The proposed draft regulation and amended directive (EU Crowdfunding Regime) published by the European Commission (EC) attempts to address this problem by establishing a harmonised authorisation regime, allowing certain EU authorised crowdfunding platforms to apply for an EU passport, which will permit them to provide services to EU users based on a single set of rules.
Key features of the EU Crowdfunding Regime
Who?
The new EU Crowdfunding Regime will apply to:
- lending-based crowdfunding platforms (P2P platforms) facilitating ‘business funding’ (meaning that lending to consumers is out of scope and remains separately regulated at an EU level by the Consumer Credit Directive (Directive 2008/48/EC); and
- investment-based crowdfunding platforms (IB platforms) in relation to transferable securities only,
(together, the Qualifying Platforms).
The EU Crowdfunding Regime will not apply to crowdfunding platforms that offer funding with a consideration of more than €5 million, which shall be calculated over a 12 month period.
Further, donation-based crowdfunding platforms, reward-based crowdfunding platforms and crowdfunding platforms which facilitate initial coin offerings are outside the scope of the EU Crowdfunding Regime. Whether these platforms are subject to authorisation and regulation in the EU will be determined by each EU member state.
How?
In order to benefit from the EU Crowdfunding Regime, prospective crowdfunding platforms will be required to apply to their national regulator (for example, in the UK, the Financial Conduct Authority) for authorisation to become an authorised crowdfunding service provider (CSP).
A prospective CSP will need to demonstrate that it is able to meet the new regulatory requirements for a CSP in accordance with the EU Crowdfunding Regime (see below). If authorised as a CSP, the crowdfunding platform will be able to provide crowdfunding services in the EU under a single set of harmonised rules (it is the EC’s view that EU member states should not be allowed to impose additional national requirements on CSPs). The public register listing all CSPs will be maintained by the European Securities and Markets Authority (ESMA).
To the extent that an ECP is also carrying on a payment service in the course of providing the crowdfunding platform, it may be required to be separately authorised under Directive 2015/2366/EU (PSD) and exercise the passport under the PSD in relation to that service unless the service will be performed by an appropriately authorised third party service provider.
Existing Qualifying Platforms which are authorised under MiFID II (Directive 2014/65/EU), the PSD, the Electronic Money Directive (Directive 2009/110/EU) or the Capital Requirements Directive (Directive 2013/36/EU), should be able to benefit from a simplified authorisation procedure to become CSPs as competent authorities should not require the submission of information already at their disposal.
CSP requirements
Amongst other requirements, the EU Crowdfunding Regulation requires CSPs to:
- provide prospective investors/lenders with a “Key Investment Information Sheet” (KIIS) which has been prepared by the project owner (i.e., the recipient of the funds) in accordance with prescriptive requirements. CSPs must have in place or adopt procedures to verify the completeness and clarity of the information contained in the KIIS as the CSP will be ultimately responsible for ensuring the KIIS is clear and complete;
- draw up an additional KIIS which meets prescriptive requirements in the event the CSP is providing services amounting to the individual portfolio management of loans (that is, the allocation by the CSP of a predetermined amount of funds of an investor/lender, which is an original lender, to one or multiple crowdfunding projects on its crowdfunding platform in accordance with an individual mandate given by the investor/lender on a discretionary investor-by-investor or lender-by-lender basis);
- have governance arrangements and internal control mechanisms in place to ensure compliance with the EU Crowdfunding Regime, including: (a) risk management procedures; (b) accounting procedures; (c) policies and procedures to ensure effective and prudent management of the platform (covering segregation of duties, business continuity arrangements and the prevention of conflicts of interest); and (d) a complaints-handling procedure which is “prompt, fair and consistent”;
- categorise potential lenders/investors as either “sophisticated investors” or “non-sophisticated investors” and in the case of non-sophisticated investors: (a) conduct an “entry knowledge test”; (b) provide explicit warnings for services deemed inappropriate; and (c) impose a maximum threshold for the amount non-sophisticated investors can invest through the CSP;
- conduct due diligence in respect of project owners, which includes conducting criminal records checks and ensuring the project owner is not established in a non-cooperative jurisdiction or high-risk third country;
- ensure all information provided from the CSP to clients (that is, both investors/lenders and project owners) about itself, the costs and financial and other risks associated with its crowdfunding services or investments, and the conditions for the crowdfunding (including project selection criteria), is fair, clear and not misleading;
- abide by prudential requirements, which may include the requirement to hold at all times an amount equal to the higher of either: (a) €25,000; or (b) one quarter of the fixed overheads of the previous year, annually. This can take the form of own funds, an appropriate insurance policy or a guarantee;
- identify persons responsible for the management of the CSP and ensure they are of “good repute” and possess the appropriate knowledge and experience;
- retain appropriate records related to services and transactions for at least five years and ensure clients have immediate access to records of the services provided to them at all times; and
- ensure filtering tools on the CSP’s website operate in a “neutral manner” by displaying results based on objective product features such as the economic sector of a project.
It is hoped that, once implemented across the EU, the harmonised rules and requirements for CSPs, such as those highlighted above, will enable the sector to grow by fostering investor trust as a result of the increased transparency, encouraging new market entrants as CSPs will be able operate across the EU without navigating multiple national regulatory regimes, and enabling entrepreneurs, start-ups, SMEs and similar businesses to access a wider European crowdfunding market.
Brexit and UK government response
As with all EU regulations, the outcome of the Brexit transition period and the concurrent trade talks will dictate the extent to which UK-based crowdfunding platforms will be able to benefit from the EU Crowdfunding Regime.
Importantly, the EU Crowdfunding Regime does not contain an ‘equivalence’ provision. Such provision would usually operate to allow the EC to declare a non-EU member state’s crowdfunding regulatory regime as ‘equivalent’ and therefore permit firms to provide services into the EU on the basis of their third country authorisation and registration with the relevant EU supervisory authority (e.g., ESMA).
Consequently, UK-based crowdfunding platforms may be required to obtain authorisation in an EU member state post-Brexit in order to access the EU market.
Client Alert 2020-312
