This disruptive source of alternative capital works by tapping into the collective effort of the internet community through web-based media and communication, and ultimately enables individuals to pledge their capital in favour of particular business ventures or specific purposes.

One of the main knee-jerk reactions to the global financial crisis in 2008 was the implementation of stricter capital requirements on retail banks.

This has resulted in restricted opportunities for traditional debt funding, particularly for start-ups and small enterprises. The longing for finance by entrepreneurs coupled with solid liquidity among investors sparked the emergence of this disintermediating technology of crowdfunding, thereby exposing the paradigm of how investment will be taking shape in the future.

The exploitation of the viral nature of online fora and the application of new internet-based technologies is risking elimination of the reliance on banks for funding, therefore shaping a more diversified and competitive environment of financing.

Crowdfunding has indeed become increasingly popular in a very short time. A 2013 World Bank report, entitled Crowdfunding’s Potential for the Developing World, highlights how crowdfunding has emerged as a multibillion-dollar global industry and Kickstarter, one of market leaders channelled over US$815 million from 2009 till 2013, involving 4.9 million backers and 50,000 projects throughout the world.

Last November, the Malta Financial Services Authority issued a consultation paper on investment-based-crowdfunding, which refers to platforms which allow consumers to purchase financial instruments, including, without limitation, unlisted shares and debt securities.

IBC offers a challenge for regulators and legislators, as the current regulatory framework was not designed with these types of businesses and investments in mind. If one runs a comparative analysis on regulated spheres across the globe, one notices a common approach across various jurisdictions, that is to apply the securities regulatory framework to IBC platforms. Other jurisdictions have implemented, or proposed to introduce, ad hoc regimes featuring softer entry requirements, limited reporting obligations for issuers, and possibly lighter conduct of business provisions.

Reading MFSA’s paper, one can easily perceive the hopeful yet cautious standpoint of the Maltese regulator. While hailing crowdfunding platforms as a promising opportunity for the Maltese economy in terms of alternative financing, MFSA hammers home a number of key risks associated with this novel financing model.

In line with the European Securities Markets Authority’s advice on IBC issued in 2014, MFSA also classified activities on IBC platforms within the perimeters of local and European legislation, namely the Investment Services Act (chapter 370 of the laws of Malta) and the Markets in Financial Instruments Directive (Directive 2004/39/EC) wherein, the operator of an IBC platform would be required to apply for a licence under the ISA.

In addition to the licence requirement, MFSA is also proposing the introduction of additional investment protection measures, including a cap on the size of the project launched on the IBC platform and a cap on the maximum funds which an individual investor may contribute to a particular project.

In real terms, a crowdfunding start-up willing to set up business in Malta would have to fork out substantial licensing fees, and comply with onerous regulatory obligations including a €50,000 initial capital requirement, and demanding conduct of business obligations. On the bright side, since the platform would fall within the ambit of MIFID, it would benefit from passporting rights, granting it access to a wider EU market, which it would not have afforded otherwise.

If Malta is aiming to establish itself as a hub for fintech start-ups, it needs to tailor a flexible framework without suffocating novel ideas.

A less onerous regime for crowdfunding platforms would be ideal for smaller start-ups as it will help them grow their business for the eventuality of obtaining a MIFID licence.

Conclusively, we eagerly await the feedback statement to the consultation document to be issued by the MFSA. One hopes that the Maltese regulator will show a degree of acceptance of these new business models.


This article was first published in the Times of Malta, 9 August 2017.