EU Crowdfunding Service Providers Regulation

On the 10 November 2021, the European crowdfunding service providers for business Regulation (Regulation EU 2020/1503) (ECSPR) comes into force across the EU. Following a 12-month transition period, the ECSPR formally introduces harmonised EU rules governing investment-based and lending-based crowdfunding services used for business financing.

Crowdfunding Service Providers (CSPs) bring together business owners, or those with a business idea, with potential investors in an online platform.

Prior to the introduction of the framework, crowdfunding platforms operating across Europe were burdened with significant costs associated with navigating the myriad of rules and licensing requirements in the cross-border marketing of their services. Under the new framework, CSPs can apply for an EU passport based on a single set of rules, which makes it easier for them to offer their services across the EU with a single authorisation.

The new regulation applies to two types of crowdfunding namely:

Investment-Based Crowdfunding also known as equity crowdfunding. Typically, capital is raised from a relatively large number of backers each investing a relatively small amount in a business in the form of shares.

Peer-to-Peer Business Lending a form of debt crowdfunding where capital is expected to be repaid with interest.

Peer-to-Peer consumer lending and reward/donation-based crowdfunding are both excluded from the ECSPR.

The new regime is expected to increase the availability of this form of finance which will help companies seeking alternatives to bank financing, in particular SME’s.

Authorisation

A CSP which facilitates investment-based crowdfunding or peer-to-peer business lending must be authorised by the relevant National Competent Authority (NCA). In Ireland, the Central Bank of Ireland is the designated NCA.

NCAs must decide whether to grant or deny authorisation within three months of an application. They must also specify which services the CSP is permitted to provide. Any additional services a CSP may wish to provide are subject to an additional application.

CSPs already engaging in activities which require authorisation may continue to operate on a transitional basis without having to be authorised until 10 November 2022.

NCAs will notify the European Securities and Markets Authority (ESMA) of all granted CSP authorisations to be included on a public register.

CSPs must also provide a confidential annual report of projects funded through its platform to the NCA. The NCA must share this anonymised information with the ESMA to publish aggregated annual statistics.

Regulation

To avoid a CSP needing to comply with more than one regulatory regime, an in-scope CSP will be exempt from MiFID II if it is authorised under the ECSPR. The CSP could, however, still be subject to the Payments Services Directive if it provides payments services. Where the crowdfunding offers of a CSP have a total consideration in excess of €5 million over 12 months, they will be subject to MiFID II and the Prospectus Regulation rather than the ECSPR.

The European Commission will review the ECSPR by 10 November 2023. In this review, they will consider a number of ongoing issues including whether CSPs should be subject to the Fourth Money Laundering Directive.

Use of SPVs

The ECSPR mandates that an SPV structure can only be used for an investment-based crowdfunding project where it only allows investors to acquire an interest in one illiquid or indivisible underlying asset which could not otherwise be offered easily to investors.

Prudential requirements

Under the new regulation, CSPs are required to hold the higher of €25,000 or one quarter of fixed overhead amounts, either in equity capital, through insurance coverage or a combination of both. Equity capital must qualify as Common Equity Tier 1 capital as per the Capital Requirements regulation.

Operational requirements

The ECSPR imposes a number of operational requirements on authorised CSPs including requirements relating to the following:

• Acting in the best interest of clients

• Effective segregation of duties, business continuity policies and procedures

• Implementing risk management controls with respect to lending

• Ensuring marketing communications are fair, clear and not misleading

• Avoiding conflicts of interest

• Not accepting inducements

• Avoiding additional operational risk associated with outsourcing

• Implementing transparent complaints-handling procedures

• Provision of asset-safekeeping and payment services

• Communications relating to the platform, costs, risks, charges and selection criteria must be clear, fair and not misleading and must be provided to the investors prior to capital being committed

• Clarity on applicable schemes including the EU Deposit Guarantee Scheme or the EU Investors Protection Scheme

• Disclosure of credit scores and pricing applied for pricing guides provided by the CSP

• Disclosure of default rates for peer-to-peer lending projects

Investor Protection Measures

The new regulation also introduces a number of new rules on investor protection most notably:

For further information please contact Máiréad Lyons.