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Crowdfunding has become an increasingly more popular means of financing for small and medium-sized enterprises (SMEs) and start-ups to gain access to funds and it is believed to support innovation and growth. Crowdfunding platforms or crowdfunding service providers (CSP) are platforms which link prospective investors to fundraisers and facilitate interactions.
The FinTech Action Plan presented by the European Commission (EC) on 8th March 2018 first made reference to the proposal for an EU Regulation on investment-based and lending-based crowdfunding service providers for business. The action plan stated that the proposal aimed to provide a regulatory framework that allows crowdfunding platforms to operate on a cross-border basis. This aspect of cross-border transactions was extremely limited under the original laws, holding back the scalability of the EU crowdfunding market.
The EU Crowdfunding Regulation (Regulation 2020/1503) was published on 7th October 2020 and member states were required to adopt and publish the necessary laws and regulations by 10th May 2021. There was no EU-wide legislation on crowdfunding prior to this regulation, however some member states had enacted their own regimes.
The European Crowdfunding Service Providers Regulation (ECSPR) requires the EBA, in close cooperation with ESMA, to develop 12 technical standards: 8 regulatory technical standards (RTS) and 4 implementing technical standards. Hence, both the EBA and ESMA launched consultations seeking input from relevant parties on the draft technical standards developed.
The decision to enact ECSP as a regulation means it will become a binding legislative act which all European member states must abide by once it comes into force on 10th November 2021. The decision to develop the ECSP as a regulation rather than a directive is thought to improve harmonisation across the EU. The new regulation, applying a single set of rules across EU member states, will allow crowdfunding providers to apply for an EU passport and facilitate cross-border transactions, as well as improving investor protection.
'Home States’, will be where the platform is regulated and all other countries it offers its services or business are referred to as ‘Host States’. There is expected to be some degree of variability with regards to the regulation of platforms for ‘Home States’, however there are a very small number of areas for a given host state to regulate differently other than with a platforms’ marketing and communication methods.
Draft Regulatory Technical Standards
The EBA published the draft regulatory technical standards (RTS) on 4th June 2021. The structure of the draft RTS is as follows:
- Chapter I sets out general provisions in terms of the information provided by the CSP to the investor and the format of the information.
- Chapter II sets out elements which must be disclosed as part of the credit risk assessment and the associated measurement techniques employed. The chapter covers credit risk of (i) the individual crowdfunding project; (ii) the portfolio; (iii) the project owners.
- Chapter III sets out the information that CSPs must disclose in relation to each loan included in given portfolio.
- Chapter IV sets out the policies, procedures and organisational arrangements that a CSP must have in place with regards to contingency funds.
What entities are in-scope?
The European Crowdfunding Service Providers (‘ECSP’) is a new category of regulated entity developed as a direct result of the Crowdfunding Regulation. ECSPs are crowdfunding platforms who provide either of the following:
- Lending-based crowdfunding (LBC), also known as peer-to-peer lending, which facilitates ‘business funding’. Persons acting as lenders may use the platform of the ESCP to find suitable persons seeking funding (borrowers).
- Investment-based crowdfunding, where persons may invest directly or indirectly into newly established businesses. Investments related to transferable securities only, i.e. shares and debentures.
The Crowdfunding Regulation applies to ECSPs who raise up to €5 million through crowdfunding offerings over a 12-month period. Offers that exceed the €5 million threshold are regulated under MiFID II.
Why Grant Thornton
Grant Thornton’s Financial Services Risk, Consulting and Advisory teams are comprised of dedicated experts who are experienced in supporting companies with these regulatory challenges outlined in the ECSPR.
In particular, our industry-leading Prudential Risk team understands that regulation continues to drive the strategic agenda for financial and non-financial institutions Working together with our sustainability specialists, we believe our skillsets combine the best of scientific knowledge with real world experience to deliver practical, actionable solutions. We specialise in assisting clients across the financial services sector in navigating through the maze of regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.