One of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders is the lack of common rules across the EU.
In March 2018, the European Commission came out with its proposal for a regulation of crowdfunding service providers (hereinafter – CF Regulation). Once adopted at EU level, the new regulation will be binding to all crowdfunding platforms, registered in the EU. Platforms will have to comply with only one set of rules, both when operating in their home market and in other EU countries.
For investors of crowdfunding platforms, the proposal will provide legal certainty as regards the applicable protection rules. They will benefit from a better protection regime and a higher level of guarantees, based on:
- clear rules on information disclosures for project owners and crowdfunding platforms;
- rules on governance and risk management;
- a coherent approach to supervision.
The main issues of CF Regulation include:
- Passporting of crowdfunding equity
Crowdfunding platforms will be able to provide their services on a cross border basis within the Common Market.
- Ad hoc legal framework
If the Crowdfunding service provider (CFSP) is registered with European Securities and Markets Authority (ESMA), it shall not be authorized under large scope of EU Directives related to financial market and investment services.
Lending to consumers shall not fall in the scope of the CF Regulation.
Economic and Monetary Affairs Committee agreed to extend the scope of the regulation by increasing the maximum threshold for each crowdfunding offer to €8,000,000 (from initial €1,000,000, as proposed by the European Commission), calculated over a period of 12 months. Thus, it is the upper limit of investments that can be raised via a crowdfunding platform per project within one calendar year.
The applicant for CFSP status will have to receive the prior approval of ESMA. During the approval process, ESMA will mainly assess the services to be rendered, the suitability of management and the internal organization of the applicant. The application should contain inter alia a program of the services offered, the procedures pertaining to risk management in administrative and accounting processes, the proof of experience and good repute of the managers and the usual legal and regulatory documents in relation to the crowdfunding platform.
- Key Investment Information Sheet
Crowdfunding platforms will be obliged to provide a duly completed Key Investment Information Sheet (KIIS) accompanying each offer. The KIIS should be drafted by the project owner on a maximum 6 pages of A4 format. KIIS shall contain, inter alia, the following positions:
- Information about the borrower and the project
- Main features of the crowdfunding process and conditions for the capital raising or funds borrowing
- Risk Factors
- Disclosure related to the loan agreement
- Fees, information and legal redress
It will be reviewed and confirmed by the CFSP (or rejected in case of non-compliance with the mandatory structure and content required).
- Investor information
CFSP to run an “entry knowledge test” on every prospective investor to determine their ability to bear loss (10% of the prospective investor’s net worth). Different criteria are detailed in the CF Regulation. The test should be repeated at least biyearly. Additionally, an option of investment process simulation should be made available for investors.
Marketing communication should state in general terms the investment envisaged and indicate where, and in which language, information about individual projects or offers may be obtained.
- Asset safekeeping
The CFSP shall provide client asset safekeeping services (directly or through a third party) in accordance with national laws of its home member state.
The CFSP will not be able to hold funds itself unless approved as a payment institution.
In accordance with the information provided by EC the CF Regulation may come into force in 2022, but we have taken a voluntary decision to comply with all major requirements of CF Regulation in terms of transparency and provision of information to the investors and mitigation of risks from the very first day of our operation! And, so, we do:
- We provide KIIS to our investors that contains explanatory statements and risk warnings and enables to unambiguously identify the project and the borrower and to make one’s own independent assessment or seek for professional advice;
- We comply to the annual limit of €8,000,000 per one investment offer;
- To absolutely avoid the conflict of interests and to provide maximum independence and objectiveness in evaluation and due diligence process, we ensure and guarantee that the borrowers placing their investment offers on the Platform are legal entities which are not in any way associated with the Platform Operator;
- We have two bank accounts: one for investment purposes – settlements with our investors and borrowers, and the other – for operating needs of the company, completely segregated from each other, thus the funds of investors are never mixed up with operating resources of the company and are directed only for loan issuing purposes;
- We have registered our associated company – FUNDAUS TRUST AGENT OÜ – which will act as a collateral agent and hold collateral and all documentation related to borrowing and lending and represent legal interests of our investors at any stage, including reinforcement procedures, if applicable.