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New EU Regulation on Cross-Border Crowdfunding Services

EU Regulation 2020/1503 on European crowdfunding service providers for business (hereinafter, the “ECSP Regulation”) was published in the Official Gazette of the European Union on 20 October 2020.

The ECSP Regulation establishes a common framework for all Member States, thanks to which start-ups and SMEs will be able to turn to investors, also from other EU countries, through portals authorised at cross-border level, and gather up to 5 million Euro per year, in the form of venture capital, loans, debt securities or bonds.

1. Crowdfunding and laws in force in Italy

Crowdfunding is a process through which a pool of individuals invests sums of money, also small amounts, to fund a business project or diverse initiatives by using websites (called “portals” or “platforms”). Those who wish to promote a business initiative and are in need of capital (equity or debt) can make their initiative public on an on-line web portal and start collecting capital from users interested in supporting it.

As a rule, project initiators publish their project on an on-line crowdfunding portal pointing out – among other things – the minimum capital necessary to complete the project’s funding, the deadline for the raising of funds, and any returns for investors.

From a legal standpoint, Italy was the first EU Member State to adopt legal provisions on crowdfunding, by starting off with the regulation of equity crowdfunding[1] and subsequently allowing also for debt crowdfunding[2].

Primary legislation on crowdfunding is contained in articles 50-quinquies, 100-ter, 190-quater of the Legislative Decree no. 58 of 24 February 1998 (the “Consolidated Financial Act”), while secondary legislation is contained in the “Rules on the raising of funds through on-line portals”, adopted with Consob Resolution no. 18592 of 26 June 2013 (hereinafter, the “Consob Rules”).

At EU level, on the other hand, there was no common legal framework on crowdfunding. This had an impact mostly on two aspects, thereby limiting the potentials of crowdfunding: on the one hand, the absence of a common legal framework made it very complicated (and at times also risky, legally, and thus substantially impossible) to raise funds through on-line portals abroad; on the other hand, in lack of a European passport, to operate abroad crowdfunding service providers had to comply with a variety of national rules of different states, and deal with the relevant costs and technical and practical difficulties connected thereto.

2. The new ECSP Regulation: scope, authorisation and supervision

The ECSP Regulation established, for the very first time, a single EU market for crowdfunding web platforms and portals.

Given the importance of the changes introduced by the ECSP Regulation and the impact it is bound to have on Directive 2014/65/EU (MiFID II) in terms of the distribution of investment products, the ECSP is set to enter into force on 10 November 2021.

The ECSP Regulation will apply to all EU crowdfunding service providers for offers up to 5 million Euro[3], calculated over a period of 12 months for each project owner.

As mentioned, the Italian legal system has had detailed legal provisions on crowdfunding portals for several years.

In some respects, the provisions introduced by the ECSP Regulation seem to have drawn on the Italian legislation; in many ways, it is much broader and cross-sectional, which means crowdfunding service providers will need to start an internal review and update process to ensure compliance (from a structural, corporate and operational standpoint) of their activities with the new ECSP Regulation.

A first big difference between the new EU rules and Italian ones lies in their scope: the Consob Rules and Consolidated Financial Act articles only apply to i) equity crowdfunding portals where, in exchange for a monetary investment in a project, the investor receives shares or quotas in the company and to ii) offers concerning bonds or other debt securities (so-called debt crowdfunding).

The ECSP Regulation also applies to lending crowdfunding portals[4] i.e., crowdfunding where users “invest” capital to grant loans aimed at specific projects for start-ups and SMEs.

It therefore has a broader scope, as it applies to providers of equity crowdfunding, debt crowdfunding and lending crowdfunding, with the exclusion of lending to consumers[5].

A particularly innovative aspect of the ECSP Regulation on lending crowdfunding lies in the individual portfolio management of loans. Based on this service, the crowdfunding service provider can execute a specific agreement with the investor, based on which the service provider may, at its own discretion, allocate a pre-determined amount of the funds received to one or multiple crowdfunding projects on its crowdfunding platform.

Pursuant to the new Regulation, those who wish to offer crowdfunding services are required to file an authorisation request with the competent authority of the Member State. In Italy, as is the case based on current national rules, Consob will be the authority in charge of granting providers with the authorisation to operate.

