Investment-based crowdfunding, which is a relatively new concept within the financial services, could be the next gold-mine on Malta’s doorstep. With the Financial Services sector in Malta always reaching new heights, the MFSA was pro-active in issuing a Discussion Paper on investment-based crowdfunding last November, and with the deadline for submission of comments elapsing last March, the MFSA has now published its position regarding the issues addressed through the Discussion Paper. In a nutshell, the MFSA’s position and that of the major stakeholders in the field seems to correspond and is aimed at attracting a new class of Investors and Issuers into the Maltese Market. The feedback statement emerged with a final provisional position on 8 major issues:
1. Typical Activity of Investment-based Crowdfunding Platform – Licensing Requirements
The MFSA in the Discussion Paper asked respondents regarding the typical activity of an investment-based crowdfunding platform and whether there are other investment services which are relevant to crowdfunding, and on the issue of how the investors’ funds are handled by the platform operators. The respondents’ answers mainly asserted that albeit being the typical service for a crowdfunding platform, the service of reception and transmission of orders is not the only existing model used on the market and therefore flexibility on the part of the MFSA is crucial. On the issue of controlling investors’ money, the respondents claimed that funds are kept in custody by the platform under very specific terms and that funds are only made available to the issuer once the project target is reached or else returned to the investor.
Following the respondents’ comments, the MFSA came to the conclusion that a Category 2 License would be applicable since investment-based crowdfunding consists of the platform acting as an intermediary between the investors and the issuers, with the Platform controls clients’ money without taking ownership of the funds. The MFSA was also convergent with the respondents on the issue that Payment Services Providers should be allowed to participate by processing payments although the platform should still retain control over the funds and exercise discretion as to when the funds are transferred.
2. MiFID and Passporting Rights
The Discussion Paper presented the requirement that the platform operator would need to acquire an investment services license and have its head office and registered office in Malta, and therefore the Operator would fall within the scope of the MiFID and would benefit from the passporting rights to carry its activities throughout the EU. This approach was agreed to by all parties and was further deemed crucial to attracting investment in Malta. The respondents opined that it is more onerous on the operator to comply with an un-harmonised national regime rather than MiFID, but suggested that a lighter minimum capital requirement than the existing MiFID requirement should be in place to allow start-ups to grow their business, perhaps through obtaining the optional exemption from Article 3 of the MiFID.
The MFSA acknowledged that Member States could opt for such exemption but opined that this would exclude the firms from the passporting rights afforded by MiFID. Furthermore, firms would only be available to provide the investment services of reception and transmission of orders without the ability to hold clients’ money, which renders such option unfeasible. The MFSA also referred to ESMA’s comments which reported that Member States which have developed regimes under the optional exemption have incurred additional costs.
3. Private or Public Companies
The issue of whether investment-based crowdfunding should be available to both public and private companies, particularly since private companies have a limitation of a maximum number of fifty shareholders, was addressed in the Discussion Paper. The respondents suggested three ways to get around the issue since the average number of investors in such investments ranges between one hundred fifty to three hundred. The respondents suggested a derogation from Article 127 of the Companies Act or else the MFSA should set up a new type of a limited liability company similar to the SAS in France. The third suggestion was the use of a nominee to have access to more than fifty shareholders.
The MFSA did not agree with these suggestions and opined that in terms of Article 127(2) of the Companies Act, for the purposes of determining the status of a company as being private or public company it is the actual beneficial owners of the shares of company that are taken into consideration, and any nominee or trust relationship is disregarded. Therefore, the nominee suggestion must be looked through in this regard. The MFSA believes the current legal framework still provides private companies the framework to benefit from an investment-based crowdfunding regime and can serve as a springboard to other sources of funding.
4. Limitations on Investable amounts
After the Discussion Paper’s proposed safeguards on investable amounts and maximum project size, the respondents agreed that certain limitations should be in place and suggested another cap on the number of projects an individual may invest during one calendar year as well as a cap on the percentage investment per individual depending on the income of the investor. As a maximum project size, the respondents suggested a cap of five million Euros (€5,000,000).
