EU Proposal in Relation to Crowdfunding Service Providers for Business

On March 8th 2018, the European Commission released a new proposalfor a European Regulation on European Crowdfunding Service Providers (“CSP”) for Business (the “Proposal”). The Proposal has come about due to the current lack of consistency across the European Union in the treatment of CSPs, and the need to improve access to finance for innovative companies, start-ups and other unlisted firms.

The creation of a harmonised legal base through a regulation would mean that an investment or a lending based crowdfunding platform would be able to provide cross border services through a form of passporting. The Proposal only applies to “crowdfunding services” which it defines as “the matching of business funding interest of investors and project owners through the use of a crowdfunding platform and which consist 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 orders… with regard to those transferable securities.”

Donation and reward based crowdfunding are excluded from the scope of the Proposal. The Proposal only relates to transferable securities and not to other types of financial instruments.

The draft regulation proposes to establish uniform requirements for the operation and organisation of CSPs as well as their authorisation and supervision. It does not apply to:

  1. Crowdfunding services that are provided to consumers;
  2. Crowdfunding services that are provided by investment firms or natural or legal persons in accordance with national law; and
  3. Crowdfunding offers with a consideration of more than EUR 1 million per crowdfunding offer calculated on a twelve month basis.

In order to qualify as a CSP in the European Union in accordance with the Proposal, the CSP must receive prior approval of the European Securities and Markets Authority (“ESMA”). The application will include details on the procedures in place in relation to administration and accounting processes, proof of the provider’s experience and all standard regulatory documents.

Another facet of the Proposal is the introduction of an obligation for CSPs to provide a key investment information sheet (the “KIIS”) to prospective investors. Within the KIIS, it is suggested to include information such as the risk to investors and the lack of guarantee by any authority. Additionally, it also notes that CSPs will be required to run an “entry knowledge test” on every prospective investor in order to properly determine that investor’s ability to bear loss, and sets a maximum limit of possible investment of 10% of the investor’s net worth. These tests should be completed at least every two years. The CSP must also provide for its clients, an appropriate procedure and outlet for complaint handling.

CSPs shall inform their clients whether asset safeguarding services are provided by them or by a third party and whether payment services and the holding and safeguarding of funds are provided by the CSP or a third party provider.

ESMA will maintain a public registry of CSPs, which would include, among other things, information on any withdrawals of authorisation for a period of five years as well as any sanctions that have been imposed on a CSP or its managers. ESMA also may impose fines (maximum of 5% of the annual turnover of the CSP) in the case of non-compliance.

As this is only in its proposal phase, the draft regulation could still see a lot of changes, but it is clear that overall there is an inherent intention at the Commission to expand and create unison in the crowdfunding services market in Europe.