European Crowdfunding Platform Regulation and licensing

November 10, 2021 the Regulation on European Crowdfunding Service Providers (ECSP) has entered into force. The new Regulation will help crowdfunding to function more smoothly across the EU and to support cross-border funding, by providing for a single set of rules on crowdfunding. Moreover, the Regulation will improve access to this innovative form of finance for small investors and businesses in need of funding, particularly start-ups.

One Crowdfunding license for all EU

The rules apply to offers with a counter value of less than EUR 5,000,000, over a 12-month period. Offers above that amount over the 12-month period do not fall within the scope of this regulation.

With adoption of the rules, investors on crowdfunding platforms will benefit from a better protection regime and a higher level of guarantees, based on clear rules on information disclosures for project owners and crowdfunding platforms, rules on governance and risk management and a coherent approach to supervision. There are however certain areas in which Member States will still have the power to make adjustments in due course.

“The new European Regulation creates pan-European passporting regime for crowdfunding platforms allowing them to penetrate other EU markets beyond the national market. It will develop an integrated EU internal market for crowdfunding services allowing to attract more financing from institutional investors”, – says Kęstutis Kvainauskas, attorney at law of ECOVIS ProventusLaw specialising in crowdfunding licensing.

A crowdfunding platform seeking approval under ECSP would need to request authorisation from the national competent authority (for example, The Bank of Lithuania) of the member state in which they are established, but will be able to provide their services cross-border into other EU member states. Through a notification procedure in a member state, ECSP would also be able to provide their services cross-border. Supervision would also be carried out by national competition authorities, with the European Securities and Markets Authority (ESMA) facilitating and coordinating cooperation between member states.

The new rules determines not only authorisation and supervision procedures of crowdfunding service providers, but also include organisational and operational requirements of crowdfunding service providers, requirements regarding effective and prudent management, complaints handling, marketing communications, administrative sanctions and other measures such as procedural rules for taking supervisory measures and imposing fines.

The regulation will apply one year after publication, with the European Commission still defining some regulatory standards with input from the European Security and Markets Authorities (ESMA) and the European Banking Authorities (EBA).

Importance of the new Regulation in context of BREXIT

Before the adoption of the Regulation crowdfunding could not reap the benefit of the common European market due to the absence of a dedicated and coherent pan-European regulatory regime. While some Member States apply the current financial services framework to crowdfunding service providers, others allow them to stay outside the regulatory regime or licensing them under MIFID directive imposing high regulatory requirements.

New European Regulation is especially important in the context of BREXIT as UK left EU in the end of 2020. Most of the Europe’s biggest Crowdfunding platforms located in the UK. It is already clear that UK-based platforms will be not be able to serve customers in continental Europe from the UK. Aiming to keep their European clients UK based platform will need to apply for the licenses in other jurisdictions of European Economic Area.

Pan-European Crowdfunding Platform already exists

Lithuania was is one of few EU Member States having national crowdfunding regulation even before ECSP Regulation. Modern Lithuanian Crowdfunding regime under the new European regulation created clear and transparent crowdfunding regulation and passportable pan-European license.

“It looks like Lithuania became one of the most attractive European jurisdiction for crowdfunding platforms planning pan-European reach”, – says Kęstutis Kvainauskas, attorney at law and partner of ECOVIS International advisory network in Vilnius, Lithuania.

Crowdfunding is increasingly popular as an alternative financing tool for start-ups as well as for small and medium enterprises (SMEs) at an early stage of company growth.