Harmonized European crowdfunding laws commence today (November 10, 2021). After years of engagement by industry leaders, largely due to the efforts of EuroCrowd, issuers may now utilize investment platforms to sell securities across all EU member states.
The European Crowdfunding Service Providers Regulation (ECSPR) rules allow platforms to be licensed at the member state level but issue securities to investors across the EU. Companies may raise up to €5 million. Prior to ECSPR, issuers could raise money across different countries in Europe but also had to manage a diverse set of regulations thus adding unnecessary friction to the funding process.
The EU explains:
“The EU market for crowdfunding is underdeveloped compared with other major world economies. For many years, one of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders has been the lack of common rules and diverging licensing requirements across the European Union. This has resulted in high compliance and operational costs, which prevented crowdfunding platforms from efficiently scaling the provision of their services. As a result, small businesses had fewer financing opportunities available to them and investors had less choice and faced more uncertainty when investing cross-border.”
Many years in the making the new rules are expected to “increase the availability of this innovative form of finance, which will help companies seeking alternatives to bank financing.”
Platforms and issuers must adhere to a set of requirements including disclosure and investor protection rules.
While the harmonized rules are actionable today for providers, final rules are still pending following a consultation by the European Securities and Markets Authority (ESMA) that is slated to reveal more granular details in May of 2022. It is not immediately clear as to when the first offering will be listed under ECSPR.
As it stands at the moment, ESMA must create 12 technical standards and 8 regulatory technical standards as well as 4 implementing technical standards.
Details outstanding include:
- Complaint 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 loss;
- Key investment information sheet;
- Reporting by crowdfunding service providers to NCAs (and NCAs to ESMA); and
- Publication of national provisions concerning marketing requirements.
ESMA has already published a Q&A on special purpose vehicles (SPVs) an important clarification that makes it easier for issuers to manage shareholders and platforms to facilitate transactions. Draft technical standards may be viewed here.
In a blog post today, EuroCrowd explained:
“The new law brings change. As of now, crowdfunding service providers offering financial services will operate under the same license for lending and securities – as well as some national instruments that will be subject to the new rules. The rules are also distinctively different from existing frameworks, so that crowdfunding has been established as a separate professional financial services sector. While there are still outstanding issues that the European Market and Securities Authorities (ESMA) are detailing, the legal text of the regulation already provides a clear action plan for platform operators.”
“The start of the new European Crowdfunding regulation will increase the quality of the European crowdfunding investment eco-system. The regulation will create a harmonized framework and makes investment crowdfunding finally available in all European countries under the same conditions and will create pan-European crowdfunding platforms”
Kleverlaan also noted there are some challenges:
“The platforms will have only 12 months to apply for the new license because the final requirements are just published today. Most likely, a large number of platforms will stop their operations in the next 12 months and existing platforms need to adjust their business model and infrastructure. This will cause a shake-out in the industry.”
One of the largest issues is the fact that a platform is regulated at the member state level and securities laws can still be different in each European country. One country may hold stricter requirements while others may be more liberal thus creating an opportunity for regulatory arbitrage where certain jurisdictions may foster a more competitive regulatory environment. Any platform considering an ECSP license has probably made a determination whether to seek a license in their home country or set up a separate operation in a different European jurisdiction. A top example is that of Germany, the largest European economy, which will allow lawsuits against platforms at the individual level thus creating a severe liability challenge for executives that manage crowdfunding providers.
In the end, ESMA may be able to pave over some of these disparities but that will take some time. As was reported earlier today, Crowdcube, a UK based operation that has long serviced European firms in need of growth capital, will operate under ECSP. Others will soon follow including, perhaps US-based platforms.