EU Crowdfunding Regulation

Scope

The Regulation establishes a harmonised legal framework for crowdfunding service providers (CSPs) operating a public digital platform in order to facilitate the matching of prospective investors or lenders with businesses (the Project Owners) that seek funding by way of loans (lending-based crowdfunding) or acquisition of transferable securities (investment-based crowdfunding).

The Regulation does not apply to:

i. Other types of crowdfunding, such as donation-based crowdfunding (where the funders do not receive any consideration) or reward-based crowdfunding (where the funders receive a non-financial consideration, like a copy of the project result);

ii. Crowdfunding offers with a consideration of more than €5,000,000 over a period of 12 months (which offers will instead be subject to the rules set out in MiFID II and Regulation EU 2017/1129 (the Prospectus Regulation));

iii. Crowdfunding offers where Project Owners are consumers.

In order to avoid a situation where the same activity would be subject to multiple authorisations within the EU, the Directive excludes legal persons authorised as CSPs from the scope of MiFID II.

Authorisation and transitional period

A CSP falling within the scope of the Regulation will need to be authorised by the national competent authority (NCA) where it is established and, once authorised, it will be able to passport its services in other Member States.

The Regulation contains a transitional period for CSPs that are already engaged in activities that will require authorisation under the Regulation. Those CSPs can continue to engage in those activities on a transitional basis until 10 November 2022, following which they will only be able to engage in those activities if they have been authorised to do so by their NCA.

Operational requirements

The Regulation contains organisational and operational requirements which include:

• Restrictions on inducements (CSPs shall not pay or accept any remuneration, discount or non-monetary benefit for routing investors’ orders to a particular crowdfunding offer made on their platform or a third-party platform);
• Credit risk assessment of the crowdfunding project and Project Owner;
• Minimum due diligence of the Project Owner (no criminal record and no establishment in a non-cooperative jurisdiction or high-risk country);
• Setting up of a complaints handling procedure;
• Conflicts of interests avoidance and prevention rules;
• Specific rules when the CSP is providing services to investors consisting in individual portfolio management of loans.

Investor protection

The Regulation provides investor protection measures, which vary depending on whether the investor would qualify as “sophisticated” or “non-sophisticated”, according to the criteria and procedure set forth in Annex II of the Regulation.

These measures include:

• Fair, clear and not misleading marketing communications;
• Entry knowledge test and simulation of the ability to bear loss for non-sophisticated investors;
• A 4-day pre-contractual reflection period for non-sophisticated investors;
• A Key Investor Information Sheet (KIIS), to be provided by the CSP, but prepared by the Project Owner, to all prospective investors, which must contain the information set out in Annex I and the disclaimer and risk warning set out in Article 23 of the Regulation. The Project Owner is responsible for the information set out in the KIIS, but the CSP must have procedures in place to verify that information and must raise omissions, inaccuracies or mistakes with the Project Owner. The KIIS does not need to be approved by the NCA;
• Bulletin boards. A CSP may operate a bulletin board which allows clients to advertise interest in buying and selling loans, transferable securities or admitted instruments for crowdfunding purposes that were originally offered on the crowdfunding platform, provided that the bulletin board shall not be used to bring together multiple third-party buying and selling interests in a way that results in a contract. In other words, the bulletin board may not consist of a matching system that executes client orders on a multilateral basis (i.e. operating a MTF or OTF within the meaning of MiFID II).

Payment service provider (PSP) required

A PSP will need to be involved. A CSP may itself, or through a third party, provide payment services provided that the CSP or the third party is licenced as a PSP.

CSPs subject to AML directive?

The European Commission will assess the necessity and proportionality of subjecting CSPs to obligations to comply with national law implementing Anti-Money Laundering Directive (Directive (EU) 2015/849).