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What are the Implications of the new EU Directive and Crowdfunding Regulations in Belgium?

Europe has been lagging behind in the crowdfunding industry compared to the rest of the world. The introduction of the European Crowdfunding Service Providers for Business will, according to Sia Partners' analysis, facilitate crowdfunding on an international level for all European Member States.

The total crowdfunding market is estimated at EUR 266 billion with China, the USA and the UK having a respective market share of 70.7%, 20.0% and 3.4% [1] leaving Europe, Indonesia and Japan with less than 6% of the market. This simple statistic is a clear indicator that Europe has been lagging behind in the crowdfunding industry. 

In order to stimulate the crowdfunding industry, the European Commission proposed (in 2018) a regulation that introduces an optional EU regime which enables crowdfunding platforms to easily provide their services across the EU Single Market. Instead of complying with different regulatory regimes, platforms will have to adhere to only one set of rules, both when operating in their home market and in other EU Member States. [2] 

Crowdfunding comes with a multitude of benefits. Firstly, crowdfunding facilitates access to alternative debt and capital markets to SMEs and further strengthens the Capital Markets Union (CMU). Lack of access to finance for such firms constitutes a problem even in Member States where access to bank financing has remained stable throughout the financial crisis. Secondly, the funding is primarily done through an online platform that is accessible to anyone willing to invest. Supposedly, one invests according to his investment profile. And lastly, it serves as a validator of the concept and idea of business activities, giving entrepreneurs access to new insights in a way that markets their products at the same time.

Changes to Crowdfunding Regulations

It is important to know that crowdfunding projects over EUR 5,000,000 are not exempted from MiFID II and thus are not undergoing any change. In this article we’ll discuss the changes of the newly proposed Regulation on the Belgian market by answering five questions. [3] 

1. What will change compared to the status quo of Belgian regulation?

The changes are twofold. Firstly, the European Union will amend the MIFID II Directive 2014/65/EU exempting crowdfunding on markets in financial instruments.  As a result, crowdfunding services do not have to follow the European Directives of MiFID II. Secondly, in turn, crowdfunding will fall under the new EU regulation called the European Crowdfunding Service Providers (ESCP) for Business.

2. How will this benefit the European economy?

The current problem with crowdfunding in Europe is the differences between the existing national rules obstructing the cross-border provision of crowdfunding services. Therefore, these services have a direct effect on the well-functioning of the internal market. In particular, the fact that the legal framework is fragmented along national borders creates substantial legal compliance costs for retail investors who often face difficulties which are disproportionate to the size of their investment in determining the rules applicable to cross-border crowdfunding services. [4] 

Therefore, in order to foster cross border crowdfunding activities, the EU finds it necessary to address the existing obstacles to the proper functioning of the internal market in crowdfunding services, and to ensure a high level of investor protection by laying down a regulatory framework at Union level. This is expected to widen the pool of investors and the number of projects to pick from, as well as provide legal certainty as regards the applicable investor protection rules. [5] 

3. When will the changes take effect?

The regulation is still under review, however, on 20 May 2020, the Permanent Representatives Committee (COREPER) reached a political agreement on the technically revised compromise texts. The Council adopted its position at first reading on 20 July 2020. However, no conclusion was reported by the EU. 

This Regulation will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. Afterwards, there is a transition period of 12 months after the date of application.

4. How will this affect me as an owner, platform service, or investor of a crowdfund project?

The provision of crowdfunding services generally involves three types of actors: a) the project owner who proposes the project to be funded, b) investors who fund the proposed project, and c) an intermediating organization in the form of a service provider that brings together project owners and investors through an online platform. 

a. Owner

Currently, depending on the amount that is raised by the platform, Belgian owners have to report specific information either with a prospectus or an information note. More specifically, (i) if the maximum raised amount is less or equal to EUR 500,000, there is no need for a prospectus. However, an information note is required unless the maximum contribution per invested is capped at EUR 5,000. (ii) If the maximum raised amount is equal or less than EUR 5,000,000, no prospectus is needed but an information note is mandatory. (iii) If the raised amount is greater than EUR 5,000,000, a prospectus is required.

The new regulation is slightly different than the existing Belgian legislation. More precisely, the owner always has to include an information note, contrary to scenario (i) above. Albeit the threshold of EUR 5,000,000 remains the same. 

b. Platform

Overall, there will be less requirements to apply as a crowdfunding platform than before. Here are a few of the main differences between the new crowdfunding regulation and MiFID II:

Topic EU Crowdfunding Regulation MiFID
Legal status Crowdfunding services shall only be provided by legal persons that are established in the European Union An investment firm shall comply with the organizational requirements laid down in paragraphs 2 to 10 in the MiFID regulation.
Display financial securities and information Crowdfunding service providers may propose to individual investors specific crowdfunding projects which shall correspond to one or more specific parameters or risk indicators chosen by the investor. An investment firm which manufactures financial instruments shall make available to any distributor all appropriate information on the financial instrument and the product approval process
Special Purpose Vehicle Where a special purpose vehicle is used for the provision of crowdfunding services, only one illiquid or indivisible asset can be offered through such a special purpose vehicle. There are no limits in offering via a special purpose vehicle.
Audit Not Applicable. An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm and take reasonable steps designed to prevent conflicts of interest.
Recording Not Applicable. Records shall include the recording of telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account.

c. Investor

For the investors there is a small change in the knowledge tests. Based on MiFID, the investment firm needs information on the client’s or potential client’s knowledge and experience in the investment field relevant to the specific type of product or service, that person’s financial situation including his ability to bear losses, and his investment objectives including his risk tolerance. [6]

However, in the new regulation, three steps are undertaken under certain conditions as stated here:

“Before a non-sophisticated investor enters into an investment of an amount that exceeds the higher of either 1000 EUR or 5% of his or her net worth, the crowdfunding service provider shall ensure that such investor: (i) receives a risk warning; (ii) provides an explicit consent to the crowdfunding service provider; and (iii) proves to the crowdfunding service provider that he or she understands the investment and its risks.” – EU Directive 2018/0048(COD) Article 15 (5b) Knowledge test

How exactly one proves point (iii) is unclear.

Similar to MiFID, the new legislation makes a distinction between a normal investor and sophisticated investor (i.e., professional investor in MiFID) in order to distinct professional clients from retail clients. [7]

5. Which crowdfunding platforms are licensed in the Belgian market?

As an investor, you have a limited number of platforms on which you can invest. The complete list of authorized platforms can be found via this link. Moreover, investing in Startups, SMEs and scaleups come with a fiscal benefit called “Tax Shelter”. For more information, please visit the official website of the federal government.

If you wish to become a crowdfunding platform today, you can find more information on the certification here.

What happens next?

Overall, this regulation will facilitate crowdfunding on an international level for all European Member States. Seeing the great potential of these platforms in China and the USA, Europe can hope increasing its market share by stimulating young companies with regulated cross-border financing. The final draft of the European Crowdfunding Service Providers (ESCP) for Business is not ready yet, so changes are still plausible.

 


Sources

[1] Source: P2Pmarketdata
[2] Reviewing New EU Directive 2018/0048(COD) and amending MIFID II Directive 2014/65/EU
[3] The comparison is based on PE650.346v01-00.
[4] Provisional Agreement COM(2018)0113 – C8-0103/2018 – 2018/0048(COD) (Link)
[5] Provisional agreement COM(2018)0113 – C8-0103/2018 – 2018/0048(COD) (Link) point (6) and (7)
[6] Directive 2014/65/EU article 25(2)
[7] Directive 2014/65/EU Annex II