New Era in European Capital Markets: Seven Months of Mandatory Implementation of the European Crowdfunding Regulation
Updated: July 2, 2024
Original Publication: December 7, 2020
Tokeportal.com own content
In this article, we summarize the Regulation on European Crowdfunding Service Providers (ECSPR), which is effective in all EU member states. The legislation is available in all EU languages on the European Parliament’s website: (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32020R1503 ).
The significance of the ECSPR is that it creates a new asset class, crowdfunding issuance, which stands on equal footing with traditional private and public offerings, yet is exempt from many of their regulations. Crowdfunding facilitates the cross-border public capital raising of private companies through authorized, regulated platforms in Europe. These platforms not only support successful campaigns but also the secondary trading of issued securities through a so-called bulletin board. A company can raise up to 5 million euros annually this way, provided they issue marketable securities (shares, and depending on the authorization and member state, other securities) in exchange. This regulation supersedes national-level regulations (which, as lower-level laws, must naturally follow the European regulation).
Taking the current size of TokePortal, which refers to its users’ investment capacity (achieved after appropriate identification, knowledge testing, and loss-bearing simulation, following the study of the risk information), qualifying campaign owners can relatively easily expect to raise between 0.5 and 1 million euros within a few months.
The update was necessitated by TokePortal.com obtaining an operational license through its Maltese subsidiary in June 2024. The provisional license was acquired in March 2024, making us the 151st authorized European service provider, and the first in Malta. Our approved Regulatory Business Plan allows us to provide services in Malta, Hungary, and the region.
The first draft of the European Crowdfunding Service Providers Regulation (ECSPR) appeared on the European Parliament’s website in March 2018, six years after the USA’s JOBS Act. After two and a half years of intensive professional and political preparatory work, the final text of the regulation was adopted by the European Parliament on October 5, 2020. The regulation, awaited by approximately 250 European investment-oriented platforms, came into force on November 27, 2020, and was fully applicable from November 11, 2022, after a one-year postponement.
Fifty percent of the authorized platforms received their licenses in France, Germany, and Spain, with 28 licenses coming from France. Additionally, new licenses were issued in countries like the Czech Republic, Poland, Slovakia, and Italy.
One-third of ECSP-licensed platforms mediate both securities and loans, another third focuses on securities, and the remaining third exclusively on loans.
The ECSPR authorizes licensed providers to offer cross-border services, i.e., public crowdfunding offers in any EU member state for issuers capable of issuing investment-worthy and transferable securities based on the Key Investor Information Sheet (KIIS). Providers can also display buy and sell offers for the crowdfunded securities, supporting secondary trading. The regulation strengthens the enforceability of investor protection rights.
With this regulation, crowdfunding has become a new legal category alongside traditional private and public offerings, allowing EU businesses to raise up to 5 million EUR (nearly 2 billion HUF annually) from international investors without additional regulatory approval.
From the mandatory application date of the regulation until obtaining the license, TokePortal.com did not engage in active campaign activities. Since we operated in the spirit of the ECSPR even before the licensing, no significant process changes are expected.
The goal of crowdfunding is to assist public offerings in the early phase before stock exchange listing, helping businesses obtain capital to reach their growth potential and market entry.
The regulation was necessary to standardize platform-based investments across more than 25 European countries, eliminate regulatory arbitrage, unify investor and consumer protection rules, and develop the market efficiently while reducing aggregated market risks and enhancing the global competitiveness of European capital markets.
The regulation’s text, referred to as “Level 1,” highlights about 30 detailed rules known as Regulatory Technical Standards (RTS), followed by ESMA’s Q&A.
Under the regulation, a crowdfunding offer refers to the online publication of investment and loan-oriented campaigns (projects). Other forms of crowdfunding, such as support or product-based crowdfunding, are not regulated as they do not involve informational asymmetry or promise returns, thus not necessitating investor protection.
The fundamental difference between a crowdfunding offer and a public investment offer is that the former’s investment details are accessible only through an online platform to authorized and identified investors. Providers must ensure an online process that can identify, authenticate, and review users.
Crowdfunding complements non-institutional (angel) and institutional (venture capital) investment forms and banking options, enabling startups and SMEs to build the most effective and crisis-resilient capital structure. The regulation is based on three principles.
The first principle imposes data provision and procedural burdens proportional to the transaction scale, contrary to the decades-old regulation that made public offerings (stock exchange listings) costly, while imposing investment restrictions suitable to the investor’s risk-bearing capacity.
The second principle regulates the protection of potential investors as consumers, setting wealth-proportionate limits on possible investments and potential losses.
The third principle pertains to the regulation of crowdfunding service providers (platform operators): the ECSPR standardizes the licensing and operational regulations of platforms, complemented by the requirement to report national market data to ESMA.
The most significant achievement of the ECSPR is the exemption it provides from the Prospectus Regulation: campaigns enabled by licensed providers can raise capital or loans up to 5 million EUR annually, regardless of national regulations.
Each member country issues the platform service provider’s operational license based on the ECSPR’s mandatory (cogent) rules. The regulation details the requirements and timelines for the issuance of these licenses.
Providers must differentiate between experienced and inexperienced investors, applying appropriate investor and consumer protection rules for the latter, including investment limits and withdrawal options. Before an inexperienced investor accepts an individual crowdfunding offer exceeding 1,000 EUR or 5% of their net worth, the provider must ensure they receive a risk warning and demonstrate understanding, and express consent for the investment. Investor categories must be re-evaluated every two years.
Providers are entitled to review campaigns (projects), authorize their launch, and manage them, only engaging in additional crowdfunding services if specifically licensed. Providers must implement transparent methods for campaign review, publish the Key Investor Information Sheet for each campaign, and verify that successful campaigns issue transferable assets.
Providers must have a minimum capital of 25,000 EUR or a quarter of the previous year’s reviewed annual fixed overheads, along with liability insurance. The regulation also covers conflicts of interest and consumer protection, including complaint handling.
For licensing, the regulation details that national authorities must assess within three months of receiving a complete application whether the prospective crowdfunding service provider meets the requirements, and make a fully reasoned decision on authorization or rejection, informing ESMA.
The ECSPR’s goal is to create a Single European Capital Market (CMU) where member states cannot require physical presence from cross-border crowdfunding service providers. This unity promotes competition among countries for crowdfunding service providers.
For feedback and comments, contact ecspr@tokeportal.com.
RISKS
Risk Disclosure
Complete and comprehensive information about investment opportunities is available only to pre-identified investors accepted by the Campaign Manager on the tokeportal.hu website. TokePortal.com does not provide investment advice or recommendations and has designed its platform-based private capital raising process following international best practices within the framework of current legislation. Investing in startups carries significant risks, potentially resulting in partial or total loss of the invested amount, with investors likely unable to access their capital for several years. We urge registered investors to only invest in businesses available on tokeportal.hu if they can bear the risks, detailed in our icon-click accessible but not exhaustive disclosure.
For more information on risks, click here.
