Crowdfunding represents a new type of intermediation where a crowdfunding service provider (CSP) interacts with its clients through a digital platform matching prospective liquid investors with businesses that seek funding. The EU has been eyeing crowdfunding as an important part of its Capital Markets Union project which, at its heart, seeks to “mobilise capital in Europe”.
To this end, in March 2018, the European Commission presented a proposal for a regulation on CSPs propounding the notion of an EU passport for CSPs and crowdfunding platforms offering their services across the EU. A relatively straightforward passporting application highlight’s the EU’s plan to make cross-border capital raisings easier, and even more efficient.
Following the European Parliament’s vote on the proposed regulation last March, the Council of the EU has recently set out its position for the proposed regulation (the Regulation). The scope of the Regulation is to lay down requirements for the operation, organisation, authorisation and supervision of CSPs, and on the transparency and marketing communications in relation to the provision of crowdfunding services in the EU. In this regard, the Regulation applies both to investment-based crowdfunding as well as lending-based crowdfunding.
By regulating investment-based crowdfunding, the Regulation seeks to provide regulatory comfort to investors within the realm of transferable securities, by enhancing ‘transferability’ of these assets. This would in turn assuage investors’ liquidity concerns by providing an avenue for them to exit their investment. In dealing with lending-based crowdfunding, the preamble of the Regulation makes it clear that loans included in the scope of the Regulation should be loans with unconditional repayment claims, whereby lending-based crowdfunding platforms merely facilitate investors and project owners to conclude loan agreements; and do not become creditors of the project owner.
It is key to note that the Regulation does not apply to crowdfunding offers with a total consideration in the EU of more than €8 million (which amount corresponds to the maximum threshold under which offers of securities to the public can be exempted from the obligation to publish a prospectus in terms of the (new) Regulation (EU) 2017/1129 or the “Prospectus Regulation”). This amount is to be calculated over a 12 month period as the sum of:
(i) the total consideration of offers of transferable securities and admitted instruments for crowdfunding purposes and amounts raised via loan agreements through a crowdfunding platform by a particular project owner; and
(ii) the total consideration of offers to the public of transferable securities made by the project owner in its capacity as an offeror (of securities to the public) under certain exemptions from the obligation to publish a prospectus laid down in the (new) Prospectus Regulation.
In addition, the Regulation allows Member States to prohibit capital raisings for crowdfunding projects from its residents for the amount that exceeds the total consideration under which that Member State exempts offers of securities to the public from the obligation to publish a prospectus in accordance with the Prospectus Regulation, which in Malta is set at €5 million.
As mentioned, the Regulation provides for the organisational and operational requirements of CSPs in order to ensure that CSPs “act honestly, fairly and professionally in accordance with the best interests of their clients and prospective clients.” By way of example, article 4(1) of the Regulation provides that crowdfunding services can only be provided by licensed legal persons that have an effective and stable establishment in an EU Member State. In the interest of investor protection, the Regulation deals with conflicts of interest by prohibiting CSPs from paying or accepting any remuneration, discount, or non-monetary benefit for directing investors’ orders to a particular crowdfunding offer made on their platform or a third party platform. This said, CSPs may propose specific crowdfunding projects to individual investors which correspond to one or more specific parameters or risk indicators chosen by the individual himself. As an additional means of investor protection, the Regulation also requires CSPs to assess whether (and which) crowdfunding services are appropriate for a prospective non-sophisticated investors before giving such prospective investors full access to invest in their crowdfunding projects.
The licensing regime for prospective CSPs is set out under chapter III of the Regulation. In brief, in order for prospective CSPs to receive authorisation, they must apply to the national competent authority of the Member State in which they are established, providing the authority with all the information set out in the Regulation, such as a business plan; procedures for complaints handling and dealing; and internal rules which prevent majority shareholders, managers, and/or employees, from engaging as project owners in crowdfunding projects offered by the prospective CSP itself. Under the proposed Regulation, a publicly available register of all CSPs would be made available by ESMA.
In the spirit of assisting companies access liquidity in the market through crowdfunding practices, the Regulation also proposes that an offer of securities which falls within its scope is exempt from the obligation to publish a prospectus in terms of the Prospectus Regulation. Bearing in mind banks’ low risk appetite when lending to SMEs and small undertakings, regulatory initiatives like the proposed Regulation bode rather well, particularly for jurisdictions such as ours which yearn for innovation and aspire to be international hubs for tech start-ups. Although the Regulation is still subject to change, and the trilogue negotiations are yet to begin, we can only be hopeful that this Regulation will pave the way for easier access to finance in the market and that it will bestow more intriguing products for the benefit of consumers in the EU.
The authors would like to thank Chris Grech, student intern at GANADO Advocates, for his assistance during the drafting of this article.
This article was first published in the Times of Malta, 9 July 2019.