A. Overview

Contributed by Dr. Marco Brand

On 20 October 2020, Regulation (EU) 2020/1503 of 7 October 2020 on European crowdfunding service providers for business ("Crowdfunding Regulation") was published in the Official Journal of the European Union. The Crowdfunding Regulation applies from 10 November 2021 but grants a transition period for the adaption of the business models under the Crowdfunding Regulation until 10 November 2023. To meet this deadline, crowdfunding service providers must become active now to adapt their business model to the new European legal framework.

The Crowdfunding Regulation is the first regulation of crowdfunding services on a European level. Up to now, crowdfunding has been governed under the various national laws of the Member States. A consequence of this has been the fragmentation of applicable regulatory regimes which makes the provision of cross-border crowdfunding services almost impossible. The key aim of the Crowdfunding Regulation is to change this position by fostering cross-border crowdfunding services in the Union while at the same time to ensure a high level of investor protection. This fragmentation will partly remain as the Crowdfunding Regulation does not cover all existing crowdfunding business models.

  • the facilitation of granting of loans; and
  • the placing without a firm commitment basis and the reception and transmission of client orders in relation to transferable securities and admitted instruments for crowdfunding services.

The Crowdfunding Regulation does not apply to:

  • project owners who are consumers;
  • crowdfunding offers of a project owner relating to transferable securities with a total consideration of EUR 5,000,000 or more calculated over a period of 12 months; and
  • the brokerage of qualified subordinated loan receivables1.

With regard to the out-of-scope crowdfunding services, the regulatory requirements of the Member States concerned continue to apply. This makes things insofar more complicated as crowdfunding service providers, project owners and investors must have different regulatory regimes on their screen.

In the following we will provide a high-level overview of the core provisions of (i) the Crowdfunding Regulation and (ii) national legislations of selected European countries.

B. EU Crowdfunding Regulation2

I. Authorization

Under the Crowdfunding Regulation, crowdfunding services may be provided only with an authorization as a crowdfunding service provider under Art. 12 of the Crowdfunding Regulation. This authorization also includes the provision of two ancillary services:

  • Individual portfolio management of loans (e.g., auto-invest functions such as the selection of loans to be disbursed by the investor according to pre-defined criteria);
  • Operation of a bulletin board (i.e., the provision of a secondary market on which the customers of the crowdfunding service provider can indicate their interest in buying and selling loans or securities originally offered on the crowdfunding platform being understood that the bulletin board must not be a multilateral trading facility within the meaning of MiFID II).

The authorization under Art. 12 does not cover payment services as defined in PSD II. Thus, for the provision of payment services (e.g., money remittance business), either an additional license under the PSD II or an authorized payment service provider is required.

Crowdfunding service providers will be supervised by the National Competent Authorities (NCAs) of the Member States concerned.

One of the big reliefs of the Crowdfunding Regulation is that investors and project owners are expressly excluded from any authorization requirements for the granting of loans and the acceptance of funds for loans which have been facilitated through an authorized crowdfunding service provider. In particular, they will not need a banking license for the deposit and credit business.

II. European Passport

An authorization under the Crowdfunding Regulation includes the ability to render their crowdfunding services on a cross-border basis within the European Economic Area (EEA) by applying for a European Passport. This will allow investors to invest on a pan-European basis through crowdfunding platforms. Similarly, project owners will benefit from their ability to seek capital from investors throughout the EEA. The procedure to obtain a European Passport is straight forward. 15 days at the latest after the submission of the relevant information, the crowdfunding service provider can start to provide crowdfunding services in the relevant Member States. No additional approval will be required.

III. Consumer Protection

Among many other consumer protection obligations, crowdfunding service providers are obligated to provide prospective investors with a key investment information sheet drawn up by the project owner including the information referred to in Annex I of the Crowdfunding Regulation. The key investment information sheet is not subject to an approval from the national competent authorities. However, where services are provided in connection with the ancillary service of loan portfolio management, the crowdfunding service provider itself must prepare the document (i.e., at the platform level).

The Crowdfunding Regulation requires the Member States to ensure the responsibility of at least the project owner and/or the crowdfunding service provider or their administrative, management or supervisory bodies for the information given in a key investment information sheet. The Crowdfunding Regulation leaves it with the Member States as to whether only the project owner and/or the crowdfunding service provider or also their administrative, management or supervisory bodies are liable for misleading, inaccurate or incomplete information in the key investment information sheet. For further details on the Member States level, reference is made to Section 3 below.

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Footnotes

1.  See Brand, Europa harmonisiert Schwarmfinanzierung, in: Börsenzeitung vom 12. März 2021.

2.  For more details on the Crowdfunding Regulation see Brand, The new European crowdfunding regulation: facilitating cross-border services, in: Journal of Investment Compliance, 2021; Wallach/Brand, in: Kunschke/Spitz/Kohle, Legal Handbook Fintech, 2nd ed. 2022, Sec. C. "Kreditplattformen und Crowdfunding", margin numbers 37 et seqq.

Originally Published by Crowdfunding in Europe

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.