There are multiple online platforms that facilitate crowdfunding. These platforms bring companies and individual investors together and allow for multiple, often small, investments in, or loans to, companies. In turn, this activity allows these companies to raise capital. To date, crowdfunding activities have not been regulated on a stand-alone basis in Ireland. However, that is set to change and the European Union has introduced a new framework that will regulate crowdfunding across EU Member States.
When will the Regulation apply and who does it apply to?
The new Crowdfunding Regulation (EU 2020/1503) will apply from 10 November 2021. Member States are required to adopt the Crowdfunding Regulation by 10 May 2021.
The Crowdfunding Regulation applies to ‘crowdfunding services’ which include:
Peer to peer crowdfunding platforms facilitating ‘business funding’ (lending to consumers is excluded), and
Investment-based crowdfunding platforms in relation to transferable securities only
In short, the Crowdfunding Regulation provides for business finance by loan or investment and seeks to regulate EU based Crowdfunding Service Providers (CSPs) that provide crowdfunding services via online platforms.
The Crowdfunding Regulation excludes CSPs covered by its scope from the scope of MiFID II in an effort to provide for a simplified regulatory regime for CSPs. However, the parameters of the Crowdfunding Regulation are limited and companies seeking finance or investment via the crowdfunding platform are restricted to raising €5 million within a 12 month period.
Offers above the €5million threshold fall within the scope of MiFID II and/or the Prospectus Regulation.
In addition, the scope of the Crowdfunding Regulation does not extend to payment services to be offered by the CSP. In this instance, the CSP should either seek authorisation under the Second Payment Services Directive to provide these services or appoint an appropriately authorised third party provider to provide payment services.
What does the Crowdfunding Regulation mean for CSPs?
In short, CSPs based in Ireland will require a licence from the Central Bank of Ireland to provide crowdfunding services.
1. Operational requirements
The Crowdfunding Regulation introduces a number of operational requirements which CSPs must adhere to, these include a requirement to:
Undertake due diligence in respect of project owners that propose their projects to be funded through the CSPs platform
Publish effective and transparent procedures for the prompt, fair and consistent handling of complaints received from clients, and
Act honestly, fairly, and professionally
Irish based CSPs will be expected to apply for authorisation from the Central Bank of Ireland in a similar way to other regulated financial services providers. The Central Bank has not yet published any details around the application process that will apply and the type of information it will require. However, details of this process are expected to be published over the next few months.
Once authorised, a CSP will be entitled to access the European single market by way of a single authorisation obtained in its home Member State.
It is essential that existing CSPs take steps now to ensure full compliance with the Crowdfunding Regulation in advance of the 10 November 2021 deadline. CSPs will be required to engage in an authorisation process with the Central Bank. CSPs that intend to enter the Irish crowdfunding market in 2021 and beyond should develop their platform in a way that is cognisant of the Crowdfunding Regulation to ensure regulatory compliance from the launch of the CSP platform.
Contact our Financial Regulation team for more information on ensuring compliance with the Crowdfunding Regulation.
The content of this article is provided for information purposes only and does not constitute legal or other advice.