Currently Russia’s emerging crowdfunding sector accounts for less than 500 million rubles (USD 7,748,755) in total liabilities, and shows disproportion of different segments and high volatility. The Central Bank of Russia (CBR) has initiated a working group of market experts from more than ten local crowdfunding platforms for the development of a regulatory framework for crowdfunding regulation for its nascent entrance with the intention of brainstorming proposals for the development of crowdfunding regulation and then submitting them to the regulator, according to a release. The proposals will eventually become a core of a crowdfunding regulatory framework that will be developed by the central bank.
“We based our concept of crowdfunding regulation on proportionate regulation and supervision guided by the expected risks, and took into account the needs of market participants who face difficulties in accessing certain funding sources,” explained Mikhail Mamuta, the Head of the Service for Protection of Financial Services Consumers and Minority Shareholders. “However, we have enough time, because crowdfunding market is only emerging and has yet to gain in volume.”
“Supervision over crowdfunding platforms should be guided by the market risks without hindering the development of efficient crowdfunding business models” is fundamental to the Bank of Russia’s approach to regulation, per communication during the first meeting of the working group on monitoring, consumer risk assessment and development of proposals for crowdfunding regulation.
The CBR also noted that crowdfunding is supposed to be regulated in three main directions, “Regulating activities of crowdfunding platforms and determining requirements for their owners and management; determining requirements for issuers of securities (offered through the platforms) and borrowers; and determining requirements for creditors and investors using crowdfunding platforms.”
The Service for Protection of Financial Services Consumers and Minority Shareholders, the author of the approach, believes that crowdfunding regulation should be introduced piecemeal, through oversight and voluntary polls of crowdfunding platforms, determining criteria for classification and registration, reporting and subsequently establishing requirements for financial indicators and risk management. Consumer rights protection remains a priority in developing the regulation framework.
Addressing and clarifying terminology is paramount for the Bank:
“In particular, crowdfunding is suggested to be defined as a mechanism for raising borrowed funds or collective funding of companies or projects with the use of Internet platforms, e.g. P2P loans, targeted grants and donations, as well as investment, through acquisition of a company’s shares or bonds, project funding with a view to make use of its outcome (concert tickets, CDs, film-making, etc.).”
Since the Bank of Russia began polling crowdfunding platforms on a voluntary basis in 2015, the monitoring revealed both market growth drivers and key crowdfunding risks. Research indicated that investors are driven by unlimited volume and maturity of investment and few formalities, while entrepreneurs launching startups are attracted by fund allocation procedure that is more simple as compared with credit institutions and microfinance organisations. Meanwhile, both investors and borrowers face risks from inaccurate identification, low quality of business project verification or other borrowers, to non-transparent activity of a platform and possibility of fraud, including Ponzi schemes. And of course these is the inherent risk of a fund loss if a project fails to raise enough money to be launched.