On December 18th 2014 the European Securities and Markets Authority ("ESMA") published an Opinion (the "Opinion") and an Advice (the "Advice") on investment-based crowdfunding.
The Opinion is addressed to national competent authorities and its aim is to build a common understanding of the main business models of investment-based crowdfunding and the related risks and issues. It clarifies which EU legislation is applicable to the typical business models and under which conditions to provide a basis for consistent supervision.
The Opinion sets out the various actors and business models applicable to investment-based crowdfunding and then goes on to assess the risks and issues that should be considered by regulators in assessing such business models. It is noted that while there are some platforms keen to be within an appropriate regulatory framework in order to increase confidence among users and enable pan-European crowdfunding there are others which structure themselves so as to be outside any applicable regulatory regime.
Regulators need to consider the issues in relation to both the issuance of securities and their distribution. Thus not only the crowdfunding platform may be subject to regulation but also the issuer of the securities.
The Opinion then goes through the various legal provisions which may potentially be applicable to crowdfunding. This analysis covers, inter alia, the Prospectus Directive, MIFID, the Market Abuse Directive, the AIFMD, the EuVECA Regulation and the Distance Marketing of Financial Services Directive.
The Advice is addressed to the EU Institutions - the Commission, Parliament and the Council and highlights gaps and issues in the current applicable regime where policymakers could consider taking action. These gaps and issues include the followings.
The impact of the Prospectus Directive thresholds.
Currently there are incentives for project sizes to be kept below certain thresholds and for the projects to be limited to certain types of investors in order to avoid coming within the full scope of the Prospectus Directive.This can reduce the viability of the project and reduce the pool of potential investors.ESMA considers that the Commission should consider further the extent to which such points are a problem and options for potential solutions.
Capital Requirements and the use of the MIFID optional exemption.
Certain national regimes have considered that the crowdfunding platforms fall within the MIFID exemption thus dis-applying initial capital requirements but also removing the possibility of relying on the EU passport.In addition as business models evolve there could be situations where an activity may in practice be within the scope of multiple requirements.ESMA feels consideration should be given as to how to solve these issues including dis-applying or reducing cumulative capital requirements.
The potential development of a specific EU crowdfunding regime for those platforms currently operating outside the scope of MIFID.