On 8 March 2018, the European Commission published a proposal for a crowdfunding regulation as well as a proposal to amend MiFIDII.
Under the proposal for a Crowdfunding Regulation, the exploiting entities of business crowdlending platforms and crowdinvesting platforms (in the proposal: crowdfunding service providers, “CSPs”) are offered a possibility to either opt for a ‘EU regulatory treatment’ or a ‘national regulatory treatment’. If the CSP opts for the EU regulatory treatment, it will have the benefit of a European passport without having to comply with additional national obligations on the basis of national crowdfunding legislation. If the CSP opts for the national regulatory treatment, things will remain as is resulting in crowdlending platforms generally not having passport possibilities and crowdinvesting platforms (to the extent regulated under MiFIDII under national laws) having passport possibilities but subjected to potential additional national obligations on the basis of national crowdfunding legislation.
The Crowdfunding Regulation enables a more uniform approach within the European Economic Area (“EEA”) in respect of financial return based crowdfunding without confronting CSPs necessarily with additional administrative and costly national burdens when they wish to offer their services on a cross border basis within the EEA.
The Crowdfunding Regulation does not apply to P2P consumer lending platforms (nor to CSPs that decide not to opt for the EU regulatory treatment). An important restriction for applicability of the Crowdfunding Regulation is that it is not available to crowdfunding offers by a project owner exceeding a consideration of more than €1mio in a period of 12 months. On the basis of Article 2 of the Crowdfunding Regulation, it is our understanding that CSPs that have opted for a ‘EU regulatory treatment’ can only provide crowdfunding services in relation to crowdfunding offers not exceeding this threshold of €1mio; a CSP can not ‘pick and choose’ and offer its services in relation to offers up to €1mio on the basis of a EU regulatory treatment as well as offering its services in relation to offers above that threshold on the basis of a ‘national regulatory treatment’. On the basis of a quick review of the documents, we do not see any limitations in this respect for two (or more) separate legal entities in the same group of companies offering crowdfunding services on the basis of either ‘EU regulatory treatment’ or a ‘national regulatory treatment’.
If a CSP opts for the EU regulatory treatment, it needs to apply to ESMA for authorization. Article 10(2) lists the documents that need to be submitted with an application (and as such the prerequisites for being authorized as a CSP). ESMA will also be the supervisor of CSPs within the EEA.
Some things we found particularly interesting are:
- CSPs are not allowed to have any skin in the game. (Art. 7(1));
- The handling of fund flows can no longer be done by CSPs (or third party services providers) without a license as a payment services provider in line with PSD2. If the CSP decides not to handle the fund flow, it needs to ensure that project owners only accepts receiving payments via a PSP as defined in Article 4(11) PSD2 (including credit institutions and electronic money institutions). (Art. 9(2) and 9(4));
- CSPs will be required to perform an investor test comparable to the current investor test required pursuant to the Dutch crowdfunding provisions of the AFM applicable to crowdlending platforms (NB since September 2017, the AFM crowdfunding provisions no longer apply to Dutch crowdinvesting platforms, with exception of the obligation to submit a monitoring sheet to the AFM on a periodic basis). (Art. 15);
- A ‘KIIS’ obligation (max 6 pages) including a prescribed risk warning is introduced. The obligation to provide a key investment information sheet (KIIS) lays with the CSPs, whilst the document itself can be drawn up by the project owner. The ‘KIIS’ needs to include at least the information as set out in the Annex to the Crowdfunding Regulation (which Annex seems to be missing in the current draft proposal that was published this morning). The CSP has the obligation to keep the ‘KIIS’ updated during the period in which the project is open for funding and the CSP has – in our words – a duty of care to ensure that investors are not being misled by the KIIS. Other than the current obligation under Dutch law for issuing entities to provide an information memorandum in line with Annex A to the Exemption Regulation Dutch Financial Supervision Act to the AFM prior to the offer being made if those issuing entities rely on the exemption to publish a prospectus when the offer of securities is more than €100k (as per 21 July 2018 more than €1mio) and less than €5mio per category of security (and calculated within the group, within the EEA and in a period of 12 months), this KIIS will not be subject to a notification or approval requirement. (Art. 16 and Annex);
- It is our understanding that CSP who offer a (passive) bulletin board for the trading in (part of) loan agreements or transferable securities, are not considered to exploit a multilateral trading system within the meaning of MiFIDII. This is particularly relevant for the Dutch market following the decision of the Court of Justice in the Robeco matter (to be found here: http://curia.europa.eu/juris/liste.jsf?num=C-658/15), which caused an internal discussion within the AFM whether or not crowdinvesting platforms are considered to exploit an MTF or OTF. Moreover, we find this Article 17 of the Crowdfunding Regulation interesting as we understand that the European legislator does not automatically qualify transferable (parts of) loan agreements as a transferable security within the meaning of MiFIDII. On this basis, crowdlending platforms could offer an exit to the investors (as well as facilitate trading amongst investors via a (passive) bulletin board) without automatically changing colours from ‘just a crowdlending platform’ needing – under Dutch law – a dispensation for the prohibition to intermediate in repayable funds on the basis of Article 4:3 Dutch Financial Supervision Act to a crowdinvesting platform needing – under Dutch law – a MiFID license for providing investment services in relation to financial instruments. (Art. 17);
- National laws etc. in respect of marketing communications applicable to CSPs will need to be published and kept updated by the national competent authorities (“NCAs”). Further NCAs need to provide a summary in English (or another language customary in the sphere of international finance) to ESMA and ESMA will publish the same on its website including hyperlinks to the relevant webpages of the NCAs. (Art. 20);
- ESMA can take supervisory measures including the imposing of a fine or a periodic penalty payment. When determining the level of a fine, ESMA will, among other things, take into account whether the infringement was committed intentionally or negligently. A fine can have a maximum amount of 5% of the annual turnover of the CSP during a calendar year. A periodic penalty payment, which shall be proportionate, can be imposed for each day of delay in compelling to an ESMA order for a maximum duration of 6 months. The periodic penalty payment can have a maximum amount of 3% (or 2% in case the measure relates to a natural person) of the average daily turnover in the preceding business year. Fines and periodic penalty payments are public unless publication would seriously jeopardize the financial markets or would cause disproportionate damage to the parties involved. The Court of Justice shall have jurisdiction to review such supervisory measures of ESMA. (Art. 27 – 30 and 33).
The proposal to amend MiFIDII is needed to offer crowdinvesting platforms the possibility to opt for a more proportionate regulatory regime than MiFIDII to the extent such crowdinvesting platforms fall under the scope of MiFIDII as implemented under national laws and regulations. The only amendment to MiFIDII relates to excluding CSPs (as defined below) from the scope of MiFID2 by adding a CSP to Article 2(1) of MiFIDII.
The proposals, impact assessment and further documents can be found here:
https://ec.europa.eu/info/publications/180308-proposal-crowdfunding_en
The proposal for a Crowdfunding Regulation is open for consultation until 8 May 2018. You can provide your response to the consultation document via: http://ec.europa.eu/info/law/better-regulation/initiatives/com-2018-113_en.
The proposal to amend MiFID2 is open for consultation until 3 May 2018. You can provide your response to the consultation document via: http://ec.europa.eu/info/law/better-regulation/initiatives/com-2018-99_en.