The MFSA presented a list of limitations in the feedback statement which are being considered;
A. An investor cannot invest more than five thousand Euros (€5,000) over a period of twelve months in one issuer listed on an investment-based crowdfunding platform;
B. An offer of securities made on an investment-based crowdfunding platform cannot exceed the value of five million (€ 5,000,000) over a period of twelve months;
C. an investor cannot invest more than twenty percent (20%) of his net annual income through an investment-based crowdfunding platform over a period of twelve months;
D. Measures A. and C. above shall not apply to professional clients under MiFID.
5. Location of the Issuer, due diligence and business plan
The Discussion Paper proposed that all investment-based crowdfunding platforms must be limited liability companies formed and registered in Malta. The respondents expressed their concerns regarding such restriction based on location and opined that a wider geographical catchment would allow platforms to work more efficiently. The respondents further noted that allowing free movement of capital would benefit the local Small-Medium Enterprises and most importantly the fact that a platform is greatly dependant on the ability to attract a significant volume of issuers. Following such recommendations, the MFSA is considering that:
A. Issuers on investment-based crowdfunding platforms should not be restricted to Maltese Companies but will initially be open to Maltese and EU registered companies, although the Authority may eventually consider whether third-country registered issuers could also be allowed to list provided they are not incorporated in countries blacklisted by the Financial Action Task Force’s [FATF];
B. As part of a minimum due diligence process on the project, the Platform will have to ensure that prospective issuers admitted to listing on a Maltese investment-based crowdfunding platform satisfy the following conditions:
i. the applicant is duly incorporated or otherwise validly established according to the relevant laws of its place of incorporation or establishment;
ii. the applicant is operating in conformity with its memorandum and articles of association or equivalent constitutional documents;
iii. the shares of the application are issued in conformity with the law of the applicant’s place of incorporation and duly authorised according to the requirements of the applicant’s memorandum and articles of association or equivalent constitutional document; and
iv. the applicant has presented a feasible business plan which includes clear funds targets, information on how the funds collected will be applied as well as a summary of the sustainability of the company as a going concern.
6. Prospectus Requirement – Summary Information Document
It is almost assumed that a certain disclosure requirement regarding the project must be in place and in the Discussion Paper it was proposed that such disclosure requirements should be tailor-made to crowdfunding even when the investment is exempt from the general prospectus requirement. The respondents agreed that some sort of disclosure requirements must be in place and opined that the degree of disclosure should be proportionate and kept to the minimum but should contain enough information so as the investor understands the service being provided, the identity of the issuer and the nature of the instrument being offered. Some respondents believe that the disclosure requirements under the MSE Prospects programme are suitable and should be applied in this case.
In the feedback statement, the MFSA established that the information which must be provided is categorised in three and should include details about the identity of the License Holder, the services and on the financial instrument being offered. The MFSA is also considering imposing supplementary requirements for investment-based crowdfunding platforms which will be incorporated in the Conduct of Business Rulebook. The operator is required to ensure that the investor confirms to have read the Summary Information Document. The MFSA believes that issuers should only be allowed to list non-complex instruments on the Platforms since such structures are open to retail investors. The platform operator will be required to draw the Summary Information Document divided into four sections with the following information;
i. General Risks Warnings
This section should include certain disclosures including those on the propensity of failure of small businesses, the illiquid nature of the securities and a statement that the information document has not been vetted by MFSA.
ii. Information obtained from Issuer relating to its activities
This section should include information on the activities carried out by the Company, including the disclosure of the main risk factors, the general terms of the offer, details of the shares and information on the assets and liabilities of the Company. This section shall also disclose any limitations to the subsequent transfer of securities.
iii. Information on the Platform and the services it offers
This section should include disclosure on the procedure for collecting and sending of subscription forms and of documents filled by the investors, information on the procedures of reporting and complaints methods and protection of the investors.
iv. The amount to be charged to the investor
This section should include the amount to be charged to the investor, broken down into the price of the offer and the fees charged for the service by the platform and any other service providers.
7. Anti-Money Laundering
Regarding the Anti-Money Laundering requirements to be in compliance with Maltese and European legislations, the respondents noted that no major concerns exists in the investment-based crowdfunding sector which is not present in other investment services. The respondents proposed using the risk-based approach which features in the 4th AMLD and the ability to place reliance on third parties, such as payment service providers which carry out due diligence processes.
The MFSA emphasised the importance of continuing compliance with relevant AML legislations, regulations and any Guidance Notes issued by the FIAU, together with the required appointment of an MLRO, distinct from that of a Compliance Officer. The MLRO would ensure the proper procedures are in place as set out in the Implementing Procedures as to the identification of the customers through the retainment of identification documents. The issue of co-operation of duties and reliance on third parties will be decided by the FIAU rather than the MFSA. The MFSA is also considering the possibility of issuing a Guidance Note on the Fit and Proper Test Standards for investment-based crowdfunding issuers.
8. Appropriateness Test
The Discussion Paper featured the issue of a requirement for a platform operator to assess the appropriateness of the instrument for the client. Respondents opined that only the same issues which are present for the whole industry feature for crowdfunding and no major difficulties seem to be present in this regard. The respondents recommended that the appropriateness test should be allowed to be done online. While the MFSA has no objection to licence holders performing the appropriateness test online, it will not allow a platform to rely on self-declarations by investors with respect to their knowledge and such assessment remains solely within the responsibility of the platform operator as the licence holder.