Authors: Kurt Hyzler & Nico Fauser
In October 2020, the EU approved a new regulation (Regulation (EU) 2020/1503) establishing crowdfunding rules applicable across the Union. The Regulation is applicable to European Crowdfunding Service Providers (ECSP). Crowdfunding represents an increasingly important type of intermediation where a crowdfunding service provider, without taking on own risk, operates a digital platform open to the public in order to match prospective investors or lenders with businesses that seek funding, by raising capital from a large number of investors who each contribute a small investment. Such funding can be lending-based or equity-based, both of which fall within the scope of the Regulation.
The Regulation was introduced with the intention of fostering cross-border crowdfunding services within the internal market, and to put an end to previous crowdfunding rules which had been implemented by individual Member States. The Regulation therefore seeks to encourage a shift from national crowdfunding to EU-wide crowdfunding, primarily by introducing strict rules to protect investors and by ensuring that no additional requirements are imposed on ECSPs authorised under the Regulation.
The Regulation requires the European Securities and Markets Authority (ESMA) to develop 8 draft regulatory technical standards (RTS), including 2 in close cooperation with the European Banking Authority, and 4 draft implementing technical standards (ITS) in order to complement the Regulation. The Regulation requires that the majority of these technical standards be submitted to the European Commission by 10 November 2021, save for 2 RTSs and 2 ITSs which are to be delivered to the Commission by 10 May 2022.
To this end, ESMA have issued a consultation paper on 26th February 2021 in order to obtain feedback from stakeholders regarding 7 RTSs and 2 ITSs.
The consultation paper seeks input on the following issues:
- Complaint handling
- Conflicts of interest
- Business continuity plan
- Application for authorization
- Information to client on default rate of projects
- Entry knowledge test and simulation of the ability to bear losses
- Key investment information sheet
- Reporting by crowdfunding service providers to national competent authorities (NCAs)
- Publication of national provisions concerning marketing requirements
Q&As: Special Purpose Vehicles (SPVs) under the Regulation
In addition to the consultation paper, ESMA also published a Q&A regarding the understanding of Special Purpose Vehicle (SPV) aspects under the Regulation.
The Regulation stipulates that the use of special legal structures such as SPVs, that interpose between the crowdfunding project and investors should be strictly limited to illiquid or indivisible types of underlying assets. Consequently, the interposition of an SPV can only be justified when the unique underlying asset is either illiquid or indivisible.
The Q&A tackles a number of topics including the circumstances and conditions in which an SPV can be created for the provision of crowdfunding services; the types of instruments that can be offered to investors via an SPV; whether an SPV can give exposure to more than one underlying asset; the type of underlying asset an SPV can give exposure to; and when an asset should be deemed to be illiquid or indivisible within the meaning of the Regulation.
ESMA will consider feedback received in relation to the consultation paper until 28th May 2021, so that the technical standards are submitted to the European Commission before 10th November 2021. Interested stakeholders may submit responses to the consultation paper by using the response form on ESMA’s website.