The proposed EU Crowdfunding Passport explained
While fundraising on the capital market will be simplified for issuers under Austrian law, the European Commission has in spring 2018 introduced its own plans for a crowdfunding framework.
The cornerstone of the new framework is the proposal for a Regulation on European Crowdfunding Service Providers (ECSP) for Business (the “Crowdfunding Regulation”). The initiative of the Commission is part of the FinTech Action Plan and the efforts to establish a more unified Capital Markets Union.
The new crowdfunding regime will be supplemental to existing national crowdfunding rules, thus leaving issuers and service providers the choice to opt for either system.
Registration as crowdfunding service provider
Under the Crowdfunding Regulation, legal persons will be able to register with the European Securities and Market Authority (ESMA) as “crowdfunding service providers”. Any crowdfunding provider needs to provide ESMA with a comprehensive set of documents, inter alia, describing and proving to ESMA that certain organisational requirements and procedures will be properly implemented. Registration and authorisation shall occur within two months as of the applicant filing a complete application with ESMA.
The registration and authorisation as crowdfunding service provider is more cumbersome for market participants as compared to some of the bespoke crowdfunding rules currently applicable throughout the European Union, e.g. the Austrian law Alternative Financing Act (AFA). Besides the initial licensing procedure, the service providers will have to comply with certain organisational and procedural standards on a continuous basis.
A crowdfunding service provider may all but be considered as an “investment firm light” given these on-going compliance obligations (such as a conflicts of interest management and even a suitability and knowledge test for the crowdfunding offers, including a simulation of the investors ability to bear losses).
Furthermore, ESMA will have significant supervision rights with respect to ECSPs as well as issuers, including the right to conduct on-site inspections.
Passporting for crowdfunding offers
A great advantage will be the passport allowing for EU wide “crowdfunding offers” to investors. Crowdfunding campaigns under e.g. the AFA cannot benefit from the existing prospectus passporting regime and will not benefit from the new passporting proposal.
Limited to EUR 1 million per 12 months
Notwithstanding the foregoing, the application of the new EU-wide crowdfunding rules shall be limited to crowdfunding offers of up to EUR one million within a 12 months’ period. It remains thus to be seen if the EU framework will gain practical relevance. Under the AFA for example, up to EUR 2 million may be raised with a simple key information document (KID) – and without having to engage a service provider that had to go through particularly cumbersome registration and authorisation procedures (which may affect its pricing).
ECSP will be allowed to place securities and receive and transmit client orders
The passport will not be the only advantage of the new proposed framework though: The “crowdfunding services” permitted to be provided by ECSPs will consist of (i) the facilitation of loan granting and (ii) the placing without firm commitment of transferable securities and (iii) the reception and transmission of client orders with regard to such transferable securities. ECSPs will be exempt from MiFID II requirements to obtain a license as investment firm.
Comparison between EU proposal and AFA regime
In the following, we prepared a summary of the key features of the new EU crowdfunding framework as compared to the (amended) AFA: