EU adopts rules to encourage cross-border crowdfunding

The Regulation on European Crowdfunding Service Providers for Business will come into force on 9 November 2020 and will apply across the EU from October 2021, a year after its publication in the Official Journal of the EU.

The regulation establishes a harmonised legal framework for crowdfunding across member states, with particular new obligations on crowdfunding service providers to act in the best interest of investors.

The rules will apply to all crowdfunding service providers facilitating business funding, and investment-based platforms in relation to transferable securities, for campaigns raising up to €5 million (£4.5 million). Larger operations will be regulated by the Markets in Financial Instruments Directive and the Prospectus Regulation.

Lending to consumers is not covered by this regulation, and reward and donation-based crowdfunding fall outside the scope of the rules.

Financial services expert Lisa Matthews of Pinsent Masons, the law firm behind Out-Law, said the regulations and the accompanying directive (6 page / 345KB PDF) will provide welcome harmonisation and consistency of approach in this area.

“Crowdfunding platforms operating in the EU will have to comply with a single set of uniform rules instead of different rules in each country,” Matthews said.

The directive which accompanies the regulation aims to broaden access to finance for small companies and widen the pool of potential investors, by enabling crowdfunding platforms to easily provide services across the EU single market.

The rules set out common prudential, information and transparency requirements and include specific requirements for non-sophisticated investors.

The regulation requires crowdfunding providers to “act honestly, fairly, professionally and in the best interests of their clients”. They must adopt risk assessment and risk management procedures and policies, and minimum insurance requirements also apply.

Providers will have to undertake a “minimum level” of due diligence on the owners of the projects being funded, ensuring in particular they do not have a criminal record arising from infringements of commercial, insolvency, financial services, fraud, anti-money laundering or professional liability rules. Projects owners cannot be established in a non-cooperative jurisdiction or high risk third country.

Investors will be provided with a key investment information sheet on each crowdfunding project, prepared by the project owner or at platform level, and providers will have to have complaints handling procedures in place enabling clients to file complaints free of charge using a standard template.

Crowdfunding service providers will have to assess if the services on their platforms are suitable for non-sophisticated investors. These investors must simulate their ability to bear loss and are to receive risk warnings if they invest more than €1,000 or 5% of their net worth.

A pre-contractual “reflection period” will also apply to non-sophisticated investors, enabling them to revoke any offer to invest within four calendar days of the making of that offer.

The rules will be overseen by regulators within each EU member state, who will have the power to impose penalties on crowdfunding service providers including fines of at least up to €500,000

Prospective service providers will have to apply for authorisation in the member state in which they are established to operate.

Financial services expert Ann Lalor of Pinsent Masons said the rules would help crowdfunding platforms in EU member states such as Ireland grow.

“With regard to peer-to-peer lending platforms, lending to corporates in Ireland was not a regulated activity. There was no legislation specifically aimed at regulating crowdfunding in Ireland. The new rules are intended to provide a single set of rules on services, allowing platforms to apply for an EU passport based on a single set of rules and promote cross-border crowdfunding activity,” Lalor said.