EU Crowdfunding Regulation: New ways to access capital
Crowdfunding is an alternative avenue for start-ups and small and medium-sized enterprises (“SMEs”) to raise finance by typically receiving small investments from a “crowd” of persons and/or organisations. It involves a Crowdfunding Service Provider (“CSP”) acting as an intermediary which operates a digital platform, to match or facilitate the matching of prospective investors/lenders with businesses that seek funding (the “project owners”).
To enhance the development of the EU Capital Market and eliminate legal uncertainty stemming from divergent national laws, the Regulation 2020/1503 on European crowdfunding service providers for business (“ECSP Regulation”) creates a harmonised framework of rules for certain crowdfunding services. It regulates investment-based crowdfunding services which entail raising capital through the sale/acquisition of transferrable securities or private company shares not subject to transfer restrictions, and lending-based crowdfunding services which involve seeking funding via loans. Reward-based and donation-based crowdfunding services, such as Kickstarter, are excluded from its scope.
The ECSP Regulation has entered into force on 10 November 2021.
Changes to the existing national crowdfunding regime
With the enactment of ECSP Regulation, the CySEC Directive DI87-10 on the provision of crowdfunding services will be phased out on 10 November 2022 when the transitional period prescribed in the Regulation would have elapsed. The said directive only covered investment-based crowdfunding services in relation to transferrable securities and mandated that a prospective CSP must be authorised as a MiFID investment firm, whereas the new regulation has no such requirement unless the CSP also intends to offer investment services.
Authorisation process and timeframes
As per the new Regulation, legal persons intending to provide crowdfunding services must apply for authorisation to the Cyprus Securities and Exchange Commission (“CySEC”). Within 25 days upon receipt of the relevant application, CySEC informs applicants on whether their application is complete or sets a deadline by which the applicant must provide any missing information. A reasoned decision to grant or reject a CSP authorisation is reached within three months from the date CySEC receives a complete application, and the decision result is communicated to the applicant within three working days.
Key provisions of the new regulation
The new ECSP Regulation outlines a series of operational requirements that CSPs must meet, including:
With regards to investor protection, CSPs must, among others, follow the below:
The Financial Services, Funds and Capital Markets team of our firm welcomes all enquiries and can assist you in crowdfunding-related matters, including:
This publication is provided for your convenience and does not constitute legal advice.
Authors: Andria Koukounis, Polyvios Nikolaou