Crowdfunding is an increasing established form of alternative financing for start-ups and small and medium-sized enterprises. However, till 2021, the sector remained unregulated throughout the European Union (“EU”).
Due to the lack of regulatory framework, EU Member States sought to implement their own regulatory regimes on a national level. Although this allowed such Member States to tailor crowdfunding rules to their needs, the differing regimes and licensing requirements between Member States impeded cross-border crowdfunding services. As a result, crowdfunding platforms found impediments from efficiently growing their services due to high compliance and operational costs.
To do away with this obstacle, the EU sought to implement the Regulation on European Crowdfunding Services Providers (the “ECSPR”), in order to lay down uniform and harmonised rules across the EU. The funding by investors under the regulated ECSPR can take the form of loans or the acquisition of transferable securities or of other admitted instruments, for the crowdfunding purposes. In other terms, the ECSPR regulates the provision of the following services:
- Investment-Based Crowdfunding;
- Lending-Based Crowdfunding.
Mainly, the ECSPR allows for Crowdfunding Service Providers to passport their services across the EU based on harmonised rules, facilitating the cross-border provision of services with a single authorisation recognised across the EU. It also provides harmonised and clear disclosure requirements for the project owners and the Crowdfunding Service Providers, together with rules on governance and risk management for Crowdfunding Service Providers. Other emerging key developments from the ECSPR are the following:
- Harmonised set of rules for all European Crowdfunding Service Providers for offers of up to EUR five (5) million in crowdfunding per project owner, over a period of twelve (12) months. Those offers exceeding the UER 5 million threshold will not fall under the ECSPR’s scope but will fall under the MiFID II/MiFIR regulatory framework;
- Harmonised set of rules for investor protection, including disclosure, disclaimer, and recommendation requirements for both the project owners/s and the Crowdfunding Service Provider on every crowdfunding project presented on the crowdfunding platform. Additionally, the ECSPR provides that a suitability assessment must be carried out for every investor, to assess their understanding of financial products and their ability to bear losses.
Crowdfunding involves three (3) types of actors: the project owner who needs the funding, the investors who fund the proposed project, and an intermediate organisation in the form of a Crowdfunding Service Provider. The Crowdfunding Service Provider brings together project owners and investors, through an online platform operated by the Crowdfunding Service Provider.
The ECSPR was adopted on the 10th November 2020, and entered into applicability twelve (12) months later, on 10th November 2021. Furthermore, existing crowdfunding platforms are granted a transition period of twenty-four (24) months, that is, till 10th November 2023, in order to apply for a new licence. This innovative legislative development is expected to give a boost to the crowdfunding sector.
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