What Is The EU’s Crowdfunding Regulation And What Does It Mean For Initial Coin Offerings?
The Commission’s proposal for a crowdfunding regulation will provide a harmonised regulatory framework for crowdfunding service providers.
If passed, the Commission’s proposal for a crowdfunding regulation will provide a harmonised regulatory framework for crowdfunding service providers to passport their services across the European Union (“EU”). In response to the proposal, the European Parliament indicated that if the Commission sought to regulate Initial Coin Offerings (“ICOs”) then it should submit a new proposal rather than regulate ICOs under the proposed crowdfunding regulation.
This article does not constitute legal or any other professional advice and is not intended to be relied upon as such.
Crowdfunding Regulation Forthcoming
If passed, the Commission’s proposal for a crowdfunding regulation will provide a harmonised regulatory framework for crowdfunding service providers to passport their services across the European Union (“EU”).
The proposal is noteworthy for two reasons. Firstly, the proposal will apply to crowdfunding projects less than €8,000,000 in consideration over a 12- month period and will enable crowdfunding service providers authorised under the regulation to passport their services across the EU.
And secondly, in response to the proposal, the European Parliament indicated that if the Commission sought to regulate Initial Coin Offerings (“ICOs”) then it should submit a new proposal rather than regulate ICOs under the proposed crowdfunding regulation.
Accordingly, it is unlikely that the final crowdfunding proposal will regulate ICOs, but rather a bespoke proposal introduced by the Commission will. For now, as the proposal heads to the European Council for a first reading, crowdfunding service providers may want to consider whether seeking authorisation under the regulation outweighs the costs associated therewith.
What is the Proposed Crowdfunding Regulation?
In response to the divergent national regulatory landscape in the EU, the Commission proposed a draft regulation to provide a harmonised regulatory framework. Citing how important crowdfunding is for small and medium-sized enterprises, the Commission noted that a harmonised regulatory structure would aid in the facilitation of capital access in the EU. Accordingly, the proposal is part of the EU’s broader Capital Markets Union projects that aims to create a coherent regulatory ecosystem for raising capital in the EU.
The objective of the Commission’s crowdfunding proposal is to provide a legal framework for lending and investment crowdfunding platforms across the EU with the exception of donation or reward-based crowdfunding platforms. In particular, the crowdfunding proposal provides a mechanism for crowdfunding service providers to apply for authorisation from the European Securities and Markets Authority to passport their services across the EU. If passed, this would facilitate an alternative channel for capital formation from the traditional banking sector.
The regulation applies to legal persons that seek authorisation under the regulation to provide crowdfunding services. A crowdfunding service means the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of any of the following:
(i) the facilitation of granting of loans;
(ii) the placing without firm commitment of transferable securities issued by project owners and the reception and transmission of client order with regard to those transferable securities.
However, the proposed crowdfunding regulation will not apply to crowdfunding offers with a consideration of more than €8,000,000 per crowdfunding offer calculated over a 12-month period.
Crowdfunding service providers that seek authorisation under the proposed crowdfunding regulation will have to adhere to stringent consumer protection obligations encompassing entry knowledge tests and the provision of key investor information sheets. The requirement to have entry knowledge tests requires the crowdfunding service provider to assess a prospective investor’s investment acumen and provide a risk warning where appropriate. The obligation to provide a key investor sheet requires crowdfunding service providers to disclose key information in relation to every crowdfunding offer in order for investors to make informed investment decisions. Together, both obligations ensure an adequate level of consumer protection.
What Implications Arise for Cryptocurrencies?
In response to the Commission’s crowdfunding proposal, the European Parliament acknowledged that ICOs constitute a crowdfunding mechanism. With the current EU regulatory status of ICOs opaque, the European Parliament highlighted that a new regulatory framework for ICOs could mitigate current market abuse and consumer protection issues. However, instead of bringing ICOs within the scope of the proposal, the European Parliament suggested that the Commission submit a fresh proposal for the regulation of ICOs. Accordingly, it is unlikely that the proposed crowdfunding regulation will regulate ICOs, but rather a future bespoke regulatory framework will.
The exclusion of ICOs from the ambit of the proposed regulation is interesting given that ICOs at EU level are still not expressly regulated. With the European Parliament citing regulatory arbitrage and supervision of crowdfunding platforms as reasons for regulating crowdfunding service providers, excluding ICOs from the proposed crowdfunding regulation seems precarious as ICOs suffer from the same issues. Not including ICOs within the fabric of the proposed crowdfunding regulation has its negatives and positives.
The obvious downside is that ICO issuers in the EU will still have no regulatory framework to work under and will have to navigate a fragmented regulatory landscape. On the flip side, as per the European Parliament’s opinion, any regulation introduced to regulate ICOs will likely be the result of a bespoke proposal. Targeted regulation rather than a simple add on to a proposal may be more beneficial for the ICO space as the Commission can take the time to make an impact assessment. Mapping out the financial, regulatory, and economic factors will ultimately lead to a more thought out and robust regulatory scheme.
Despite the exemption of ICOs from the proposed crowdfunding regulation, the consumer protection obligations imposed on crowdfunding service providers illuminates a possible regulatory path for ICOs. Requiring crowdfunding service providers to assess investors’ commercial acumen and disclosing key information on the crowdfunding project, may spill over to future ICO regulation. As the same consumer protection concerns underpin ICOs, it seems reasonable that future EU regulation will impose similar obligations on ICO issuers. Indeed, because ICOs target predominately retail investors it makes sense from a regulatory perspective to include these types of provisions in a regulatory proposal. Minimising information asymmetries between investors and ICO issuers will alleviate the abundance of fraud and misrepresented ICO schemes that have plagued the ICO ecosystem. While such provisions are merely hypothetical at this point in time it is quite reasonable that an EU proposal on ICOs will include consumer protection regulations.
No ICO Regulation For Now
The Commission’s crowdfunding proposal attempts to harmonise the current patchwork of national regulatory regimes. Crowdfunding service providers should welcome this change as it provides a mechanism to provide their services under a passport regime across the EU. Those that find the costs of complying with the stringent consumer protection obligations too onerous will take solace that the proposed regulation will not replace national regulatory schemes.
It is also noteworthy that the European Parliament left the door open for the Commission to propose a separate proposal for the regulation of ICOs noting that the current unregulated status has fostered market abuse and consumer protection concerns. Time will tell whether the Commission takes initiative in that vein, but for now, the proposal will not contain provisions to bring ICOs within the scope of the proposal. Despite that finding, the consumer protection obligations imposed in the crowdfunding regulation illuminates the types of regulatory provisions we may see in a future EU ICO regulation, as ICOs and crowdfunding platforms share similar features and regulatory issues.
