In today's dynamic financial landscape, accessing funding through traditional routes has become increasingly challenging and costly. As a result, crowdfunding has emerged as a popular alternative for entrepreneurs and small to medium-sized businesses seeking capital.

Crowdfunding platforms, operating through digital means, offer investment opportunities to a wide range of investors, providing numerous benefits such as marketing exposure, validation of business ideas, and access to valuable insights and information. Recognizing the need for safeguards and common rules, the European Union (EU) introduced the European Crowdfunding Service Providers for Business Regulation (Regulation 2020/1503) (Crowdfunding Regulation), aimed at establishing authorisation requirements and harmonized rules for crowdfunding service providers within the EU.

This article examines the recent developments and updates regarding crowdfunding service providers in Cyprus, focusing on their regulatory framework and potential impact on the local crowdfunding sector.

The Crowdfunding Regulation: An Overview

The Crowdfunding Regulation serves as a framework for matching the funding interests of investors and project owners through crowdfunding platforms.

It identifies three key players:

  • project owners;
  • investors;
  • intermediary organizations operating online crowdfunding platforms.

To provide crowdfunding services, legal persons must be established in the EU and authorized by the relevant competent authority.

The regulation encompasses two main types of funding:

  • Lending-based crowdfunding: This type of crowdfunding involves investors providing an agreed amount of money to project owners for a specified period, with the project owner assuming the obligation to repay the amount with interest.
  • Investment-based crowdfunding: Under this model, crowdfunding platforms facilitate the placement, without firm commitment, of transferable securities and admitted instruments for crowdfunding purposes. It covers shares of private limited liability companies that are not subject to transfer or advertising restrictions.

It is important to note that the Crowdfunding Regulation excludes certain types of crowdfunding transactions, including crowdfunding offers with a consideration exceeding EUR 5,000,000 over a 12-month period, services provided to consumer project owners, reward-based crowdfunding, and donation-based crowdfunding. While compliance with domestic legislation is necessary, these types of transactions are not subject to the Crowdfunding Regulation.

Cyprus's Approach to Crowdfunding Service Providers

Recognizing the potential of crowdfunding to foster innovation and attract fintech investments, Cyprus has taken steps to establish a bespoke regulatory regime for crowdfunding service providers operating within its jurisdiction. Initially, Cyprus allowed investment firms to obtain additional authorization to offer investment-based crowdfunding services. However, to align with the Crowdfunding Regulation, the Cyprus Securities and Exchange Commission (CySEC) issued a Policy Statement on March 13, 2023. This statement expands the eligibility criteria for entities applying to operate as crowdfunding service providers and broadens their scope of activities.

Cyprus Investment Firms (CIFs) previously authorized under the domestic regime have a transition period until November 10, 2023, to obtain authorization within the framework of the Crowdfunding Regulation. During this transition period, they are not eligible for passporting opportunities. Furthermore, the updated regime allows entities beyond Cyprus Investment Firms to apply as crowdfunding service providers, thus enhancing market competition and accessibility.

Authorization Process and Required Services

The Directive D173-2009-02 was issued by CySEC to outline the authorisation process, applicants are no longer limited to Cyprus Investment Firms.

The applicant must be a legal entity and specify the desired services and activities, which may include:

  1. Provision of individual portfolio management of loans: Crowdfunding service providers may offer services related to the management of loan portfolios for investors.
  2. Use of special purpose vehicles for crowdfunding services: Special purpose vehicles can be employed to facilitate crowdfunding activities, ensuring efficient and secure transactions.
  3. Establishment and operation of contingency funds related to loan portfolio management: Crowdfunding service providers may establish contingency funds to mitigate risks associated with loan portfolio management.
  4. Provision of asset safekeeping services: To ensure the security and custody of assets, crowdfunding service providers may offer asset safekeeping services to their clients.
  5. Provision of payment services: Crowdfunding service providers can facilitate payment transactions between project owners and investors, ensuring smooth and secure financial transactions.
  6. Application of credit scores to crowdfunding projects: To assess the creditworthiness and risk associated with crowdfunding projects, service providers may apply credit scoring methodologies and frameworks.
  7. Proposal of pricing for crowdfunding offers: Crowdfunding service providers play a crucial role in determining fair and appropriate pricing for crowdfunding offers, based on thorough assessments of credit risk and market conditions.
  8. Operation of a bulletin board: Service providers may operate a bulletin board where project owners can showcase their crowdfunding campaigns, allowing investors to explore and participate in various investment opportunities.

It is important to note that if crowdfunding service providers intend to provide payment services, custody services, or investment services directly, without involving separate licensed entities, additional licensing in accordance with relevant legislation is required.