Authorised crowdfunding service providers will offer their services under the supervision of the authority that issued the relevant authorisation. So, in Italy, Consob will keep on performing its supervisory activities over providers in terms of regulation, reporting and inspections.

Member States will need to designate the authorities in charge of issuing the authorisation, supervision and, in general, the performance of the tasks envisaged in the ECSP Regulation, and subsequently inform ESMA (European Securities and Markets Authority).

3. Enabling crowdfunding service providers to operate cross-border

Crowdfunding service providers authorised in one Member State may start cross-border activities in other Member States by forwarding certain information to the competent authority designated by the Member State in which the authorisation was granted. This procedure is similar (with some differences) to the passporting procedure envisaged for the performance of investment and banking activities in another Member State, other than that of the first authorisation.

The information to be provided by the authorised manger includes: a) a list of the Member States in which the provider intends to offer crowdfunding services; b) the details of the individuals and legal entities in charge of providing the crowdfunding services in such Member States; c) the date of commencement of crowdfunding services by the provider; d) a list of all other activities exercised by the provider which do not fall under the scope of the ECSP Regulation.

The procedure is subject to a quick and streamlined tacit approval system: the provider may start offering its activities once 15 days have passed from its submission of the above information to the relevant authority.

To facilitate transparency for investors, ESMA is required to establish a public register of all authorised crowdfunding service providers and of all crowdfunding platforms operating in the EU[6].

The authorisation to provide crowdfunding services pursuant to the ECSP Regulation may be requested by legal entities having a stable establishment in the Union, the latter to ensure effective supervision by the competent authority of the Member State.

The request for authorisation must be filed with the competent authority of the Member State in which the provider of crowdfunding services has its registered office.

The ECSP Regulation does not mention – among the requirements to provide crowdfunding services – the need to have branches in other Member States. Actually, pursuant to the Regulation, Member States cannot require providers of crowdfunding services on a cross-border basis to have a physical presence in the territory of a Member State other than the Member State in which those crowdfunding service providers are authorised.

4. Investor protection

In terms of investor protection, the Regulation has introduced a number of important precautionary requirements, transparency and information disclosure rights and obligations, as well as measures for the protection of non-sophisticated investors[7].

Among these:

  1. A pre-contractual reflection period for non-sophisticated investors: basically, the right to withdraw from the offer within four calendar days from the investment or expression of interest in the crowdfunding offer[8];
  2. Crowdfunding service providers ’ obligation to verify the completeness, correctness and clarity of the information contained in the Key Investment Information Sheet (KIIS) provided by project initiators;
  3. The introduction of procedures to allow investors to file complaints with the competent authorities in relation to alleged violations of the Regulation by providers of crowdfunding services;
  4. A simulation of non-sophisticated investors’ ability to bear loss, calculated as 10% of their net worth and a specific risk warning if the investment exceeds the higher of either Euro 1,000 or 5% of that investor’s net worth.

Furthermore, the Regulation requires crowdfunding service providers to adopt an effective system of governance for the proper management of risk and for preventing any conflict of interest[9].

5. Effectiveness and transitional period

The ECSP Regulation will come into effect in Member States on 10 November 2021.

Crowdfunding service providers will be able to continue to provide crowdfunding services that are included within the scope of this Regulation in accordance with the applicable national law until 10 November 2022 or until the issue of an authorisation pursuant to such Regulation, if this occurs before the above date.

Member States may put in place simplified opt-in procedures to transition to the new regime for portals that are already authorised[10].

During the transitional period, Member States may have in place simplified authorisation procedures for entities that, at the time of entry into force of the Regulation, are authorised under national law to provide crowdfunding services. At the end of the transitional period, national laws on crowdfunding shall be fully replaced by the new regime and providers not authorised pursuant to the new Regulation will no longer be able to operate.

[1] Law Decree no. 179 of 18 October 2012 (so-called Growth Decree bis), converted with amendments into Law no. 221 of 17 December 2012, amended the TUF by introducing in Title III, Part II, a new Chapter III-quater which outlines the legal framework for equity crowdfunding portal management services. More recently, Chapter III-quater of Title III, Part II was renamed Chapter I of Title III-bis of Part II by means of art. 2 of Legislative Decree no. 165 of 25 November 2019.

