This past week the European Securities and Markets Authority (ESMA) issued a consultation paper addressing standards for the previously approved pan-European crowdfunding regulation. As covered in the past, the European Union has passed legislation to enable online securities offerings across its member nations. After many years of debate and discussion, the enactment of the law that legalizes cross-border securities offerings for crowdfunding platforms has been broadly welcomed by industry participants. Under the new rules, issuers may raise up to €5 million across the European Union. It is anticipated that these new rules will be a huge boost to online capital formation for the European Union. The European Crowdfunding Service Providers for Business and Amending Regulation (ECSPR) was approved in October 2020 and is anticipated to go into effect towards the end of 2021.
Supervision of these securities offerings will be carried out by national competition authorities with the ESMA coordinating cooperation between EU member states. Of course, questions remain and the ESMA has been tasked with establishing a viable regulatory environment for investment crowdfunding rules to be effective.
The consultation provides a draft version of some of the Technical Standards that ESMA will submit to the European Commission according to the ECSPR. The ECSPR requires ESMA to develop 8 draft regulatory technical standards (RTSs), including 2 in cooperation with the European Banking Authority (EBA), and 4 draft implementing technical standards (ITSs). The majority of these standards will be submitted by ESMA to the European Commission by 10 November 2021. The remaining 4 technical standards mandates (2 RTSs and 2 ITSs) must be delivered to the Commission by 10 May 2022. In addition to these 12 mandates to ESMA, the new regulation gives a mandate to EBA to develop 2 additional RTS (both in cooperation with ESMA). Crowdfunding Service Providers (CSPs) are preparing feedback to be submitted to ESMA now.
The consultation is divided up as follows:
- Complaints handling
- Conflicts of interest
- Business continuity plan
- Application for authorisation
- Information to client on default rate of projects
- Entry knowledge test and simulation of the ability to bear losses
- Key investment information sheet
- Reporting by crowdfunding service providers (CSPs) to CAs and CAs to ESMA
- Notification to ESMA of national provisions concerning marketing requirements
ESMA has posed a series of 20 different questions for interested parties including such topics like the “key investment information sheet” (KIIS) which is expected to be created by each issuer for each securities offering or at the platform level to maintain transparency and boost investor protection.
At the end of January, Olivier Gajda, the Executive Director of the European Crowdfunding Network (ECN), told Crowdfund Insider:
“In those EU Member States where until now no regulation was applied to crowdfunding, this [ECSPR] will be the case as of November 2021. This brings more clarity for small investors, especially in those market where there has been potential fraud already, and create new opportunities in those market where no or limited activity has happened until now. For those Member States where regulation has been applied already, the new rules will replace existing regulatory interpretation at the latest in November 2022 due to a transition period for member states with existing crowdfunding regulation. Exceptions might survive where regulation is not based on capital markets laws, but we don’t expect them to be significant going forward. The new rules will provide fertile ground for platforms with a professional background, capital, and the willingness to grow. But this will also mean renewed investment to adapt procedures and professional conduct. We will see increased consolidation, which in some national markets would help create larger actors, and cross border expansion of more platforms, likely the bigger markets first. And we will see new players enter.”
It may be too early to delineate areas of concern raised by securities crowdfunding platforms, CI is aware of ongoing discussions taking place in preparation to respond to the ESMA consultation. Some of the debate will emerge from needing national regulators to level the playing field between existing law and European rules. Member states must be cognizant of the fact that issuers may be inclined to host offerings in countries with regulations viewed as more friendly to online capital formation.
The ESMA consultation is embedded below or you may download it here.