On 21 April 2017, the Department of Finance announced the launch of a consultation on the regulation of crowdfunding in Ireland. The consultation will run until 2 June 2017.
WHAT IS CROWDFUNDING?
Crowdfunding is a method of raising finance from the public (individuals, companies and institutional investors) which is often used by start-up businesses (in particular, small and medium enterprises (SMEs)) as an alternative to traditional bank finance.
A business looking to raise funds via crowdfunding will generally use an online crowdfunding platform, through which it can pitch its business plan, and raise amounts of money from multiple sources. Online crowdfunding platforms match potential investors with businesses seeking investment, coordinate payments between the parties, and may be involved in setting the interest rates in loan-based crowdfunding, or the valuation in investment-based crowdfunding.
THE MAIN TYPES OF CROWDFUNDING
There are four main types of crowdfunding (see below), three of which are the subject of the Consultation Paper.
Click here to view table.
CURRENT REGULATORY POSITION
» Is crowdfunding currently regulated in Ireland?
No, unless an online crowdfunding platform offers related services that are regulated such as, for example, payment services or MiFID investment services (in which case, it would need authorisation from the Central Bank). Apart from that, neither the relationship between the investor and the business, nor the online crowdfunding platform, is regulated.
» Is crowdfunding regulated at EU level?
No, although some Member States have introduced, or plan to introduce, domestic legislation in this area. Consumer protection legislation, and financial services legislation generally, was developed before crowdfunding developed into a key source of finance. As a result, that legislation of itself is unlikely to adequately regulate the sector, but legislation such as MiFID, the Payment Services Directive, AIFMD and the Prospectus Directive could (if amended) provide the necessary framework.
» View of the European Commission
In January 2017, as part of its consultation on its mid-term review of Capital Markets Union, the European Commission noted that crowdfunding is growing as a source of finance but remains small, with market development taking place in only a few Member States, and little crossborder activity. The Commission also signalled that divergences in regulatory frameworks and in how EU legislation is interpreted in Member States could fragment the crowdfunding market, and make investor protection more difficult. It is not currently planning to introduce specific laws dealing with crowdfunding, but is continuing to monitor the sector.
» Views of EBA and ESMA
The European Banking Authority (EBA) has concluded that regulatory convergence in the area of crowdfunding is desirable, using existing financial services legislation (notably the Payment Services Directive) as the starting point.
The focus of the European Securities and Markets Authority (ESMA) has been on investment-based crowdfunding (see its December 2014 opinion on investment-based crowdfunding in which it focused on how existing EU financial services legislation could apply to crowdfunding platforms). Earlier this month, in a letter to the European Commission, ESMA again indicated that it would like to see EU legislators examine crowdfunding in the context of the current EU legislative framework to ensure that crowdfunding can reach its full potential. It attached the results of its November 2016 survey of national competent authorities (NCAs) (again in the context of investment-based crowdfunding only) which indicated that 10 NCAs have reported that investment-based crowdfunding platforms are operating in their jurisdictions. The results of the survey also indicate how those platforms are regulated in each of those jurisdictions.
» View of the Central Bank of Ireland
In June 2014, the Central Bank issued a Consumer Notice on Crowdfunding, including Peer-to-Peer Lending, highlighting that crowdfunding on a standalone basis is not regulated in Ireland and flagged that, in light of this, Irish consumers who invest in crowdfunding projects do not benefit from the Central Bank's codes, are not protected by the Deposit Guarantee Scheme or the Investor Compensation Scheme, and cannot lodge a complaint with the Financial Services Ombudsman. Further, those who operate crowdfunding platforms are not subject to the Central Bank's client asset rules.
Some of the key risks highlighted by the Central Bank in that Consumer Notice are included in the list of disadvantages of crowdfunding in the table below.
ADVANTAGES AND DISADVANTAGES OF CROWDFUNDING
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OBJECTIVES OF THE CONSULTATION
The Consultation Paper is focused on whether a regulatory regime should be put in place for the crowdfunding sector, or whether this would impede the development of crowdfunding in Ireland.
The Consultation Paper notes that the majority of investors in crowdfunding projects are expected to be consumers (i.e. individuals acting for personal, rather than business, purposes).
Views have been sought on the following points (which will be relevant if a decision is taken to regulate crowdfunding):
Click here to view table.
The Consultation Paper also seeks views as to whether, if a decision is taken not to regulate crowdfunding, Ireland should consider non-regulatory supports to encourage the development of crowdfunding as a source of finance in Ireland.
Depending on the responses received by the time the consultation closes on 2 June 2017, the Central Bank will decide whether to pursue a regulatory regime for crowdfunding in Ireland. In launching the consultation, the Minister for Finance commented that "[ensuring] that the development of this exciting and innovative form of finance is facilitated for the benefit of the economy, while also ensuring adequate protection for consumers providing funds through crowdfunding platforms is of critical importance".
Crowdfunding is, if the UK experience is anything to go by, likely to become an increasingly important source of non-bank lending. A fit-for-purpose regulatory regime will provide comfort and confidence to investors/lenders and help to ensure that the industry grows on a stable and robust footing.