The new era in European capital markets: the European Crowdfunding regulation enters into force
2023.12.11. – Tokeportal.com own content
The US has not been idle in the face of European efforts; in the second part of our article, we take a look at the JOBS Act, which paved the way for Crowdfunding regulation, and has also been amended in a positive way.
After two and a half years of intensive technical and political preparation, the European Parliament adopted the crowdfunding regulation on 5 October, which was awaited by around seventy European investment crowdfunding platform operators, and many crowdfunders. We have already written about the legislative history and the adoption of the Regulation in Europe; this time we bring you the details.
The ECSP Regulation entered into force on 27 November, the 20th day after its publication, and will be fully applicable from 11 November 2021, one year later.
Update – 2023.11.21.
2023.11.11.
As of November 11, 2023, the application of the European regulation on crowdfunding services (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32020R1503) has become mandatory. This regulation authorizes licensed service providers to engage in “full passporting,” meaning the provision of cross-border services in any EU member state, under the supervision of any EU authority. These providers are capable of issuing tradable securities and are suitable for investment for businesses that submit a fully and prudently completed Key Investor Information Sheet (KIIS) to an authorized service provider, which permits its publication. The enacted legislation also strengthens the enforceability of investor protection rights.
With this, crowdfunding has become a new legal category alongside traditional private and public offerings. It allows EU businesses to raise capital from international investors, up to EUR 5 million annually, or nearly HUF two billion, without additional regulatory approval.
Tokeportal.com has submitted its application for approval to the MFSA and is currently in the final stages of the process, expecting to receive the license by early December. Until the license is obtained, Tőkeportál refrains from actively conducting regulated crowdfunding activities. It continues to provide preparatory activities for campaigns related to completed campaigns and those starting after obtaining the license.
In 2024, international campaigns are also planned. Given that Tőkeportál has operated in the spirit of ECSPR so far, with significant procedural changes expected only after obtaining the license, substantial changes in processes are not anticipated.
For any questions, please contact ecspr@tokeportal.com.
The Regulation was necessary in order to
- standardise the terminology for platform-based investments, which have already been launched in more than 25 countries in Europe,
- standardise the authorisation procedure for platforms and campaigns,
- eliminate regulatory arbitrage,
- standardise investor and consumer protection rules,
and in doing so, develop the market and make it efficient while reducing aggregate market risks and increasing the global competitiveness of European capital markets.
Under the Regulation, the online publication of investment and loan campaigns (projects) is called a Crowdfunding offer. Donation and product-based or other forms of Crowdfunding are not covered by the Regulation, as they do not present information asymmetry, do not promise a return and therefore do not require investor protection.
The categorical difference between a crowdfunding offer and a public offer-based investment is that in the former case, the investment offer, the details on which the investment decision is based, is only available through an internet platform and only to eligible, identified investors, managed in the manner prescribed by the Regulation. The provider is required to provide an online process that is able to identify, authenticate and verify its users.
Crowdfunding complements non-institutional (angel) and institutional (venture capital) forms of investment and bank lending, allowing start-ups and SMEs to build the most efficient and crisis-resilient capital structure. Its regulation is based on three principles.
- The most forward-looking principle is that it imposes a disclosure and procedural burden on the firm seeking capital that is proportionate to the size of the transaction, i.e. the degree of investor risk – as opposed to the half a century old regulation that made going public (IPO), extremely expensive. In 2012, the tables were turned: as a way of dealing with the crisis of ’98, the regulator removed the licensing requirement for small capital injections, but introduced a limitation commensurate with the investor’s ability to bear the risk.
- The second principle is based on the protection and regulation of potential investors as consumers, by setting a limit on the potential investment, and hence on the potential loss, in proportion to their wealth.