[2] The 2019 Budget Law (Law no. 145 of 30 December 2018) changed the Consolidated Financial Act by extending the applicability of rules on the gathering of funds on-line also to offers concerning bonds or debt securities issued by SMEs.

[3] Such 5 million Euro amount represents the threshold used by most Member States to exempt securities offered to the public from the obligation to publish a prospectus, in line with EU Regulation 2017/1129 (so-called Prospectus Regulation).

Transactions involving greater amounts are regulated by the MiFID and Prospectus Regulation.

[4] Current national rules on lending crowdfunding are found in Section IX of the Provisions of the Bank of Italy on the collection of savings by non-bank entities (Resolution no. 586 of 2016), where lending crowdfunding is defined as social lending, i.e. “an instrument through which a pool of individuals may ask a pool of potential investors, by means of on-line platforms, for reimbursable funds for personal use or to finance a project”.

To date, lending crowdfunding platforms may only operate if they have been authorised as a payment institution pursuant to art. 114-septies of Italian Banking Law, as a financial intermediary pursuant to art. 106 of Italian Banking Law or as a credit institution.

[5] Donation and reward based crowdfunding do not fall within the scope of the new rules in that they can be considered financial services.

[6] In Italy, providers of crowdfunding services are currently enrolled in a register held by Consob. The ordinary section of this register lists providers specialising in the collection of funds, allowed only to receive and transmit orders, in relation to which there is a specific exemption, but which cannot offer other investment services, given that they have not been authorised as a SIM (Società di Intermediazione Mobiliare) or as an investment firm.

Instead, the special section lists providers that are such “by law”, that is, they have already been authorised to provide investment services, thus banks, SIMs, managers of collective investment undertakings (asset management firms, SICAFs and SICAVs which manage their assets directly, EU AIFMs, non-EU AIFMs, EU management companies, EuVECA and EuSEF managers) limited to the offer of shares or quotas of collective investment undertakings investing in SMEs and social enterprises.

[7] Non-sophisticated investors are defined, residually, by the Regulation as investors that are not “sophisticated”. Sophisticated investors indicates all individuals or legal entities which are regarded as professionals pursuant to Annex II of Section I, points 1, 2, 3 or 4 of the MIFID II, or all individuals or legal entities who have the approval of the crowdfunding service provider to be treated as a sophisticated investors in accordance with the criteria and procedure under Annex II of the ECSP Regulation. Annex II defines a sophisticated investor as “an investor who possesses the awareness of the risks associated with investing in capital markets and adequate resources to undertake those risks without exposing itself to excessive financial consequences”. The following individuals or legal entities are in any case considered to be sophisticated investors in all services offered by crowdfunding service providers pursuant to the ECSP Regulation: 1) Legal entities meeting at least one of the following criteria: a) own funds of at least Euro 100,000; b) net turnover of at least Euro 2,000,000; c) balance sheet of at least Euro 1,000,000. 2) Natural persons meeting at least two of the following criteria: a) personal gross income of at least Euro 60,000 per fiscal year, or a financial instrument portfolio, defined as including cash deposits and financial assets, that exceeds Euro 100,000; b) the investor works or has worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services envisaged, or the investor has held an executive position for at least 12 months in a legal person as referred to in point 1); c) the investor has carried out transactions of a significant size on the capital markets at an average frequency of 10 per quarter, over the previous four quarters.

[8] The right of withdrawal granted by the Consob Rules to retail investors can instead be exercised within seven days from the offer. In this case, the Italian legislation currently in force is more favourable to investors.

[9] In this respect, providers may not accept as project owners in relation to the crowdfunding services offered on their crowdfunding platform their shareholders holding 20%, or more, of share capital or voting rights, their managers or employees, any natural or legal person linked to those shareholders, managers or employees by control.

[10] To date, 44 providers of crowdfunding services are enrolled in the ordinary section of the register held by Consob. This indicates that the new EU Regulation will have a considerable impact on the Italian crowdfunding portal situation. It will thus be necessary to carefully monitor if and how the Italian supervisory authority decides to implement the streamlined opt-in mechanism.