Our firm specialises in assisting clients who aim either to provide crowdfunding services or to raise finance through crowdfunding platforms which is an increasingly popular and innovative method for funding start-ups and small to medium-sized enterprises (“SMEs”). Through these platforms, entrepreneurs showcase their projects to the public via a web-based “crowdfunding platform,” inviting numerous individuals to contribute relatively modest sums. The most common types of crowdfunding models are:
Lending-Based Crowdfunding;
Investment-Based Crowdfunding;
Donation-Based Crowdfunding.
Lending-Based Crowdfunding services provided by a Crowdfunding Service Provider consist of the facilitation of granting of loans to crowdfunded projects. As an example, these facilitating services can take the form of presenting crowdfunding offers to investors, and pricing or assessing the credit risk of crowdfunding projects or project owners. Lending-Based Crowdfunding is essentially an agreement between the investor and the project owner, whereby the former makes available to the latter an agreed amount of money and for an agreed period of time. Then, the project owner obliges itself to repay that loaned amount to the investor, together with the accrued interest.
Additionally, the Crowdfunding Service Provider may also provide individual portfolio management of loans services, whereby the Crowdfunding Service Provider allocates a pre-determined amount of funds of a particular investor to one or more crowdfunding projects. In this process, the investor provides the Crowdfunding Service Provider with a number of criteria that the crowdfunding projects must fulfil, in order for those projects to be financed by the investor’s funds.
Investment-Based Crowdfunding services provided by a Crowdfunding Service Provider consist of the placing, without a firm commitment basis, of transferable securities (such as shares and bonds) and admitted instruments for crowdfunding purposes. Our firm assists clients who intend to provide Investment-Based Crowdfunding services, where investors invest in a project by receiving (in the most general of cases) shares in the company of the proposed project.
The Donation-Based Crowdfunding platforms are usually operating as a rewards-based system, where the investors or donors may support (especially donate) a project or a product by contributing relatively small amounts of money to the owner of the campaign which is advertised on the online Donation-Based Crowdfunding platform. Moreover, this platform allows to the idea, charity, or start-up business as part of the campaign to solicit funds in the form of donations, or exchange for specified rewards. As the Donation-Based Crowdfunding is basically not regulated as a financial service, our law firm provides assistance on company incorporation for a Donation-Based Crowdfunding platform operator and in other platform operation legal requirements and advises on potential regulatory exemptions that may apply.
In 2021, the European Crowdfunding Service Providers Regulation (“ECSP” or the “Regulation”) entered into force, providing a harmonised regulatory framework throughout the EU for the provision of crowdfunding services. This harmonised framework has also made it easier for authorised Crowdfunding Service Providers to passport their crowdfunding services across the EU, since it eliminated the different legal regimes impeding cross-border services. The ECSP regulates Lending-Based Crowdfunding and Investment-Based Crowdfunding services, therefore, other forms of crowdfunding such as Donation-Based Crowdfunding remain as of yet unregulated.
The core purpose of the ECSP is to provide investor protection. The Regulation obliges Crowdfunding Service Providers to differentiate between sophisticated investors and non-sophisticated investors, offering higher protection to the latter. Our firm can assist clients in the authorisation process with the MFSA, together with their compliance to the ongoing requirements and obligations under the Regulation.
Once authorised, ECSPs must comply with stringent organisational, governance, and conduct-of-business requirements, including conflict-of-interest policies, safeguarding clients’ funds, transparent fees, suitability assessments, key investment information documents, risk disclosures, and client fund segregation
Following this milestone, in 2023, the Crowdfunding Service Providers Act was enacted to implement the relevant provisions of ECSPR. The MFSA also published Crowdfunding Rules to be read in conjunction with the ECSPR (including any Implementing and Regulatory Technical Standards issued therefrom).
If you intend to provide crowdfunding services or intend to raise funding for your projects in an alternative and innovative way through a crowdfunding platform, we offer the following services in an efficient and professional manner:
