REGULATION (EU) 2020/1503 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937) (“the EU Crowdfunding Regulation” or “Regulation”)
The EU Crowdfunding Regulation is due to have effect as and from the 10.11.2021. The Regulation will allow crowdfunding service providers authorised (on the basis of a harmonised authorisation system) in one member state, to passport their services into other EU Member States on the basis of the one authorisation (Article 18 of the Regulation).
Who may provide Crowdfunding services
The provision of crowdfunding services generally involves:
- the project owner who proposes the project to be funded
- investors who fund the proposed project, and
- an intermediating organisation in the form of a crowdfunding service provider that brings together project owners and investors through an online platform.
Under Article 3 of the Regulation, crowdfunding services must only be provided by legal persons that are established in the Union and that have been authorised as crowdfunding service providers in accordance with Article 12 of the Regulation (see also recital 31 of the Regulation).
What Crowdfunding Services are regulated
Two crowdfunding services are regulated:
the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of any of the following activities:
- the facilitation of granting of loans; ‘loan’ means an agreement whereby an investor makes available to a project owner an agreed amount of money for an agreed period of time and whereby the project owner assumes an unconditional obligation to repay that amount to the investor, together with the accrued interest, in accordance with the instalment payment schedule;
- the placing without a firm commitment basis, as referred to in point (7) of Section A of Annex I to Directive 2014/65/EU (MiFID II), of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders, as referred to in point (1) of that section, in relation to those transferable securities and admitted instruments for crowdfunding purposes (Article 2(1) of the Regulation).
Where the Crowdfunding Regulation does not apply
The Regulation does not apply to (a) crowdfunding services that are provided to consumers (b) to other services related to those provided to consumers (article 3(a) of Directive 2008/48/EC) and (c) crowdfunding offers with a consideration of more than EUR 5,000,000, calculated over a period of 12 months. The Regulation specifies how this is calculated for each of the business models regulated (Article 1 of the Regulation).
Limits on Crowdfunding Offers made by a particular project owner
The threshold for a total consideration for crowdfunding offers made by a particular project owner is set at €5,000,000, which is the threshold used by most Member States to exempt offers of securities to the public from the obligation to publish a prospectus. (Recital (16) of the Regulation).
Prudential Requirements (Regulatory Capital) required under the Directive
The regulatory capital required of the crowdfunding service provider under Article 11, must be equal to an amount of at least the higher of the following:
€25,000; and one quarter of the fixed overheads of the preceding year, reviewed annually. This amount in broad terms can take one of the following forms:
- Own funds, consisting of Common Equity Tier 1 items referred to in Articles 26 to 30 of Regulation (EU) No 575/2013 after the deductions in full, pursuant to Article 36 of that Regulation, without the application of threshold exemptions pursuant to Articles 46 and 48 of that Regulation;
- an insurance policy covering the territories of the Union where crowdfunding offers are actively marketed or a comparable guarantee; or (c) a combination of points (a) and (b). (Article 11 of the Regulation).
Requirements for authorisation under Article 12 of the Regulation
The applicant to the Central Bank of Ireland will generally require to be an Irish registered company. With the application form, the following documents will need to be provided:
- a programme of operations setting out the types of crowdfunding services and of the crowdfunding platform that it intends to operate, including where and how crowdfunding offers are to be marketed;
- a description of the governance arrangements and internal control mechanisms;
- a description of the systems, resources and procedures for the control and safeguarding of the data processing systems;
- a description of the operational risks;
- a description of the prudential safeguards in accordance with Article 11 and proof that the prospective crowdfunding service provider meets the prudential safeguards in accordance with Article 11 (Prudential Requirements);
- a description of the business continuity plan;
- the identity of the natural persons responsible for the management, and proof that the natural persons are of good repute and possess sufficient knowledge, skills and experience to manage the prospective crowdfunding service provider (see Article 12(3) for more detail on these);
- a description of the internal rules to prevent persons referred to in the first subparagraph of Article 8(2) from engaging, as project owners, in crowdfunding services offered by the prospective crowdfunding service provider;
- a description of the outsourcing arrangements;
- a description of the procedures to handle complaints from clients;
- whether the applicant intends to provide payment services itself or through a third party, under Directive (EU) 2015/2366, or through an arrangement in accordance with Article 10(5) of this Regulation;
- a description of the procedures to verify the completeness, correctness and clarity of the information contained in the key investment information sheet;
- a description of the prospective crowdfunding service provider’s procedures in relation to investment limits for non-sophisticated investors referred to in Article 21(7).
