The European Commission wants to facilitate crowdfunding platforms to scale up and engage in cross-border activities by establishing a new regime for “European Crowdfunding Service Providers”.
The new regime is set out in a proposal for a Regulation on European Crowdfunding Service Providers (ECSP) for Business (“Crowdfunding Regulation”). Platforms will have the option of applying for a single EU-wide authorisation to exercise crowdfunding activity, or continuing to operate under national rules. The Crowdfunding Regulation applies to lending-based and investment-based crowdfunding.
At the moment crowdfunding is primarily regulated at domestic level. While some member states apply the current financial services framework to crowdfunding service providers (“CSPs”), others allow them to operate under exemptions from that framework.
Moreover, member states are increasingly implementing bespoke national frameworks to cater specifically for crowdfunding activities on local markets. As a result, the existing rules diverge as regards the operating conditions for crowdfunding platforms, the scope of permitted activities and the licencing requirements.
The Commission is concerned that the divergent national rules applicable to crowdfunding are inhibiting the growth of cross-border crowdfunding activity and is seeking to specifically regulate business crowdfunding at the EU level.
The Crowdfunding Regulation would give CSPs the ability to opt for a single EU-wide regime regulating authorisation, organisational, operational and supervisory requirements. Its overall aim is to broaden access to finance for smaller firms, in line with the Commission’s priority of establishing a Capital Markets Union (“CMU”) in order to increase and diversify the sources of funding to the EU’s economy.
The Crowdfunding Regulation applies to both lending-based and investment-based crowdfunding. It does not apply to crowdfunding services that are provided to consumers, MiFID firms, crowdfunding services provided in accordance with member states’ national laws or crowdfunding offers with a consideration of more than EUR 1 million per crowdfunding offer.
Organisational and Operational Requirements
The Crowdfunding Regulation sets out requirements regarding the provision of crowdfunding services, effective and prudent management, complaints handling, conflicts of interest, outsourcing and client-asset safekeeping.
Pursuant to these requirements, CSPs are permitted to exercise discretion on behalf of clients with respect to the parameters of clients’ orders provided they take all necessary steps to obtain the best possible result for their clients and comply with disclosure requirements. However, they are prohibited from paying or accepting any benefits for routing investors’ orders to a particular crowdfunding offer.
CSPs are also prohibited from:
- having any financial participation in any crowdfunding offer on their crowdfunding platforms; or
- accepting as their clients any of their shareholders holding 20% or more of share capital or voting rights, managers and employees or any person directly or indirectly controlling crowdfunding platforms; or
- holding client funds or providing payment services unless authorised to do so under the Payment Services Directive 2015/2366. Alternatively, they must put in place arrangements to ensure that project owners accept crowdfunding offers or any payments by means of an authorised payment service provider.
Authorisation and Supervision
The European Securities and Markets Authority (“ESMA”) is to be responsible for authorising and supervising CSPs.
The Crowdfunding Regulation sets out a list of information that an applicant must provide when seeking authorisation as a CSP, which includes, among other things, a programme of operations, a description of governance, risk procedures, data processing systems, business continuity arrangements, a description of outsourcing arrangements and information about management.
This information is intended to ensure that ESMA is informed about the services that the applicant intends to provide, and able to assess the quality of its management and its internal organisation and procedures
ESMA must decide on an application for authorisation within two months of receipt of a complete application and notify the applicant within five working days after taking that decision.
ESMA must establish and maintain a publicly available website of all European CSPs.
Transparency and Knowledge Requirements
CSPs must provide their clients with appropriate information regarding the nature, risks, costs and charges of crowdfunding services. They must also carry out an entry knowledge test of their prospective investors to ensure their knowledge of investment. CSPs must explicitly warn prospective investors whenever the crowdfunding services provided are deemed as inappropriate for them.
CSPs must provide prospective investors with a Key Investment Information Sheet (“KIIS”) which sets out material information about the crowdfunding project owners, the investors’ rights and fees, the type of securities offered and loan agreements, as well as risk warnings. The project owner is responsible for drawing up the KIIS, however, the CSP must ensure that it is complete.
The Crowdfunding Regulation also sets out provisions governing bulletin boards, which permit direct interactions between investors, record-keeping and marketing communications.
The Crowdfunding Regulation must now be considered by the European Parliament and by the Council of Ministers and may be subject to change. The Commission is seeking to have the Crowdfunding Regulation adopted by mid-2019. It will apply 12 months from the date that it enters into force.