- The third principle is the regulation of the crowdfunding provider, the platform operator: the ECSP Regulation standardises the licensing and operational regulation of platforms and adds the requirement for all local supervisory authorities to report market data from their member states to the European Securities and Markets Authority, ESMA. This principle is where the biggest achievement of ECSPR lies, since the capital or loan that can be raised annually through a campaign by service providers is being increased to €5 million per year, creating an exception to the public offer regulation, the Prospectus Regulation, which regulates capital raises above €1 million.
The text of the Regulation states that the European authority plans to carry out thorough market surveillance, exchange of experience and consultation for two years after the introduction of the ECSP Regulation. It follows that the first amendment to this Regulation is expected to come three years from today. Until the application deadline of November 2021, the 30 or so detailed rules highlighted in the text of the Regulation, the so-called Regulatory Technical Standards (RTS), will be developed by ESMA and the European Banking Authority (EBA), with the possibility of regulatory cooperation from Member States, and it will be approved by the European Commission.
Below we highlight some of the most interesting elements of the rules for investment-crowdfunding .
Which regulation applies to platforms providing crowdfunding services?
The platform provider’s licence to operate is issued by each member state under the ECSPR’s non-derogable, categorically binding rules, the requirements and timing of which are regulated by the Regulation. Authorisations are registered by ESMA. The service authorisation must be obtained by 10 November 2021.
– Online identification is used by many other fintech providers; in addition, crowdfunding providers are required to distinguish between experienced and inexperienced investors, and in particular the latter should be subject to appropriate investor and consumer protection rules, with investment limits and opt-outs. In any case, before a prospective inexperienced investor accepts an individual crowdfunding offer to invest an amount exceeding EUR 1 000 or the higher of 5 % of that investor’s calculated net assets, the crowdfunding provider should ensure that such investor receives a risk warning and demonstrates understanding of it and expressly consents to the finalization of his investment. One means of differentiating between experienced and inexperienced categories of investors is the knowledge test that has to be used in the identification process, and the other is the detailed risk disclosure, the wording of which is also defined by ECSPR. The investor categories should be reassessed every 2 years.
– The service provider is authorised to review campaigns (projects) in advance to authorise their launch and conduct them, but can only offer other payment services if specifically authorised. The service provider must implement a transparent methodology for the review of campaigns and the launch of the campaign; it must publish a key investment information sheet (KIIS) for each campaign – the content of which is defined by the regulation – which is filled in by the project owner and verified by the service provider; and it must also verify that a successful campaign will only result in the issuance of transferable assets by the campaign owner, which may be shares or other admitted instruments for crowdfunding purposes – the key is transferability.
– The platform operator must have a minimum capital of one quarter of the previous year’s annually reviewed
fixed overheads, but at least EUR 25 000, is required. The Regulation also covers conflict of interests and consumer protection aspects, including the way complaints are to be handled.
– The Regulation contains detailed rules on the authorisation of crowdfunding providers: the national competent authority must assess, within three months of receipt of a complete application, whether the prospective crowdfunding provider meets the requirements set out in this Regulation and adopt a fully reasoned decision to authorise or refuse authorisation as a crowdfunding provider and inform ESMA accordingly. One of the achievements and main objectives of the Regulation, introduced to create a Single European Capital Market (CMU), is that Member States should not require crowdfunding providers providing cross-border crowdfunding services to have a physical presence in the territory of a Member State other than the one in which they are licensed.
This will create the single market for financing early (before public offering) stage companies through the means of crowdfunding, and will also start the competiotion among member states for crowdfunding service providers
Entry into force, application
As we mentioned at the beginning of this article, the Regulation published on 7 October entered into force 20 days later. On the expiry of the one-year transition period, Member States shall notify the Commission and ESMA of their laws, regulations and administrative provisions implementing the Regulation by 10 November 2021 at the latest. A one-year grace period may be granted to Member States that have regulated crowdfunding before the entry into force of this Regulation, i.e. before October, and a further two years to countries that have not yet extended the exemption from the obligation to draw up a prospectus to at least EUR 5 million per year in the range of EUR 1-8 million per year under the national competence of the Member States as set out in the Prospectus Regulation.