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European Commission Crowdfunding Regulation

The European Commission published a draft new regulation on European crowdfunding service providers for business on 8th March 2018. Platforms active in both the loan-based crowdfunding and investment-based crowdfunding markets would be subject to the new rules, which would be directly applicable. The proposals include requirements on acting in the best interests of clients, complaints handling and management of conflicts of interest, as well as duties to disclose certain information to clients and records management. Details are here.

Under the proposal, a crowdfunding service provider will be able to choose to either provide or continue providing services on domestic basis under applicable national law (including where a Member State chooses to apply MiFID II to crowdfunding activities, or can seek authorisation from ESMA to provide crowdfunding services under the proposed Regulation. In the case of authorisation under EU rules, authorisation covers both the provision of services in a single Member State and on a cross-border basis. If the provider chooses to apply the EU rules, authorisation under the applicable national rules is withdrawn. Authorisation granted under this Regulation would allow crowdfunding service providers to provide crowdfunding services under a passport across all Member States.

ESMA will, within two months from the receipt of a complete application, assess whether the prospective crowdfunding service provider complies with the requirements set out in this Regulation and will adopt a fully reasoned decision granting or refusing authorisation as a crowdfunding service provider. ESMA will have the right to refuse authorisation if there are objective and demonstrable grounds for believing that the management of the crowdfunding service provider may pose a threat to its effective, sound and prudent management and business continuity and to the adequate consideration of the interest of its clients and the integrity of the market.

Given the risks associated with crowdfunding investments, ESMA will impose a threshold for a maximum consideration for each crowdfunding offer. That threshold will be EUR 1,000,000.

The use of legal structures, including special purpose vehicles (SPVs), to interpose between the crowdfunding project and investors, will be strictly regulated and permitted only where it is justified.

Crowdfunding service providers will be prevented from having any financial participation in the crowdfunding offers on their crowdfunding platforms, and shareholders holding 20% or more of share capital or voting rights, managers and employees, or any person directly or indirectly controlling crowdfunding platforms, will not be able to be clients in relation to the crowdfunding services offered on that crowdfunding platform.

Where a crowdfunding service provider carries out payment services in connection with its crowdfunding services, it will need to be authorised also as a payment institution.

Crowdfunding service providers will not be able to provide any discretionary or non-discretionary matching of buying and selling interest, because that activity requires an authorisation as an investment firm or as a regulated market.

Crowdfunding service providers will, before giving prospective investors full access to their crowdfunding offers, assess whether and which crowdfunding services offered are appropriate for the prospective investors, and will do so every two years. Service providers will at all times offer prospective investors and investors a simulation of their ability to bear loss, calculated as 10% of their net worth.

Crowdfunding service providers will provide prospective investors with a key investment information sheet drawn up by the project owner for each crowdfunding offer.

Alongside the draft new regulation, the Commission has also set out a further legislative proposal to exempt crowdfunding service providers from the obligations of the EU’s MiFID II regime.

The Commission has commented that to date, 11 EU countries, including the UK, have developed bespoke rules on crowdfunding at national level. However, it said that crowdfunding platforms struggle to operate on a cross-EU basis because of the “compliance and operational costs” involved in conforming to the various national rules. The national rules on crowdfunding are tailored to “the characteristics and needs of local markets and investors, which results in differences of how the rules are designed and implemented with respect to the conditions of operation of crowdfunding platforms, scope of permitted activities and licencing requirements”, it also commented.

How can Thistle help you?

Thistle will continue to keep this area under review and will issue further updates where necessary. Please contact us if you need assistance in relation to any of these issues.