EU creates a single framework for crowdfunding services - A new perspective for the Luxembourg financial sector in the digital world ?
On 7 October 2020, the European Parliament adopted Regulation (EU) 2020/1503 (“Crowdfunding Regulation” or “Regulation”), which aims to make it easier for crowdfunding platforms to offer their services throughout the EU single market. The Crowdfunding Regulation entered into force and applies to crowdfunding offers since 10 November 2021. As a European Regulation the Crowdfunding Regulation does not require further transposition or implementation into national law, the Luxembourg Law of 25 February 2022 amending the Law of 2 March 2004 on Securitisation now provides additional provisions stating in particular the competence of the CSSF for the due authorization of Luxembourg providers.
Objectives of the Crowdfunding Regulation
The aim of the Crowdfunding Regulation is to create a uniform legal framework for crowdfunding services in the European Union. Pursuant to Article 1 (1) the Regulation establishes uniform requirements for the provision of crowdfunding services.
- for the provision of crowdfunding services,
- the organisation, authorisation and supervision of crowdfunding service providers,
- the operation of crowdfunding platforms, and
- transparency and marketing communications in relation to the provision of crowdfunding services.
Crowdfunding is an alternative form of financing that uses a publicly accessible and digital crowdfunding platform to bring together potential backers with companies that need funding for a specific project or business idea. The investment offer is aimed in particular at private individuals. Funding is usually provided through a large number of small amounts of money from several backers. In addition to the investors and the companies to be financed, crowdfunding service providers are involved in the provision of crowdfunding services as an intermediary organisation. These bring together the project promoters and the investors with the help of an online platform. The Crowdfunding Regulation focuses primarily on crowdfunding service providers and sets out special requirements for them.
What is the scope of the Crowdfunding Regulation ?
The Regulation applies to credit-based and investment-based forms of crowdfunding (“lending-based crowdfunding” and “investment-based crowdfunding”) up to a total investment volume of 5m euros per crowdfunding offer.
The Crowdfunding Regulation thus covers loans, transferable securities and other instruments authorised for crowdfunding purposes. However, according to Art. 2 of the Regulation, “loans” only include loans with an unconditional repayment obligation. Subordinated loans are thus not covered by the provisions of the Crowdfunding Regulation. The other instruments permitted for crowdfunding purposes generally also include shares in limited liability companies, provided that their effective transfer is not subject to restrictions under national law.
Admission regime of the Crowdfunding Regulation
At the heart of the Regulation is the creation of a uniform authorisation regime. In future, crowdfunding service providers (“European Crowdfunding Service Providers” or “ECSP”) will only need a single authorisation on the basis of which they can offer their services via a corresponding platform throughout the EU. For this, the company seeking the regulatory status of an ECSP must fulfil the following requirements:
- Only companies with an establishment in an EU member state can be authorised as crowdfunding service providers ;
- The authorisation is granted upon application by the competent authority of the member state ;
- The licensing authority decides on the application within 3 months and communicates its decision to the respective applicant as well as to the European Securities and Markets Authority (“ESMA”) ;
- ESMA shall maintain a list of all crowdfunding service providers, which shall be publicly accessible on its website and kept up to date at all times.
Organisational and due diligence requirements and investor protection
In addition, numerous organisational, due diligence and conduct obligations are introduced for crowdfunding service providers that serve to protect investors. These include, in particular, the obligation to provide potential investors with a Key Investment Information Sheet prepared by the promoter for each offer. The Crowdfunding Regulation specifies with an annex the information to be included therein. In addition, crowdfunding service providers must publish the default rates of crowdfunding projects offered on their platform over the last 36 months.
Platform for secondary market of crowdfunding investments
Finally, the Crowdfunding Regulation creates the possibility for crowdfunding service providers to operate a forum or platform through which investors can indicate their interest in buying or selling loans, transferable securities or instruments eligible for crowdfunding purposes originally offered on their platform. This platform is not intended to be an internal system for concluding securities transactions, unless the crowdfunding service provider is also separately authorised as an investment firm in respect of transferable securities in accordance with Article 5 of Directive 2014/65/EU. The platform is solely intended to facilitate access to the secondary market of crowdfunding investments.
Implications for existing crowdfunding regulations
The Regulation puts crowdfunding on new regulatory ground in Luxembourg as well. The Crowdfunding Regulation takes precedence over any specific national regulations, legal provisions and regulatory regimes for the cases that fall within its scope. Accordingly, crowdfunding offers relating to the investment products covered must comply with the requirements of the Crowdfunding Regulation (cf. Article 1(2)(c) of Regulation (EU) 2020/1503). Accordingly, a aforementioned maximum threshold of 5m euros applies in particular as to the total volume of the crowdfunding offer.
The Regulation differentiates between knowledgeable and non-knowledgeable investors with regard to investor protection. The terms are defined in the Regulation. In simplified terms, knowledgeable investors are professional clients, for whom no limits apply to the amount to be invested. To protect non-expert investors however, the Crowdfunding Regulation provides for maximum investment amounts. Thus, non-expert investors can only invest an amount of 1,000 euros or 5 per cent of their net assets in a project without further protective measures. However, investments in excess of this remain possible in principle. In these cases, the crowdfunding service provider only has to ensure that the investor receives a risk warning, explicitly agrees to the investment vis-à-vis the crowdfunding service provider and proves that he understands the investment and its risks.
In general, any crowdfunding services falling within the scope of the Crowdfunding Regulation are already subject to the rules set out in the Regulation as from 10 November of last year, date when the Regulation came into effect. From a Luxembourg perspective the provision of crowdfunding services from the territory of the Grand Duchy of Luxembourg requires a license as ECSP from the Commission de Surveillance du Secteur Financier (“CSSF”), as such service providers fall under the ongoing prudential supervision of the CSSF. However – as the CSSF explicitly clarified – in the interest of legal certainty and in view of the replacement of national rules by the rules set out in the Regulation, insofar as types of crowdfunding services are concerned which are now included within the scope of the Regulation, Article 48 of the Regulation introduced a transitional period until 10 November 2022 at the latest allowing persons providing such crowdfunding services in accordance with national law preceding the Regulation to adapt their business activities to the Regulation and to have sufficient time to apply for an authorisation thereunder. The European Commission clarified that the transitional period is also applicable to ECSP operating in a jurisdiction where no national law is applicable, such as Luxembourg. The CSSF recently invited platforms active in crowdfunding service provision to assess whether their services fall under the scope of the Regulation and in the positive, to apply for the CSSF authorisation as European Crowdfunding service providers, to be obtained at the latest by the end of the transitional period, i.e. 10 November 2022. An authorisation request should be introduced with the CSSF in accordance with the Regulation and in particular Article 12 of the Regulation which will be further detailed by regulatory technical standards to be adopted by the European Commission. Until then, the CSSF recommends to consider ESMA’s draft regulatory standards for guidance.
Additional formal provisions and rules complementing the Regulation were formally enacted in Luxembourg by the Law of 25 February 2022 amending the Law of 2 March 2004 on Securitisation et al. (see our Post dated 21 February 2022), which was published in the Memorial on 4 March 2022 and entered into force as per 8 March 2022.
Assessment and outlook
The Crowdfunding Regulation lays the foundation for a uniform and reliable framework for crowdfunding platforms. The Regulation creates legal certainty and reliability for both crowdfunding service providers and investors.
It is particularly welcome from a domestic perspective – with Luxembourg successfully offering cross-border financial services in the banking, insurance and investment fund area – that Luxembourg-regulated crowdfunding service providers can from now on serve the entire EU internal market on the basis of a single CSSF-license, providing them with a European Passport.
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