Regulation (EU) 2020/1503 on European #crowdfunding services: the way ahead

1.       Outlook

Crowdfunding is a form of alternative finance which exists in various models to allow the raising of funds via an internet-based platform by matching multiple retail investors with a fundraiser’s request for investment. Such funding could take the form of loans or the acquisition of transferable securities or of other admitted instruments for crowdfunding purposes. The form of the equity-crowdfunding, which allows Internet investors to enter the share capital of the company, has been created for investment and financing in start-ups in order to “fill a funding gap for startups that cannot attract other financing, or are too early in their life cycles to attract angels and VCs”. This model of crowdfunding has been regulated in Italy by the Consob Regulation No. 18592of 12 July 2013. Given the risks associated with crowdfunding investments and the need to harmonise the rules applicable to crowdfunding activities across the EU, the EU has implemented a bespoke regime in Regulation EU (2020/1503) on European crowdfunding services platforms (the “Crowdfunding Regulation”), which includes both lending-crowdfunding and investment-based crowdfunding and does not cover reward or donation-based crowdfunding. The Crowdfunding Regulation entered into force on 9 November 2020 but will apply to the Member States from 10 November 2021. As a transitional measure, existing crowdfunding service providers are permitted until the later of 10 November 2022, or they are granted authorisation under the Crowdfunding Regulation to continue operating under the relevant national framework. The new regime is considered an important component of the Capital Markets Union initiative in the EU, the full realisation of which continues to face difficult challenges. The service of lending-based crowdfunding also includes the individual portfolio loan management which is defined as the allocation by the crowdfunding service provider of a pre-determined amount of funds of an investor, 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 on a discretionary investor-by-investor basis. On the other end, the activity of an investment crowdfunding platform which involves securities, even if qualified as “investment activity” is subject to the Crowdfunding Regulation when it is carried out by an on-line platform and, therefore, it falls outside the provisions of MIFID II. In addition, the activity of the platform does not however include the activity of payment services between investors and project owners. The Crowdfunding Regulation outlines that the payment services activity remains subject to PSD2, therefore the authorised crowdfunding platform shall not provide payments services unless authorised for this purpose or has entered into an agreement with a payment services provider.

2.                 The Crowdfunding Regulation applies to ….

The Crowdfunding Regulation applies to the following categories of service crowdfunding providers which “can be structured as comparable funding alternatives” (Recital 1 of the Crowdfunding Regulation):

1)     Lending based crowdfunding platforms which allow individuals and firms to lend money to a project owner or a special purpose vehicle (SPV); and

2)     Investment based crowdfunding platforms which allow investors to purchase transferable securities (shares or bonds) issued by a project owner. 

For the purposes of the first category, loans shall be unconditional obligations to repay an agreed amount of money to the investor, and the platforms shall merely facilitate the granting of loans by investors to a project owner without acting as a creditor of the project owner.  Due to the definition of loan (“an agreement whereby an investor makes available to a project owner an agreed amount of money for an agreed period of time and whereby the project owner assumes an unconditional obligation to repay that amount to the investor, together with the accrued interest, in accordance with the instalment payment schedule”) it can be assumed that alternative or innovative loan products and even loans with well-known features (such as bullet repayments and revolving facilities) may fall outside this definition. In addition, the Crowdfunding Regulation does not regulate invoice trading platforms which therefore are not subject to its provisions. The Crowdfunding Regulation does not provide that a “project owner” shall necessarily be a juridical person and to this purpose states that no restrictions shall be provided by the Member States to the project owner. This provision is intended to allow entrepreneurs to access the platforms also for the purpose of validating a business idea, give access to a large number of people providing insights and information and use the crowdfunding as a marketing tool.

3.                 But does not apply to ….

The Crowdfunding Regulation does not apply:

(a)          if the project owner is a “consumer” and intends to raise money for non-professional purposes. This means that peer-to-peer lending platforms will not be subject to the provisions of the Crowdfunding Regulation and will continue to be subject to Member States regulations. Such limitation appears to be in line with the purpose of the Crowdfunding Regulation aimed at creating a fertile soil for the access to finance for SMEs and start-ups. In the same way, individuals can be investors without limitations to access the platforms.  

(b) to other services related to those defined in point (a) of Article 2(1) and that are provided in accordance with national law;

(c)      to offers with a consideration of more than EUR 5 000 000 over a certain period. Such an amount is reached considering (i) the total amount raised over that period through the issuance of securities and the granting of loans (ii) the total amount of the public offer of securities carried out by the project owner out of the platforms pursuant to the exemption regime provided for by the Prospectus Regulation. In case of loans, the component under paragraph (ii) does not apply.

4.                 A cross- border authorisation

Under the Crowdfunding Regulation only legal persons established in the EU are entitled to obtain authorisation to provide crowdfunding services to EU clients. Member States shall refrain from imposing additional requirements to the providers authorised according to the Crowdfunding Regulation and/or impose the physical presence of the provider acting on a cross-border basis in the territory of a Member State other than the Member State where the crowdfunding provider is authorised. The authorisation shall not exclude other activities to be carried out by the providers, which means that the crowdfunding platform may act as a “hybrid” provider which carries out this service within a different business model. A simplified proceeding should also apply to those crowdfunding platforms which are already authorised according to the domestic regulation at the time of the entering into force of the Crowdfunding Regulation. The authorised platform shall provide cross-border service according to the passporting regime which will apply in a simplified manner (the proceeding shall not exceed 15 days and limited information shall be provided to the national Authority).

5.                 Certain compliance rules

The Crowdfunding Regulation provides new rules to be adopted by the platform vis-à-vis investors and project owners. In particular, crowdfunding platforms are required to undertake at least “minimum level” due diligence with respect to each crowdfunding project and its owners. This must include (i) an assessment of criminal records and infractions relating to commercial, insolvency, fraud or money laundering issues; (ii) credit risk assessment of the project or project owner. In addition, the platform shall comply with: (i) informative obligations and key investment information sheet (KIIS), while the project owner is responsible for drafting the KIIS, the platform and its intermediaries are required to distribute it; (ii) platforms must carry out an appropriateness test to assess unsophisticated investors, which is required to be based on an investor’s experience, financial situation, basic understanding of the investment risks and a simulation of the investor’s ability to bear losses; (iii) a pre-contractual “reflection period” applies to all offers to fund projects made by unsophisticated investors (so defined in detail in the Crowdfunding Regulation). The reflection period applies for four calendar days, during which an investor may revoke his or her offer. This period differs from that applying to the distance financial services regime (15 days).

 6.                 Conclusions

The Crowdfunding Regulation is expected to reduce costs and simplify the regulatory regime which should generate a positive impact on the market. To this end, it is important that such benefits are not paralysed by Member States’ implemented rules in terms of restrictions or limitations. In addition, Member States should adjust the applicable provisions to the crowdfunding to create competitive players across the EU. For instance, specific provisions are provided to the tax regime which applies in Italy to investors (individuals) raising funds through lending based crowdfunding platforms. However, such special regime does not currently apply also to Italian investors raising funds through lending-crowdfunding platforms based in other Member States.