For Reid Feldman and Hubert de Vauplane of the Paris Office of Law Firm Kramer Levin, the latest revisions of the French crowdfunding regulation are part of a broader effort by the French authorities to relax the monopoly of French banks on credit and extend the scope of alternative financing. Besides an increase of the ceiling of funds that can be raised through crowdfunding, most notable evolutions are the introduction of a new financial instrument called “minibon” and the clarification of the status of crowdinvesting platforms. More substantial reform will be necessary to unleash the potential of alternative financing.
Therese Torris: You consider the recent changes in French crowdfunding regulation as part of a broader trend towards opening up the French banking monopoly, can you explain?
Hubert de Vauplane : The reform of France’s crowdfunding regulation fits into a trend toward supporting alternative credit channels. Several recent regulatory developments go in this direction, including the creation of European long-term investment funds (ELTIFs) which allows Alternative Investment Funds (AIF) to grant loans directly to companies; the ESMA opinion of 11 April 2016 advocating the liberalization and harmonization of rules on financing of businesses by investment funds; and the “Sapin II” law which allows French authorities to promulgate legislation on the financing of business by funds and the assignment of business loans to them. These changes are progressively making dents in the banking monopoly on credit.
Therese Torris: What are the major regulatory changes concerning crowdfunding?
Reid Feldman : This year – two years after France adopted a progressive legal framework dedicated to crowdfunding – we have seen a flurry of new legal measures. One major change is the increase of the ceiling for offerings of securities via crowdfunding platforms without the need for a prospectus. An issuer may now raise up to €2.5 million in any 12-month period, provided that issuances above €1 million not represent more than 50% of the issuer’s capital. And lenders on loan platforms (IFPs) can make interest-bearing loans of up to €2,000 per project, up from the previous limit of €1,000.
A second change is that securities offered through crowdinvesting platforms can include not only ordinary shares and plain vanilla bonds but also all kinds of shares, including preferred shares and other hybrid securities, as well as participating notes issued by cooperative firms and for-profit state-owned businesses.
Another very important development was the creation of a new type of financial investment issued by crowdinvesting platforms: the minibon.
Therese Torris: Can you explain the regulatory framework for minibons?
Hubert de Vauplane: Indeed, an ordonnance this April set up new rules for an old form of promissory notes called bons de caisse, which are IOUs for debt of a maximum maturity of 5 years issued by a business with a least three years of financial accounts. In October, a decree clarified the conditions for issuing minibons through crowdfunding platforms. Minibons will pay a fixed interest rate limited by the usury rate for business overdrafts (as are loans intermediated by IFPs) and be amortized at least quarterly (so in fine repayment is prohibited). The maximum amount of minibons issued by a company in any 12-month period is €2.5 million.
Minibons can only be issued via the internet platforms of CIPs (Conseil en investissement participatif) or PSIs (Prestaire de services d’investissement), which now have access in this context to the official banking record of company debt or « FIBEN ». Rules of conduct applicable to CIPs and PSIs for the intermediation of shares and bonds also apply in respect of minibons. One novelty is that the transfer of minibons may be handled via distributed ledger technology using « blockchain » – details should be provided by a decree currently under discussion.
Therese Torris: What regulatory changes do you expect or hope will unleash the potential of alternative financing in France?
Reid Feldman : Allowing investment funds to make loans to companies is a very important development for France. The growth of alternative financing for businesses and consumers has been spectacular in countries such as the United Kingdom, the United States and China, but this has not yet been the case in France.
In addition to ELTIFs, two types of investment funds may now lend directly to companies: the specialized professional fund (fonds professionnel spécialisé or “FPS”) and the professional capital investment fund (fonds professionnel de capital investissement or “FPCI”).
Management companies of such funds must be licensed in France, or in another EEA Member State which has the same requirements as France, for “granting loans” and must insure that the fund respects operating and other requirements such as the procedures for credit analysis and risk evaluation.
Fund management companies that invest in minibons will have to be licenced for “selecting loans”. The French market and securities regulator, the AMF will require them to have sufficient resources to carry on this activity. Note also that the conditions required for the securitization of minibons via a securitization entity (organisme de titrisation or “OT”) are, for the time being, not defined.
Main French crowdfunding regulation references
- Ordonnance n° 2016-520 du 28 avril 2016 relative aux bons de caisse (Promissory notes)
- Décret n° 2016-799 du 16 juin 2016 relatif aux obligations d’assurance de responsabilité civile professionnelle des conseillers en investissements participatifs et des intermédiaires en financement participatif
- Décret n° 2016-1453 du 28 octobre 2016 relatif aux titres et aux prêts proposés dans le cadre du financement participatif
- Décret n° 2016-1587 du 24 novembre 2016 fixant les conditions dans lesquelles certains fonds d’investissement peuvent octroyer des prêts aux entreprises
- Arrêté du 12 octobre 2016 portant homologation de modifications du règlement général de l’Autorité des marchés financiers (AMF)
- LOI n° 2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique (Loi Sapin)
Therese Torris, PhD, is a Senior Contributor to Crowdfund Insider. She is an entrepreneur and consultant in eFinance and eCommerce based in Paris. She has covered crowdfunding and P2P lending since the early days when Zopa was created in the United Kingdom. She was a director of research and consulting at Gartner Group Europe, Senior VP at Forrester Research and Content VP at Twenga. She publishes a French personal finance blog, Le Blog Finance Pratique.