Monday, November 23, 2020
The regulation of crowdfunding in Ireland, and indeed a unified
approach across Europe has been long awaited.
Due to the continued growth and development of crowdfunding
across Europe over the past number of years the following pieces of
legislation have been brought into effect to provide that much
needed unified framework for the regulation of the sector across
- Regulation (EU) 2020/1503 (the
- Directive (EU) 202004/1504 (the
“MiFID II Amending Directive“).
The Regulation will apply from 10 November 2021, with member
states being required to adopt and publish the necessary laws,
regulations, and provisions to give effect to the directive by 10
May 2021, and to apply those measures from 10 November 2021.
Crowdfunding Service Providers
(“CSPs“) covered by the Crowdfunding
Regulation are excluded from the scope of the MiFID II Amending
Directive, to simplify the applicable rules for CSPs.
Crowdfunding is not currently regulated in Ireland. Instead,
some aspects of a crowdfunding platform services may be caught by
various legislative provisions such as MIFID investment services or
payment services, the Prospectus Regulations and/or the
Companies Act 2014. The Regulations are a welcomed boost to
the sector by providing for key investor protections, increasing
investor confidence, and enabling CSPs passport their services
Why are the Regulations necessary?
With the absence of a unified set of crowdfunding rules across
the EU, this can lead to legal uncertainty and in turn discourage
investment in projects. It is also a barrier to crowdfunding
service providers offering cross-border services. For companies
operating in smaller markets, it has limited their opportunities to
benefit from investments by a large number of people.
Who do the Regulations apply to?
- P2P crowdfunding platforms who
facilitate ‘business funding’
- Investment based crowdfunding
platforms in relation to transferrable securities only.
Donation and reward based crowdfunding models are not caught by
the new regulations.
It will apply to all CSPs in respect of offers of up to
€5,000,000, calculated over a period of 12 months per project
owner; offers above that threshold will be regulated by MiFID
II and the Prospectus Regulation.
A CSP may also be required to be separately authorised under the
Payment Services Directive (“PSD”) where it is carrying
out payment service in the course of providing the crowdfunding
platform, unless the payment service will be performed by an
appropriately authorised third party provider.
Does this mean additional protections for investors?
The introduction of the legislation will require CSPs to give
investors clear information about any potential financial risks
associated with a given project.. The legislation will ensure key
investment information relating to the project will be provided by
the project owner or the platform providing the service.
Authorisation and supervision of CSPs
A legal person who intends to provide crowdfunding services
shall apply to the competent authority in the Member State where it
is established for authorisation as a CSP as set out in Article 12
of the Regulation. CSPs will be required to provide their name,
legal form, programme of operations, constitutional documents,
description of their governance policies in relation to risk
assessment, complaints procedure and business continuity. The CSP
must also furnish details of the appointed management.
A fully reasoned decision must be provided by the relevant
competent authority within three months of the application. Any
authorisations must be recorded with the European Securities and
Markets Authority (ESMA) who will maintain a public register of all
CSPs. Once authorised, CSPs will be supervised by the relevant
authority on an ongoing basis and will be required to produce an
annual report of their work to the relevant authority. If the CSP
no longer meets the conditions for authorisation or is no longer
providing services, authorisation can be withdrawn.
The Regulation also details the investigative and supervisory
powers of Competent Authorities in relation to CSPs.
Operational requirements of Crowd Funding Service
- CSPs shall act honestly, fairly, and
professionally in accordance with the best interests of their
- Effectively employ risk assessment
and risk management procedures and policies in a prudent
- In the interest of avoiding conflicts
of interest, CSPs should operate as neutral intermediaries between
clients on their crowdfunding platform.
- CSPs shall undertake at least a
minimum level of due diligence in respect of project owners that
propose their projects to be funded through the crowdfunding
platform of the CSP.
- CSPs shall have in place effective
and transparent procedures for the prompt, fair and consistent
handling of complaints received from clients and shall publish
descriptions of those procedures.
All information, including marketing communications as from CSPs
to clients about themselves, about the costs, financial risks and
charges related to crowdfunding services or investments, about the
crowdfunding project selection criteria, and about the nature of,
and risks associated with, their crowdfunding services shall be
fair, clear and not misleading.
CSPs shall inform their clients that their crowdfunding services
are not covered by the deposit guarantee scheme established in
accordance with Directive 2014/49/EU and that transferable
securities or admitted instruments for crowdfunding purposes
acquired through their crowdfunding platform are not covered by the
investor compensation scheme established in accordance with
If CSPs apply credit scores to crowdfunding projects or suggest
the pricing of crowdfunding offers on their crowdfunding platform,
they shall make available a description of the method used to
calculate such credit scores or prices. If the calculation is based
on accounts that are not audited, that shall be clearly disclosed
in the description of the method.
It is notable that the Regulation provides for specific
protection for “sophisticated” and
“non-sophisticated investors”, including whereby, the
latter must undergo a suitability assessment by the CSP. The
Regulation recognises that a sophisticated investor (e.g. an
investment firm, institutional investors, large corporates etc) is
aware of the risks associated with investments in crowdfunding
projects, and therefore the barriers or checks that are applicable
to non-sophisticated investors are not required. Such barriers or
checks include a loss simulation exercise to show a
non-sophisticated investor can withstand a 10% loss to their net
worth (to be reviewed by the CSP annually).
The introduction of a pre-contractual “reflection
period” may prove problematic in practice or require revisions
to existing platforms, where non-sophisticated investors may revoke
any offer to invest within 4 days of making an offer.
The requirement for a company raising funds (i.e. the
“Project Owner”) to prepare an investment information
sheet was to be expected and is good practice. The CSP must
verify the accuracy of this information and where there are
inaccuracies that are not addressed properly, the CSP must take
steps to cancel the crowdfunding offer.
Member States shall, in accordance with their national law,
ensure that competent authorities have the power to impose
administrative penalties and other administrative measures
including fines of up to at least €500,000 and take any other
suitable measures for infringements of certain provisions of the
A decision imposing administrative penalties or other
administrative measures for infringement of the Regulation shall be
published by competent authorities on their official websites
immediately after the natural or legal person subject to that
decision has been informed of that decision. The publication shall
include at least information on the type and nature of the
infringement and the identity of the natural or legal persons
The Regulations have been a long time coming and are a
much-welcomed development for companies small and medium, looking
to scale globally.
In August 2017, on foot of an invite from the Department of
Finance for submissions for a crowdfunding regulatory framework in
Ireland, Philip Lee was the only Irish law firm to address the
consultation in full. Many of the issues identified in the
Philip Lee submission and other industry submissions have
materialised in the Regulation, including due diligence checks, the
applicability of the Prospectus Regulations, suitability
assessments for investors, the concept of a key information sheet
and robust complaints handling processes.
Crowdfunding platforms that comply with the new rules and
become “authorised crowdfunding service
providers” may offer their services to potential
investors across the EU under the EU passporting regime. This is a
significant development for the sector, where Irish based companies
using a CSP can have access to the European investment market via
crowdfunding, and investors across Europe can have confidence in
the sector and the CSP itself, where all players are adhering to
the same rulebook.
Ireland is already a world leader in attracting foreign direct
investment. To date, some of the most successful CSPs have operated
from the UK under local rules. Given Ireland’s prominent
position as a destination for doing business, coupled with Brexit
and the challenges that local businesses in the UK will have in
accessing the European market, the implementation of the Regulation
in Ireland has the potential to pave the way for Ireland to be a
global hub for the crowdfunding sector.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.