The new European Crowdfunding Regulation was published in the EU Official Journal on 20 October 2020 and came into force on 10th November 2021.
This is a long-awaited milestone and introduces many new features for the sector.
Why a new EU Regulation on Crowdfunding?
Crowdfunding has increasingly established itself in recent years as a significant financing channel for a growing number of entrepreneurial realities, overcoming the growing difficulties in accessing credit through traditional channels.
At the same time, crowd-investing has enabled many small and medium-sized savers to find a simple and immediate channel to invest their money, committing even very modest sums either as a first investment or as a means of differentiating their portfolio.
Up to now, however, there has been no common regulation in Europe, and the various states have acted independently in regulating the sector internally.
This had, on the one hand, created regulatory inconsistency between different countries, and on the other, had placed considerable limits on the development of cross-border markets, effectively discouraging investors and platform managers from operating in countries other than their own.
The new European regulation on crowdfunding, therefore, stems from the need to overcome these limits and, at the same time, to provide a common framework of protection for investors in different countries.
As we shall see, the regulation mainly affects the platforms that offer investment services and introduces control mechanisms aimed at maximum investor protection and, at the same time, opens the door to investment and fundraising on an international basis.
New European Crowdfunding Regulation: how it works
As mentioned above, the new Regulation focuses mainly on the construction of a homogeneous regulatory framework between different European countries, providing a common regulation for operators providing crowdfunding investment services.
Highlights of the new provisions.
- Providers of crowdfunding services will be able to operate at European level, but they will need a specific qualification issued by a competent authority of the country in which they are based, which will certify and qualify them as providers of investment services. This is what already happens in Italy according to the Consob Regulation.
- In addition to the authorisation obtained in the country of origin, operators will also be subject to controls by ESMA (European Securities and Markets Authority), which sets up a public register of all authorised operators at European level with a view to transparency and protection for investors.
- Again, with a view to increasing investor protection, it has been established that crowdfunding service providers will have to present a standardised document known as a KIIS (Key Investment Information Sheet) containing all the information on the company offering the service and on the type of investment, and the related risks, that the investor is about to undertake.
- At the same time, the Regulation broadens the range of entities that can benefit from equity crowdfunding investments, no longer limiting fundraising only to start-ups and SMEs, but also extending it to any natural or legal person acting for commercial or professional purposes.
- On the other hand, the legislation restricts the instruments that can be offered through platforms, excluding units of undertakings for collective investment (OICR).
- Similarly, a restriction is introduced on indirect investments made through special purpose vehicles, which remain possible only in cases where the asset being offered is indivisible or illiquid.
- The new European Crowdfunding Regulation also focuses on aspects relating to possible conflicts of interest for providers of investment services: they will be prohibited from participating in fundraising for projects hosted on their platform and will not be able to accept projects promoted by companies in which they hold more than 20% of the capital or voting rights.
- Again with a view to protection, the Regulation introduces an enhanced appropriateness assessment for so-called unsophisticated investors.
- In short, in the case of an investment exceeding the higher of €1,000 or 5% of the investor’s net worth, the crowdfunding service provider will have to warn the investor about the risks and obtain explicit consent and a demonstration of full understanding of the investment and its risks.
- Finally, under the new Regulation, the maximum fundraising ceiling for each campaign is raised from €1 million to €5 million, calculated on a 12-month basis for each issuer.
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