On 5 October 2020, the European Parliament approved a new regulation that will allow crowdfunding platforms to provide services across the EU single market in a simpler and safer way. The aim of the new regulation is to give investors access to a wider choice of projects and better protection, and companies seeking funding greater access to capital.
The new regulation provides a single, standardised legal framework based on shared criteria, which allows crowdfunding platforms to operate outside the country in which they are located, thus facilitating cross-border funding for companies, which is still relatively rare today.
Legal uncertainty and the lack of uniform rules have so far discouraged international investment. Crowdfunding platforms operating in more than one EU country will now have to comply with one set of basic rules, instead of having to adapt to different rules in each market. The new rules will apply to European crowdfunding service providers that raise up to €5 million per project per year.
One of the main risks of crowdfunding is failure or non-delivery of goods or services. It also happens that investors' decisions are not always based on market data and in some cases can even be influenced by emotions. The new rules require crowdfunding platforms to provide customers with clear information on potential financial risks, through a project presentation sheet prepared either by the company or by the platform itself.
The regulation will come into force on 10 November 2021. From this date, existing platforms that wish to continue providing crowdfunding services in Europe will have 12 months (until 10 November 2022) to obtain authorisation to provide the service. This transitional period may be extended by the European Commission for a further 12 months (until 10 November 2023). As of the latter date, only crowdfunding service providers authorised in accordance with the new regulation will be able to offer their services in Europe.
Crowdfunding platforms will also have to update their security and transparency protocols to try to prevent possible conflicts of interest, facilitate due diligence and handle possible complaints.
Two new categories of investors will also be introduced: sophisticated (professional) and unsophisticated (non-professional) investors. Unsophisticated investors will benefit from additional and adequate protection, which will include a risk awareness test, a simulation of loss-taking capacity and specific warnings for investments above a certain amount. A withdrawal clause will allow unsophisticated investors to cancel offers or expressions of interest within 4 days of signing the contract. The maximum amount that can be raised by each project is set at €5,000,000 in twelve months and throughout the European Union.
Crowdfunding service providers will also be able to create a noticeboard for the purchase and sale of securities originally offered on digital platforms.
The new European regulation represents an important step forward for the industry. Until now, if you wanted to operate outside your home country, you had to go to your local regulator and were sometimes faced with contradictory rules. The new regulation will allow crowdfunding service providers to overcome some of the main current complexities and has been welcomed by all industry players.