On 8 March 2018, a new proposal for an EU Regulation was issued, in order to create a European Crowdfunding Services Business (CF Regulation).
The rationale of the EU Commission’s initiative stems out from the global project on Capital Market Union, which aims to broaden access to the financing of companies established in the EU. Indeed, the EU Commission aims to promote and ease the access of SMEs to different sources of financing and notably, by this proposal, to establish a European label for investment - and lending- based crowdfunding platforms that enables cross-border activity and seeks to address risks in a proportionate manner.
The first point of interest is obviously the “passporting” of crowdfunding activity. For the time being, there is no harmonisation in terms of crowdfunding, which creates different regulatory frameworks in different jurisdictions (for instance the UK framework is very different from the Spanish one, etc.). This results in a limitation of the offer of crowdfunding services, to just the territory which the rules could geographically apply. Thanks to the CF Regulation, an investment - or lending-based crowdfunding platform will be able to provide its services on a cross border basis. As of the CF Regulation’s entry into force, and under certain conditions, a resident in Spain will be in a position to, for instance, invest through a Luxembourg crowdfunding service provider (CFSP) for projects in Bulgaria and Italy.
Ad hoc legal framework
The second point of interest is the creation of an ad hoc legal framework. Therefore, lending to consumers, in the sense of the relevant EU Directive on credit agreement for consumers, should not fall in the scope of the CF Regulation. The CF Regulation gives clarity on the fact that if the CFSP is registered with ESMA, it will not authorised under MiFID, AIFM, UCITS, Credit Institution and investment firm EU Directives.
It is worth noting that, if the CFSP acts as payment service provider in addition to its core activity, it should comply with the EU Directive on payment service providers which could be very attractive to certain CFSPs.
One Million threshold
The Regulation proposes a “One million threshold”, i.e. under which there is no compulsory requirement for issuers to obtain an approved prospectus. One million is the maximum total consideration in the EU per crowdfunding offer (not the entire platform) calculated on a 12 month basis. Based on our experience, most of the potential CFSPs should fall into this scope.
Besides this threshold, the CF Regulation only covers and permits investment based crowdfunding services in relation to transferable securities in order to ensure an easy exit for the investors.
In order to qualify as a CFSP, the applicant must receive the prior approval of ESMA (offers per se are not subject to approval). During the approval process (in which timing is regulated), ESMA will be mainly focused on the assessment of the services to be rendered, the suitability of management and the internal organisation and procedure put in place to align the CFP to the requirements of the regulation.
Furthermore, the application should contain inter alia a program of the services foreseen, the adequate procedures with regards the risk in administrative and accounting processes, the proof of experience and good repute of the managers of the CFSP and the usual legal and regulatory documents in relation to the CFP. The formats and features of these documents might be clarified further by the EU Commission.
The proposal mentions the obligation to draft a “key investment information sheet” (KIIS) prior to each offer. It is a different approach to what is known currently on the market as this KIIS should be drafted by the project owner on a maximum six sides of A4 sized paper format. It will be reviewed and confirmed by the CFSP, which in case of non-alignment with the requisites shall refuse to issue it on a “stand-alone durable medium”. As expressed in the proposal, the CF Regulation aims to “strike a delicate balance between the responsibilities for the project owner and the crowdfunding service providers taking into account what information the crowdfunding services provider has access to and what information it is practically able to verify”.
The complete content should be clarified by a delegated act but it is clear that, for the moment, the KIIS will contain, at least, explanatory statements and risk warnings.
Finally, the KIIS should warn about the risk to investors and the lack of guarantee by any authority, but should not need to be approved by a competent authority.
A novelty is the “entry knowledge test” which requires any CFSP to run a test on every prospective investor to determine their ability to bear loss (10% of the prospective investor’s net worth). Different criteria are detailed in the CF Regulation. The test should be run every two year at the least.
Marketing communication should state in general terms the investment envisaged and indicate where, and in which language, information about individual projects or offers may be obtained. Therefore any open or planned projects shall not feature in the marketing communications relating to the crowdfunding platform.
The CFSP shall provide client asset safekeeping services (directly or through a third party) in accordance with national laws of its home member state.
As mentioned above, the CFSP cannot hold funds unless approved as a payment institution.
Conclusion and timing
The proposal can be a powerful new means to finance companies in the grow-up phase. Indeed, the current lack of harmonisation and legal framework has created some reluctance from potential investors. It is hoped that this initiative will give a new boost to financing activities and to answer the question stated in the title, from our point, it is more a complement to the financing tool box than a replacement of the existing types of investment funds.
In terms of timing, there is no clarity (the CF Regulation states that it shall apply 12 months from its entry into force), however as an EU regulation, it will be in force (no implementation at the level of the EU states needed) 20 days following its publication in the official journal of the EU.
One can therefore conclude that there is a real momentum (as for instance with the US or Asian initiatives) and the willingness of the EU to harmonise the legal framework will facilitate to seize this opportunity.