The second part of our series on crowdfunding looks at potential regulation of crowdfunding in Ireland.
There is currently no legislation in Ireland regulating crowdfunding or the platforms that facilitate crowdfunding. Provided crowdfunding platforms do not offer ancillary regulated services such as investment or payment services, they do not require authorisation from the Central Bank.
Accordingly there is little protection for individuals and organisations providing such funding as the protections provided to consumers under the Central Bank codes of conduct do not apply to crowdfunding platforms. In addition to this, the Financial Services Ombudsman does not have the remit to deal with complaints if a crowdfunding investor encounters problems.
Following on from the publication of a European Commission report on regulating crowdfunding in several EU member states, the Department of Finance is now considering a move to regulate crowdfunding in Ireland.
Regulation of Lending-based crowdfunding
Lending-based crowdfunding is the principal form of crowdfunding currently being offered in Ireland. In this model, lenders loan money to borrowers through the use of a crowdfunding platform. If the borrower defaults or the platform becomes insolvent, lenders risk losing part or all of their money.
To mitigate against this risk, appropriate credit risk management and money handling procedures are vital for the viability of the platform in the long run and for the protection of lenders and borrowers.
To protect investors in this part of the crowdfunding market, there are regulations in place in other EU member states (e.g. the UK) which Ireland could follow. Such regulations include:
- ensuring that consumers interested in lending to individuals or businesses have access to clear information. This allows them to assess the risk and to understand who will ultimately borrow the money
- application of core consumer protection requirements to platforms operating in this market so that client money would be protected and firms meet minimum capital standards
- imposing an obligation on firms running these platforms to have resolution plans in place so that, in the event of the platform collapsing, loan repayments will continue to be collected so those lending money do not lose out.
Regulation of Equity-based crowdfunding
The equity model of crowdfunding facilitates companies who wish to raise funds from investors in return for a percentage shareholding in the business. There are restrictions in Ireland on a private company offering shares to the public. In addition there would typically be a restriction on the transfer of these shares and as such they are not readily realisable and carry significant risks.
The UK has also introduced new consumer protection rules for the sale of these securities which Ireland could also consider following. These rules include marketing restrictions, so platforms may only make direct offer promotions to retail consumers who meet certain criteria such as:
- those who take regulated advice;
- those who qualify as high net worth or sophisticated investors; or
- those who confirm they will invest less than 10% of their net assets in this type of security.
UK rules also require firms to check whether investors understand the risks if they do not take regulated advice.
Crowdfunding in Ireland is steadily gaining momentum and it is expected that pressure will come to bear on the government to provide legislation specific to this sector.