Compliance and Prudential Requirements

Compliance with regulatory requirements is crucial for crowdfunding service providers in Cyprus. In addition to adhering to the Crowdfunding Regulation, providers must meet certain prudential requirements to ensure financial stability and investor protection. These requirements include maintaining prudential safeguards equal to the higher of EUR 25,000 or one quarter of the fixed overheads of the preceding year, reviewed annually. Fixed overheads include the cost of servicing loans for a three-month period, particularly when the crowdfunding service provider facilitates loan grants. The objective is to ensure that providers have sufficient financial resources to meet their obligations and to protect the interests of investors.

To enhance investor protection, the Crowdfunding Regulation mandates the provision of key information through the Key Investor Information Sheet (KIIS). Project owners are responsible for preparing the KIIS, which contains essential information about each crowdfunding offer. In Cyprus, the KIIS must be available in both Greek and English, with the Greek version continuously accessible. CySEC has also implemented a requirement for project owners to submit the KIIS to them at least seven working days before it is made available to prospective investors.

Organizational and Operational Requirements

The Crowdfunding Regulation sets out various organizational and operational requirements for crowdfunding service providers to minimize risks, ensure investor protection, and promote fair and transparent practices.

Some of the key requirements include:

  • Duty of fair and professional conduct: Crowdfunding service providers must act honestly, fairly, and professionally in the best interests of their clients, prioritizing client welfare and protection.
  • Prudent Management: The management body of crowdfunding service providers is responsible for establishing and overseeing adequate policies and procedures to ensure effective and prudent management. This includes the segregation of duties, business continuity planning, and prevention of conflicts of interest.
  • Risk Assessment: Crowdfunding service providers must assess the risks associated with the loans intermediated on their platforms and establish appropriate systems and controls to manage and mitigate those risks effectively.
  • Pricing and Credit Risk Assessments: When determining the price of a crowdfunding offer, providers must conduct reasonable credit risk assessments based on sufficient information. They must establish and maintain clear policies and procedures for conducting credit risk assessments, ensuring fairness and appropriateness of pricing, conducting valuations when necessary, implementing robust risk-management frameworks, and maintaining detailed records of facilitated crowdfunding offers.
  • Due Diligence: Crowdfunding service providers are required to undertake a minimum level of due diligence regarding project owners to evaluate their credibility, reliability, and the viability of their projects.
  • Complaint Handling: Effective and transparent procedures for handling complaints must be established by crowdfunding service providers to promptly, fairly, and consistently address any client concerns or grievances.
  • Avoidance of Conflicts of Interest: Crowdfunding service providers must avoid participating in crowdfunding offers on their own platforms to prevent any conflicts of interest that may compromise fair treatment of investors.
  • Segregation of Client Funds: Crowdfunding service providers must ensure that client funds are kept separate from their own funds, maintaining clear segregation to protect the interests of investors.
  • Transparency and Reporting: Crowdfunding service providers are required to provide regular and comprehensive reporting to investors, including information on the performance of the crowdfunding offers, any relevant updates or changes, and financial statements.
  • Compliance Function: Providers must establish a compliance function to monitor and ensure adherence to regulatory requirements, including the Crowdfunding Regulation and relevant legislation.


The regulatory landscape for crowdfunding service providers in Cyprus has undergone significant changes with the implementation of the Crowdfunding Regulation. The new framework expands the eligibility criteria for entities applying to operate as crowdfunding service providers and introduces enhanced prudential, compliance, and operational requirements to ensure investor protection, transparency, and fair practices.

By adopting the Crowdfunding Regulation, Cyprus aims to attract innovative fintech companies and promote the growth of the local crowdfunding sector. The broadened scope of activities and the inclusion of various types of entities as potential crowdfunding service providers encourage market competition and increase accessibility to crowdfunding platforms. However, it is crucial for providers to carefully navigate the regulatory requirements and establish robust organizational and operational frameworks to meet the standards set by the Crowdfunding Regulation and to maintain investor trust.

As the crowdfunding landscape continues to evolve, Cyprus remains committed to fostering a supportive environment for entrepreneurs and investors, facilitating access to capital and encouraging economic growth. By ensuring compliance with the Crowdfunding Regulation and continuously monitoring developments in the crowdfunding industry, Cyprus can position itself as a favorable destination for crowdfunding service providers and a hub for innovation and investment opportunities.

In conclusion, the regulatory framework for crowdfunding service providers in Cyprus has evolved to align with the Crowdfunding Regulation, introducing stricter requirements to safeguard investors and promote transparency and fair practices. These changes aim to enhance market competition, attract fintech investments, and foster the growth of the local crowdfunding sector, ultimately contributing to the overall economic development of Cyprus.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.