the EU under the new harmonised rules.
Additionally, to enhance transparency for investors, the Regulation requires the national competent authority to inform ESMA when it has approved an application and requires ESMA to establish a public and up-to-date register of all authorised crowdfunding service providers in the EU.
In addition to providing clarity and reducing entry costs for companies wishing to crowdfund, the Regulation should therefore provide greater legal certainty to investors.
To compliment the new Regulation, the EC has also adopted a proposal for a Directive amending MiFID II, which will apply to larger fund raisings.
What is next?
In advance of 10 November 2021, activity is ramping up, with the European Securities and Markets Authority (ESMA) launching a Question and Answers document (Q&A) on the Regulation, and publishing a Consultation Paper on the draft technical standards which it is required to develop under the Regulation.
The purpose of the Q&A is to "promote a convergent application" of the Regulation and to "provide responses to the possible questions posed by the general public, market participants and competent authorities".
The first set of Q&As, published on 25 February 2021, considers the use of a special purpose vehicle (SPV) under the Regulation. It addresses when an SPV can be set up to provide crowdfunding services; the types of instruments that can be offered to investors via an SPV; whether an SPV can provide exposure to more than one underlying asset; the types of underlying assets that an SPV can give exposure to; and what is meant by "illiquid" and "indivisible" under the Regulation.
Over the coming months, ESMA will develop the Q&A and add additional questions and answers to the above topics concerning the use of an SPV, in addition to addressing new topics for other areas covered by the Regulation.
ESMA must also develop several technical standards under the Regulation. The Consultation Paper, published on 26 February 2021, contains draft technical standards on:
- conflicts of interest
- business continuity plans
- authorisation applications
- providing information to clients on the default rates of projects
- entry knowledge tests and simulation of the ability to bear los
- key investment information sheet
- reporting by crowdfunding service providers to national competent authorities (NCAs) and reporting by NCAs to ESMA
- publication of national provisions concerning marketing requirements.
Most of these technical standards are to be submitted to the European Commission for adoption before the Regulation comes into force on 10 November 2021 and the remaining technical standards are due to be delivered by 10 May 2022.
What will the UK's approach be?
Whilst the UK Government provided assistance throughout the ongoing negotiations on the Regulation, and is supportive of the new approach to set a minimum regulatory baseline for all crowdfunding platforms across the EU, the Regulation does not contain an "equivalence provision", meaning that UK based crowdfunding platforms may be required to obtain authorisation in an EU member state.
In November 2020, the Cabinet Office published a letter, responding to the House of Lords European Union Select Committee (the Committee) Chair's request for clarification on the UK's approach to the Regulation (and the related directive making consequential amendments to MiFID II).
The Committee asked for further detail on the government's assessment of whether a similar change to the UK's regulation of crowdfunding would enhance the competitiveness of the sector. The Cabinet Office explained that it has been "actively reviewing the merits of these regulations, but at this time there is no evidence to suggest their implementation would result in material benefit to the UK Crowdfunding sector" and that "the Government believes the final EU text shares key similarities with existing UK regulation".