The Department of Finance (DoF) recently published a Feedback Paper on the Regulation of Crowdfunding in Ireland. This was done as part of the IFS 2020 Action Plan, which is the Government’s five-year strategy for driving the growth and development of the International Financial Services sector in Ireland. The Feedback Paper follows a six-week public consultation process on the regulation of crowdfunding, that closed in June 2017.
As the DoF noted, crowdfunding is not currently a regulated activity in Ireland. Consequently, there are no formal consumer protections available for those using crowdfunding platforms to provide funds. However it was noted that most of the respondents who provided feedback were of the view that some legislation does apply to this area, including data protection laws and the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010.
The Feedback Paper makes the following observations:
Risks involved in crowdfunding in Ireland:
A number of risks were identified with regard to unregulated crowdfunding, including the following:
- Lack of understanding of the level of risk on the part of consumers;
- Identity theft, money laundering, terrorism financing, data protection and fraud;
- Misleading and insufficient disclosure of information by businesses on crowdfunding platforms;
- Risk of unfair contract terms, or misleading commercial practices;
- If the business fails or the crowdfunding platform itself fails, there is a risk that lenders or investors will lose all of their money;
- Risk that the return on the investment is less than expected;
- The lack of a secondary market for equity stakes means that it is difficult to value them and they can be diluted by further equity sales;
- Risks to businesses seeking funding through crowdfunding platforms.
The crowdfunding market in Ireland:
- The DoF's view is that the crowdfunding market in Ireland is relatively small. There are currently only three crowdfunding platforms operating in the market, all of which provide peer-to-peer lending services.
- There are currently no equity crowdfunding platforms operating in Ireland, according to the DoF.
- Currently, crowdfunding constitutes approximately 0.33% - 0.4% of the SME finance market; for comparison, this is 12% in the UK.
- the demand for alternative sources of financing, including crowdfunding, from Irish SMES is quite muted. For example, in the latest wave of the Department of Finance SME Credit Demand Survey, covering the period October 2016 – March 2017, only 6% of the SMEs surveyed were seeking non-bank finance.
- As of 24th May 2017, Linked Finance (a lending service) had more than 15,650 registered users. More than 880 loans have been provided to Irish SMEs and over €25.6 million of business lending has been facilitated with €16 million in principle outstanding. Linked Finance accounts for over 90% of the market share of peer-to-peer lending in Ireland.
Crowdfunding in other jurisdictions:
- The UK is the largest market for both loan and equity crowdfunding projects in the EU, with €1.6 billion of funding raised through loan (peer-to-peer) crowdfunding projects and €89 million raised through equity crowdfunding projects in 2013-2014.
- In 2013-2014, the European crowdfunding market successfully raised €2.3 billion. The volume of funding raised through equity platforms grew by 167% and the volume of funding raised through loan (peer-to-peer) crowdfunding platforms grew by 112%.
- The total European online alternative finance market, which includes crowdfunding, peer-to-peer lending and other activities, grew by 92% to reach €5,431m in 2015.
- A large number of EU states, including the UK, are considering introducing bespoke regulations for crowdfunding.
Feedback received by the DoF:
- Those who responded to the feedback were generally of the view that crowdfunding should be regulated in Ireland, but also commented that it should be proportionate and were concerned that it should facilitate the development and growth of the industry, as opposed to stifling or hindering it.
- The current lack of regulation was also viewed by some respondents as resulting in inefficiencies and uncertainties, as well as discouraging the entry into the market of new crowdfunding platforms.
- The comment was made that existing Irish domestic legislation will need to be reviewed in order to examine its application to crowdfunding platforms, e.g. with regard to possibly allowing private companies to offer securities to the public, in terms of the prospectus thresholds under existing Irish and EU prospectus laws, and in relation to dual authorisation for platforms that could also be considered to be other types of regulated entities.
- Any regulations introduced should allow cross-border lending and investment and be MiFID compatible, as well as allowing domestic lending and investment.
After the DoF held its public consultation, the European Commission proposed a pan-European regulatory regime for crowdfunding in its 2018 work programme. The European Commission is due to bring a proposal for an EU framework on crowd and peer-to-peer finance for discussion in March 2018. The DoF has stated that it will monitor the progress and developments on this and implement European regulations as necessary.
The DoF has also noted that, if and when EU laws are introduced and transposed into Irish law, this may also allow for the possibility of Irish crowdfunding platforms passporting their services to other EU member states.