New EU Rules for Crowdfunding platforms (2020)
The EU market for crowdfunding is currently underdeveloped as compared to other major world economies. One of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders is the lack of common rules across the EU. This raises compliance and operational costs and prevents crowdfunding platforms from expanding.
Why is EU crowdfunding legislation necessary?
Currently, the regulation of crowdfunding in the EU is still primarily based on national legislation. To fix the problem of crowdfunding platforms having to comply with different regulatory regimes based on national legislation, the Commission suggested an optional EU licensing regime, where platforms must deal with only one set of rules in both their home market and the other Member States without further authorization.
The current lack of uniform crowdfunding rules across the EU results in legal uncertainty and discourages investment in projects in a different country. This has limited opportunities for companies that could benefit from investments by a large number of people, especially when they operate in smaller markets.
What is crowdfunding?
Start-ups and innovative companies often have difficulty accessing funds via traditional means such as bank loans. Crowdfunding platforms enable them to connect to and raise funds from multiple small investors. Crowdfunding is a growing alternative form of financing that connects those who can give, lend or invest money directly with those who need financing for a specific project.
Crowdfunding is split between four main types of crowdfunding:
- Lending-based crowdfunding (peer-to-peer lending/crowdlending)
- Equity-based crowdfunding (also referred to as investment-based crowdfunding)
- Reward-based crowdfunding
- Donation-based crowdfunding
The new regulation is aimed at crowdfunding services that provide a financial return for investors, which means that the crowdfunding types affected are lending-based crowdfunding and equity-based crowdfunding.
What changes will the new regulation bring?
Crowdfunding platforms operating in more than one EU country will have to comply with a single set of basic rules instead of different rules in each country. The directive aims to broaden access to finance for small companies.
The two main objectives of the new regulation are to:
- Enable European Crowdfunding platforms to scale up by making it easier for crowdfunding platforms to operate across the EU.
- Increase investors’ trust to engage in platforms operating across borders by increasing transparency and strengthening the integrity of platforms.
Main changes are:
- A single set of rules will apply to crowdfunding services in the EU, up to EUR 5 000 000
- Strict rules to protect investors from financial losses
- Member states are responsible for authorizing and supervising crowdfunding providers
The new rules aim to help crowdfunding services to function smoothly in the internal market and to foster cross-border business funding in the EU, by providing for a single set of rules on crowdfunding services.
The uniform set of criteria will apply to all European Crowdfunding Service Providers (ECSP) up to offers of EUR 5 000 000, calculated over a period of 12 months per project owner.
How will the new rules protect investors?
One of the major risks of crowdfunding is that investment decisions are often not based on data and may be influenced by emotions. Small companies going bankrupt or delays in delivering goods are among the most common problems that investors do not predict.
The objective is that crowdfunding service providers must provide investors with clear information about intrinsic risks and charges they may occur, including insolvency risks and project selection criteria. Investors will be provided with a “key investment information sheet” (KIIS) crafted by the issuer for each crowdfunding offer or at the platform level to maintain transparency and boost investor protection.
When will the rules enter into force?
As there was no proposal to reject the Council’s positions and no amendments tabled, the text of the crowdfunding legislation has been adopted. The European Parliament approved new rules on 5 October 2020. The new rules will start to apply one year after its publication in the Official Journal of the EU.
The new rules seek to help crowdfunding services to function smoothly in the internal market and to foster cross-border business funding in the EU. The rules will apply to all European Crowdfunding Service Providers (ECSP). ECSP’s will be able to compete across the European Union and provide cross-border crowdfunding services via a notification procedure.
How will the supervision be carried out?
Supervision will be carried out by national competition authorities and with the European Securities and Markets Authority (ESMA) coordinating cooperation between EU member states. A crowdfunding platform seeking approval under ECSP would need to request authorisation from the national competent authority (NCA) of the member state in which they are established but will be able to provide their services cross-border into other EU member states.