The European parliament passed the final version of the long-discussed European Crowdfunding Service Provider Regulation (ECSP) on 7th of October 2020. The new regulation is supposed to go into effect in about one year. Just as any other European regulation it will be directly applicable to European citizens and businesses. A transposition into the national law of the respective member states will not be necessary. Providers of crowdfunding services then will be subject to numerous new supervisory provisions. Existing crowdfunding platforms will have to ensure within the next twelve months that they obtain the required authorization as well as the implementation of necessary business processes. But what exactly will be regulated by the new regulation?
CROWDFUNDING SERVICE PROVIDERS GET HARMONIZED AUTHORIZATION REQUIREMENTS THROUGHOUT EUROPE
The creation of harmonized authorization requirements for crowdfunding service providers is the central focus of the European Crowdfunding Service Provider Regulation. A crowdfunding service provider in the sense of the ECSP is a service provider that matches the financing needs of investors and project developers via a platform solution, either through the brokerage of loans or through the brokerage of transferable securities in the sense of MiFID II. The ECSP will be applicable to platform operators that publicly offer crowdfunding projects with a funding goal of up to 5 million euro. Operators of crowdfunding platforms will have to meet numerous requirements and provide a series of verifications in order to obtain the newly established authorization. They will, e.g. have to dispose over regulatory collaterals to the amount of 25.000,00 euros or over a quarter of the established fixed costs of the previous year, which ever amount is higher. They will also have to establish internal control mechanisms and be led by fit and proper managing directors. The authorization requirements will be standardized throughout the European Union. There will therefore be a passporting option available, meaning that a crowdfunding service provider which is authorized in one EU member state will be able to offer his services in another EU member state on the basis of its original authorization and without the necessity to apply for another authorization in the target member state.
NUMEROUS ORGANIZATIONAL, DUE DILIGENCE AND CONDUCT OBLIGATIONS FOR CROWDFUNDING PLATFORMS
Next to the new authorization obligation and the respective provisions regarding the application process, the ECSP will also introduce a number of organizational, due diligence and conduct obligations for the operators of crowdfunding platforms. These platforms will all have to be operated in the legal form of a legal person. Furthermore, the operators will have to ensure that they have no conflicts of interest while operating the platform and that they fulfil the strict information and transparency obligations towards their investment clients. These information and transparency obligations stipulate among other things that the operator must inform the potential investor about the investment risks associated with the investment if the investment exceeds 1,000 euros and that he additionally has to provide the investor with an investment information sheet that may not exceed the volume of six pages and which has to be created by the project developer. Operators of crowdfunding platforms will also be obligated to provide information regarding the default rates of projects that were offered on their platform. They will also be obliged to fulfil strict requirements with regards to the publication of marketing publications concerning projects that are offered on their platform.
DO LICENSED FINANCIAL SERVICE PROVIDERS ALSO NEED TO APPLY FOR THE NEW AUTHORIZATION?
Financial service providers that intend to offer securities of projects with an issuing volume of less than 5,000,000 euros to small retail investors via a platform solution will have to grapple with the requirements of the new regulation, even if they are already authorized for conducting placement business and/or investment brokerage services. There will be the option to adjust the business model in order to avoid the new obligations to be applicable. If this is option is not wanted or feasible, the strict provisions of the new regulation will have to be implemented.
Attorney Lutz Auffenberg, LL.M. (London)
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