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Industry Update: Crowdfunding

On 18 December 2019, the European Parliament’s negotiating team reached a deal with the Council for the European Union on the implementation of EU-wide rules aimed at helping crowdfunding services function smoothly while fostering cross-border business funding.

The announcement (found here) follows the publication of the Council’s compromise proposal in June 2019 (2018/0048 (COD)) which revised the European Commission’s draft framework for common rules for crowdfunding platforms across Europe (P8_TA(2019)0301) (the “Crowdfunding Regulation“).

The announcement comes as a targeted response to the fragmented and often conflicting regulatory regimes currently in force for crowdfunding service providers (CSPs) operating within EU Member States. The Crowdfunding Regulation is set to form part of the European Commission’s wider FinTech Action Plan (COM(2018) 109/2), directed at harnessing technological innovation in financial services.

The details of the Crowdfunding Regulation are yet to be finalised and will be subject to final endorsement by the European Parliament and the Council, however given that technical work on the final text is now underway, EU crowdfunding platforms or CSPs should consider that the Crowdfunding Regulation is likely to pass further legislative hurdles without significant delay.

What is crowdfunding?

The term ‘crowdfunding’ is used to describe ways in which people and businesses (including start-ups and small to medium enterprises (SMEs)) raise money, typically through an internet-based platform.  A ‘crowdfunding service provider’ operates a platform open to the public to facilitate prospective investors or lenders being matched with businesses that seek funding.

What to expect from the proposed EU Crowdfunding Regulation

The uniform set of criteria will apply to all European Crowdfunding Service Providers (ECSPs) up to offers of EUR 5 000 000 (up from the figure of EUR 1 000 000 proposed by the Commission), calculated over a period of 12 months per project owner.

To enable small companies or start-ups to make use of the crowdfunding option, the shares of certain private limited liability companies, which are freely transferable on the capital markets, are to be included in the scope of the legislation.

Investors will also be provided with a key investment information sheet (KIIS), drawn up by the project owner for each crowdfunding offer, or at platform level. CSPs will need to give clients clear information about the financial risks and charges they may incur, including insolvency risks and project selection criteria.

In addition, investors identified as non-sophisticated would be offered more in-depth advice and guidance, including on their ability to bear losses and a warning in case their investment exceeds either 1000 EUR or 5% of their net worth, followed by a reflection period of four calendar days.

It is envisioned that a prospective ECSP would need to request authorisation from the national competent authority (NCA) of the member state in which they are established. The NCA in Gibraltar is the Gibraltar Financial Services Commission (GFSC).

This will be done through a notification procedure in a member state, each ECSP would also be able to provide their services cross-border. Supervision would also be carried out by NCAs with the European Securities and Markets Authority (ESMA) facilitating and coordinating cooperation between member states.

The Crowdfunding Regulation will be accompanied with additional safeguards and clarification on how investors should be informed of the consequences of their choices.

Implications for crowdfunding in Gibraltar

As of the date of publishing, Gibraltar has not introduced its own specific crowdfunding regulations, although crowdfunding service providers may, given the nature of the products and services these platforms tend to provide, be deemed to be conducting licensable activity falling within scope of Gibraltar’s Financial Services (Markets in Financial Instruments) Act 2018, Prospectuses Act 2005 or Financial Services (Distributed Ledger Technology Providers) Regulations 2017 among other financial services legislative frameworks.

It is noteworthy that in the first reading of the Crowdfunding Regulation in the European Parliament (2018/0048(COD)), it was stated that initial coin offerings (ICOs) “should” be excluded from the Crowdfunding Regulation as their inclusion would not tackle the problems associated with ICOs as a whole.

Gibraltar’s commitment to the advancement of the FinTech regulatory agenda has been apparent in its implementation of the ground-breaking Financial Services (Distributed Ledger Technology Providers) Regulations 2017 establishing Gibraltar as a go-to jurisdiction for all manner of innovative and ‘disruptive’ businesses looking for a forward-thinking jurisdiction with the right regulatory framework within which to operate.

Crowdfunding in Gibraltar Post-Brexit

With Gibraltar scheduled to leave the EU with the UK at the end of January 2020, Gibraltar’s departure is expected to be subject to the terms of a withdrawal agreement, the effect of which will be to require regulatory alignment with the EU for the duration of the implementation period, namely till the end of 2020. To the extent that the Crowdfunding Regulation proceeds through the remaining legislative steps to become law, Gibraltar will pro-actively work to maintain compliance with its provisions.  Whilst any analysis of matters relating to regulatory alignment post-implementation period is premature, there is a wide consensus in the Gibraltar financial services community that alignment enabling continued access to the single market for financial services should be a key objective going forward.

Hassans will continue to report on all relevant developments in this specific and more general matters relating to Brexit as they happen.

For further information on Crowdfunding Service Providers or other FinTech matters please contact Aaron Payas or Patrick Gill from the Hassans’ FinTech Team.

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