EU takes a step towards a Union-wide single market for crowdfunding
Existing national rules for crowdfunding platforms differ across the European Union. This can get in the way of providing crowdfunding services across national borders. A new regulation aims to deliver a uniform framework for these service providers and introduce a straightforward passporting regime.
What has happened?
The EU has introduced a Regulation on European crowdfunding service providers for business (CFR) and an accompanying Directive. This is a response to the largely different national rules across the Union which present an obstacle for the cross-border provision of crowdfunding services. The CFR introduces an EU-wide approach to crowdfunding, including new passporting rights.
Why is the CFR needed?
Crowdfunding represents an increasingly important type of alternative finance for start-ups and small and medium-sized enterprises, typically relying on small investments.
The CFR is part of the European Commission’s fintech action plan and digital finance strategy. The European Commission has previously identified that crowdfunding platforms do not always fall squarely in the EU regulatory framework and wants to ensure loan- and investment-based crowdfunding services are treated as regulated activities.
What does the CFR require?
The CFR sets rules for crowdfunding service providers (CFSPs) on, among other things:
- Authorisation as CFSP and cross-border provision of crowdfunding services
- Capital requirements
- Entry knowledge test and simulation of the ability to bear loss
- Pre-contractual reflection period
- Key investment information sheet
- Market communications
How does the CFR impact existing crowdfunding platforms?
EU CFSPs which are in the scope of the CFR, including those that are already regulated under a national regime, must apply for a licence under the new regime. A transitional period for these firms means that the deadline for getting that licence is 10 November 2022.
What does the CFR cover?
The CFR applies to crowdfunding campaigns up to EUR 5 million over a 12-month period. Larger crowdfunding operations fall within the scope of the Prospectus Regulation and might trigger an authorisation requirement for the crowdfunding service provider under MiFID II.
What are the key points to note for crowdfunding service providers?
- Judging application of the CFR: Crowdfunding platforms should start by working out if they fall within the scope of the CFR which covers broadly speaking loan- and investment-based crowdfunding services. They should also consider how they can track on an ongoing basis whether the funds they raise are within the threshold noted above.
- Identifying relevant activities: The licensing procedure under the CFR does not impact other licensable activities. So if a CFSP were, for example, to provide payment services in connection with its crowdfunding services it may also need to be separately licensed as a payment service provider under the Payment Services Directive.
- Operational build: The CFR imposes comprehensive requirements for all stages of the provision of crowdfunding services, starting with an entry assessment of the prospective non-sophisticated investor’s experience, through specific IT requirements regarding the buying and selling of loans and transferable securities for crowdfunding purposes, to reporting and recording obligations.
- Investor assessments: Before giving prospective non-sophisticated investors full access to invest in crowdfunding projects on their platform, CFSPs will have to assess whether and which crowdfunding services offered are appropriate for these investors. This assessment includes requesting information about the investor’s experience, financial situation and basic understanding of risks involved, and should be reviewed every two years.
- Key investment information sheet: CFSPs will be required to provide prospective investors with a key investment information sheet drawn up by the project owner for each crowdfunding offer. While the project owner is generally responsible for the information provided, it is the duty of the CFSP to ensure that the key investment information sheet is clear, correct and complete. In this respect, where an omission, mistake or inaccuracy is detected by the crowdfunding service provider, they should, under certain conditions, suspend or even cancel the crowdfunding offer.
What happens next?
The CFR and the accompanying directive start to apply from 10 November 2021. As noted above, existing CFSPs have an additional twelve months in which to apply for a licence under the new regime. Meanwhile, EBA and ESMA will develop the fourteen sets of regulatory and implementing standards provided for in the CFR.