European Crowdfunding Regulation – Lexology

A. Overview

On 20 October 2020, Regulation (EU) 2020/1503 of 7 October 2020 on European crowdfunding service providers for business (“Crowdfunding Regulation”), which applies from 10 November 2021, was published in the Official Journal of the European Union. This is the first regulation of crowdfunding services on a European level. Up to now, crowdfunding has been governed under the various national laws of the Member States. A consequence of this is the fragmentation of applicable regulatory regimes which makes the provision of cross-border crowdfunding services almost impossible. The key aim of the Crowdfunding Regulation is to change this position by fostering cross-border crowdfunding services in the Union while at the same time to ensure a high level of investor protection.

B. Scope of Application

The Crowdfunding Regulation applies to the provision of crowdfunding services which are defined as the matching of business funding interests of investors and project owners (i.e., the persons seeking funding) through the use of an internet-based crowdfunding platform and which consist of any of the following activities:

  • the facilitation of granting of loans;
  • the placing without a firm commitment basis and the reception and transmission of client orders in relation to transferable securities and admitted instruments for crowdfunding services.

The Crowdfunding Regulation does not apply to:

  • project owners who are consumers;
  • crowdfunding offers of a project owner relating to transferable securities with a total consideration of EUR 5,000,000 or more calculated over a period of 12 months; and
  • the brokerage of qualified subordinated loan receivables.

C. Key Provisions of the Crowdfunding Regulation

I. Authorization and Supervision of Crowdfunding Service Providers

1. Scope of Authorisation

Crowdfunding services may be provided only with an authorisation as a crowdfunding service provider under Art. 12 of the Crowdfunding Regulation. This authorisation also allows a service provider to provide the following ancillary services:

  • Individual portfolio management of loans (Art. 6 of the Crowdfunding Regulation);
  • Operation of a bulletin board (Art. 25 of the Crowdfunding Regulation).

The individual portfolio management service includes relevant auto-invest functions (i.e., the selection of loans to be disbursed by the investor according to pre-defined criteria).

The operation of a bulletin board means the provision of a secondary market on which the customers of the crowdfunding service provider can indicate their interest in buying and selling loans or securities originally offered on the crowdfunding platform. However, no contracts may be concluded on the forum. In other words, the bulletin board must not be a multilateral trading facility within the meaning of Art. 4(1) No. 22 of Directive 2014/65 (MiFID II).

Authorisation under Art. 12 does not cover payment services as defined in Directive (EU) 2015/2366 (PSD II). Thus, for the provision of payment services (e.g., money remittance business), either an additional license under the PSD II or an authorised payment service provider is required to be instructed.

Although the Crowdfunding Regulation basically applies from 10 November 2021, crowdfunding service providers can continue to provide crowdfunding services in accordance with applicable national law until 10 November 2022, unless they have obtained a licence under the Crowdfunding Regulation before that date. The Commission can extend this transitional period by one year until 10 November 2023.

2. Prerequisites for an Authorisation

The prerequisites for an authorisation under Art. 12 are – compared to the national rules applicable to date – rather strict. In particular, the following information must be submitted with the application:

  • description of the governance arrangements and internal control mechanisms;
  • description of the systems, resources and procedures regarding the control and safeguarding of the data process systems;
  • description of operational risks;
  • description of the prudential safeguards (i.e., own funds requirements in a minimum of EUR 25,000);
  • description of the continuity plan;
  • description of any outsourcing arrangements;
  • fit and proper test as well as excerpt from the criminal records authority concerning the board members.

3. Supervision

Crowdfunding service providers will be supervised by the National Competent Authorities (NCAs) of the Member States concerned. In Germany this will be the Federal Financial Supervisory Authority (BaFin).

The European Securities Markets Authority (ESMA) will establish a publicly available register of all authorised crowdfunding service providers.

II. No Authorisation Requirement for Investors and Project Owners

Under the Crowdfunding Regulation, investors and project owners are expressly excluded from any authorisation requirements for the granting of loans and the acceptance of funds for loans which have been facilitated through an authorised crowdfunding service provider. In particular, they will not need a banking license for the deposit and credit business.

III. European Passport

Authorized crowdfunding service providers benefit from the ability to render their crowdfunding services on a cross-border basis within the European Economic Area (EEA) by applying for a European Passport (Art. 18 of the Crowdfunding Regulation). This will allow investors to invest on a pan-European basis through crowdfunding platforms. Similarly, project owners will benefit from their ability to seek capital from investors throughout the EEA.

The procedure to obtain a European Passport is straight forward. 15 days at the latest after the submission of the relevant information, the crowdfunding service provider can start to provide crowdfunding services in the relevant Member States. No additional approval will be required.

IV. Consumer Protection

Chapter IV of the Crowdfunding Regulation deals with investor protection. Among many other consumer protection duties, crowdfunding service providers will be obligated to provide prospective investors with a key investment information sheet drawn up by the project owner (Art. 23 of the Crowdfunding Regulation). The key investment information sheet must include the information referred to in Annex I of the Crowdfunding Regulation, but it will not be subject to an approval from the relevant NCA. As a departure from the general requirement for the project owner to prepare the key investment sheet, where services are provided in connection with loan portfolio management, the crowdfunding service provider itself must prepare the document (i.e., at the platform level). In those circumstances, the key investment sheet must include the information prescribed by Art. 24 of the Crowdfunding Regulation.

D. Impact on Existing Crowdfunding Business Models and Outlook

Irrespective of the fact that the Crowdfunding Regulation will not cover all existing crowdfunding business models, it should have a significant impact on existing crowdfunding structures in Europe. In particular, the availability of the European Passport will open new funding sources for project owners. This together with the harmonized authorisation requirements of crowdfunding service providers is expected to contribute to further growth of the crowdfunding market in the European Union. In addition, the exemption of investors and project owners from being licensed as credit institutions, allows the granting and brokerage of loans through a crowdfunding platform without the need of a fronting bank. This should make crowdlending more cost-efficient and more attractive to project owners and investors. However, these advantages will be available only upon receipt of an authorisation from the competent NCA and the authorisation process may prove to be somewhat burdensome, crowdfunding service providers would be well advised to prepare for the authorisation procedure sooner rather than later.



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