Crowdfunding Update – March 2022
Following on from our October 2021 briefing on crowdfunding (see here), there have been some major developments in this newly regulated sector. This article provides an overview of these latest developments. Please contact any member of the McCann FitzGerald LLP Start Strong team for assistance.
1. European Union (Crowdfunding) Regulations 2021
On 13 December 2021, the European Union (Crowdfunding) Regulations 2021 (the “Irish Crowdfunding Regulations”) were transposed into Irish law, giving effect to the EU Regulation 2020/1503 (the “EU Crowdfunding Regulation”) which came into force on 10 November 2021 (and marked the introduction of the first set of harmonised rules for crowdfunding service providers within the EU). The EU Crowdfunding Regulation makes it easier for crowdfunding platforms to develop and offer their services across national borders under a single regime. For small investors and businesses, especially start-ups, access to this innovative form of finance has been improved. For investors, it provides better protection and a higher level of guarantees.
The EU Crowdfunding Regulation sets out common rules on:
- providing crowdfunding services;
- organising, authorising and supervising crowdfunding service providers (“CSPs”); and
- applying transparency and marketing crowdfunding services.
The new regulatory framework applies to peer-to-peer business lending and investment-based crowdfunding. However, peer-to-peer consumer lending and donation/reward-based crowdfunding are out of scope and, for CSPs, it only applies to those that offer up to €5,000,000 per project owner over a period of 12 months. Offers exceeding this will fall into the scope of MiFID II/MiFIR and the Prospectus Regulation.
Pursuant to the Irish Crowdfunding Regulations, the Central Bank of Ireland (the “Central Bank”) has been designated the national competent authority for crowdfunding regulation in Ireland and are responsible for the authorisation and supervision of crowdfunding service providers pursuant to the Regulations. CSPs that facilitates either peer-to-peer business lending or investment-based crowdfunding via its platforms will need to be authorised by the Central Bank.
Once authorised, they will be able to provide crowdfunding services across the EU on a cross-border basis in line with the requirements outlined in the EU Crowdfunding Regulation.
It is an offence for such entities to commence engaging in crowdfunding services until authorisation as a crowdfunding service provider has been obtained from the Central Bank.
For new applicants for authorisation, the Central Bank has published a Guidance Note available here.
CSPs that have provided crowdfunding services in Ireland before 10 November 2021 will need to get an authorisation (but may continue to provide these services until 10 November 2023, provided these platforms have submitted their authorisation application to their national competent authority before 1 October 2022).
Due Diligence Requirements
CSPs are obliged to undertake a minimum level of due diligence in respect of project owners, including whether the project owner has a criminal record and/or place of incorporation in a non-cooperative jurisdiction or high-risk third country.
Conflicts of Interests
CSPs will be prohibited from having participation in crowdfunding offers offered on their platforms as well as from offering crowdfunding offers of persons closely related to them (i.e. their shareholders having more than 20% of shares/voting rights, their managers, employees or persons related to them).
CSPs must publish transparent procedures for the prompt, fair and consisting handling of complaints, offering an additional level of protection to investors.
Provision of Assets Safekeeping Services and Payment Services
CSPs are prohibited from providing payment services without the individual approval under the Payment Services Directive. Custody services related to transferable securities are prohibited unless approved under the MiFID II or CRDIV framework.
Key Investment Information Sheet
The key investment information sheet, which is limited to a maximum of six sides of A4-sized pages, need to be drawn up by the project owner for each crowdfunding offer and will need to contain all information about the project owner(s) and the crowdfunding project set out in the EU Crowdfunding Regulation. CSPs will be required to have adequate procedures in place to verify the completeness, correctness and clarity of information contained in it.
Lending based CSPs providing portfolio management services will also be required to draft the key investment information sheet at platform level which shall contain key information on the CSP, available loans in which investors’ funds can be invested as well as information on fees and risks associated with investments.
Project owners (or where a project owner is a company, each director of that company) shall be liable to pay compensation to an investor in respect of a crowdfunding project to which a key investment information sheet relates for losses or damages sustained by the investor by reason of either:
- misleading/inaccurate information contained in the key investment information sheet; or
- the omission of key information needed to aid investors when considering whether to finance the crowdfunding project.
2. Updates to the Consumer Protection Code 2012
A number of provisions of the Consumer Protection Code 2012 will now apply to advertising by crowdfunding service providers in Ireland.
Amongst other requirements, any advertisement must be fair and clear and must not mislead or seek to influence consumers unduly in their investment decisions. A CSP must also include a regulatory disclosure statement in all advertisements.
Crowdfunding service providers must display a prominent warning message on all advertisements that investment in crowdfunding projects entails risks, including the risk of partial or entire loss of the money invested; and that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme.
Also contributed by Donncha Sexton and Suvi Ronan
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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