Crowdfunding Services Provider Obligations
The crowdfunding service provider must, amongst other things:
- ensure all information as referred to in Article 19 (Information to Clients) and Article 27 (Article 27 requirements regarding marketing communications) is clear fair and misleading (Article 19 of the Regulation);
- inform their clients that their crowdfunding services are not covered by the deposit guarantee scheme nor are transferrable securities not covered by the investor compensation scheme;
- if they apply credit scores to crowdfunding projects or suggest the pricing of crowdfunding offers on their crowdfunding platform, make available a description of the method used to calculate such credit scores or prices. If the calculation is based on accounts that are not audited, that shall be clearly disclosed in the description of the method (Article 19(6) of the Regulation).
- inform their clients about the reflection period for non-sophisticated investors referred to in Article 22.
- provide prospective investors with a key investment information sheet drawn up by the project owner for each crowdfunding offer (Article 23(2) of the Regulation). Note there are specific requirements for this information sheet in the case of crowdfunding service providers providing individual portfolio management of loans (Article 24(1) of the EU Crowdfunding Regulation).
- have in place and apply adequate procedures to verify the completeness, correctness and clarity of the information contained in the key investment information sheet (Article 23(11) of the Regulation);
- have in place and apply adequate procedures to verify the completeness, correctness and clarity of the information contained in the key investment information sheet at platform level. (Article 24(6) of the Regulation).
- request the project owner to notify it of any change of information in order to keep the key investment information sheet updated at all times and for the duration of the crowdfunding offer (Article 23(8) of the Regulation).
Obligations of Project Owner
Member States must ensure the responsibility of at least the project owner or its administrative, management or supervisory bodies for the information given in a key investment information sheet.
Those responsible for the key investment information sheet must be clearly identified in the key investment information sheet by, in the case of natural persons, their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the key investment information sheet is in accordance with the facts and that the key investment information sheet makes no omission likely to affect its import (Article 23(9) of the Regulation).
Bulletin board (Article 25)
Crowdfunding service providers may operate a bulletin board on which they allow their clients to advertise interest in buying and selling loans, transferable securities or admitted instruments for crowdfunding purposes that were originally offered on their crowdfunding platforms (Article 25(1) of the Regulation).
The bulletin board must not be used to bring together buying and selling interests by means of the crowdfunding service provider’s protocols or internal operating procedures in a way that results in a contract. The bulletin board must therefore not consist of an internal matching system that executes client orders on a multilateral basis.
For Crowdfunding service providers that allow the advertisement of interest on the bulletin board, they must comply with the following requirements:
- they are to inform their clients about the nature of the bulletin board;
- require their clients advertising a sale of a loan, security or instrument to make available the key investment information sheet;
- provide clients intending to buy loans advertised on the bulletin board with information on the performance of loans facilitated by the crowdfunding service provider;
- they are to ensure that their clients advertising an interest to purchase a loan, security or instrument and qualifying as non-sophisticated investors receive the information referred to in Article 19(2) and the risk warning referred to in Article 21(4) (Article 25(3) of the Regulation).
Crowdfunding service providers that allow the advertisement of interest referred to Article 25(1) and that provide asset safekeeping services in accordance with Article 10(1) must require their investors advertising such interest to notify them of any changes in ownership for the purposes of conducting ownership verification and record-keeping.
Crowdfunding service providers that suggest a reference price for the buying and selling referred to in Article 25(1) must inform their clients that the suggested reference price is non-binding and substantiate the suggested reference price, and must disclose key elements of the methodology in line with Article 19(6).
Loans Default Rates
As regards loans, Article 20 imposes separate obligations for crowdfunding service providers which provide crowdfunding services consisting of the facilitation of granting of loans.
Crowdfunding service providers which provide crowdfunding services consisting of the facilitation of granting of loans must :
(a) disclose annually the default rates of the crowdfunding projects offered on their crowdfunding platform over at least the preceding 36 months; and
(b) publish an outcome statement within four months of the end of each financial year indicating, as applicable:
- the expected and actual default rate of all loans the crowdfunding service provider has facilitated, by risk category and by reference to the risk categories set out in the risk-management framework;
- a summary of the assumptions used in determining expected default rates; and
- where the crowdfunding service provider offered a target rate in relation to individual portfolio management of loans, the actual return achieved.
The default rates referred to in Article 20(1) must be published in a prominent place on the website of the crowdfunding service provider.
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