Crowdfunding also regulated at European level

Crowdfunding is increasingly an established form of alternative financing for start-ups as well as for small and medium businesses at an early stage of company growth. Usually this funding is provided by family, friends and own financial resources until later development rounds in which venture capital or even private equity funds take an interest.

Crowdfunding represents a type of intermediation where a crowdfunding service provider operates a digital platform

• open to the public;
• in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding;
• irrespective of whether that funding leads to a loan agreement, to an equity stake or to another transferable security based stake;
• without the crowdfunding service provider taking on own risk.

1. What is the purpose of this crowdfunding regulation?

The aim of this Regulation is to create a capital markets union (KMU) and to increase the availability of finance for innovative companies, start-ups and other non-listed companies and to promote business financing.

Several Member States, including Belgium, already have their own national legislation on crowdfunding, but these laws differ significantly in several areas. As a result, investors are less inclined to invest across borders via crowdfunding platforms. And this has a direct impact on the functioning of the internal market for such services.

The merit of the Regulation is that it introduces a single regime for the provision of crowdfunding services. As a result, providers of crowdfunding services will have the option of applying for a single licence for their activities across the European Union.

2. What does this mean?

Any crowdfunding platform operator will be able to apply for a licence form "European Enterprise Crowdfunding Service Provider" (ECSP).

This has to be done through the national prudential authority, in Belgium the FSMA.

Such an ECSP licence will allow crowdfunding platforms to operate throughout the EU without having to comply with the national regulations of the other Member States.

The Regulation introduces uniform requirements for the following aspects of a crowdfunding platform:

• The functioning and organisation of an ECSP;
• The procedure for licensing and supervising an ECSP;
• Transparency and marketing communications in relation to the provision of crowdfunding services in the EU.

The Regulation is not intended to replace the existing national regulations of the Member States. Providers of crowdfunding services can still choose to provide crowdfunding services at national level on the basis of existing national legislation alone.

But in that case, it is not possible to obtain a licence as an ECSP.

3. What should an ECSP take into account?

The maximum price for each crowdfunding offer should not exceed the €8 million threshold. This amount will be calculated over a period of 12 months.

Among other things, an ECSP must meet the following conditions:

• Ensure effective and prudent management, including segregation of duties, business continuity and prevention of conflicts of interest, in a manner that promotes the integrity of the EU market and the interests of their clients;
• Exercise at least a minimum level of due diligence towards project owners proposing to fund their project through their crowdfunding platform;
• Have effective and transparent procedures for dealing promptly, fairly and consistently with customer complaints and clearly describe them;
• Prevent conflicts of interest by not holding a financial participation in a crowdfunding offer on their platform unless the information on that participation is clearly made available to the customers;

Crowdfunding service providers shall offer their services under the supervision of the national competent authority of the Member State where the crowdfunding service provider is authorised. For Belgium, this is the FSMA.

ESMA (the European regulator) compiles a register of all crowdfunding service providers, which is made available to the public on its website and regularly updated.

4. Scope of the Regulation

The Regulation applies to legal persons, which are genuinely and permanently established in an EU Member State, and which choose to apply for, or already have, a licence as an ECSP.

Both crowdfunding based on lending and crowdfunding based on equity participation are covered by the Regulation.

Crowdfunding services don't fall within the scope of the Regulation:

• when they use initial coin offerings (ICOs) on their platform, i.e. crypto currencies and assets for which a separate European regulation is in the making;
• in connection with consumer credits;
• offered by persons authorised under Directive 2014/65/EU;
• offered in accordance with national legislation;
• in case of financial instruments other than securities;
• offered with a price above EUR 8 000 000, calculated over a period of 12 months, in relation to a particular crowdfunding project.

5. Conclusion

This new Regulation can be considered as an important milestone in business financing.

It will make cross-border funding via crowdfunding platforms much easier. 

And yet, it will still be possible to launch a crowdfunding platform within one of the Member States provided that the relevant national legislation in that Member State is respected. But, in that case, it will not be possible anymore to obtain a licence as an ECSP.

A Regulation has direct effect and therefore does not need to be transposed into Belgian law.

This Regulation entered into force on 9 November 2020 but its application is (mainly) foreseen for 10 November 2021.