Has the Regulation on European Crowdfunding Service Providers Moved Too Far Toward MiFID Standards?
Eugenia Macchiavello - University of Genoa, Department of Law
-- The European Commission has been looking at crowdfunding as an important alternative source of funding for SMEs (as part of its Capital Markets Union program and FinTech Action Plan) and has underlined the potential of digital finance in the wake of the COVID-pandemic crisis (see its recent Digital Finance Strategy). In March 2018, it presented a proposal for a regulation on European Crowdfunding Service Providers (hereinafter ECSPs Regulation) but the legislative process progressed slowly, not least because of the differing views about financial-return crowdfunding intermediation that emerged during trilateral negotiations. I have described and analysed such different views and compared them with current national approaches to crowdfunding in my recent EBI Working paper, "What to Expect When You Are Expecting’ a European Crowdfunding Regulation: The Current ‘Bermuda Triangle’ and Future Scenarios for Marketplace Lending and Investing in Europe”. As a result of those divergent views, the original text of the Regulation has undergone several relevant revisions and, while a final agreement was eventually reached on 19 December 2019, the final text was adopted and made public by the Council only on 20 July 2020 and is now awaiting formal adoption by the European Parliament before being published in the Official Journal.
In my recent paper , "The European Crowdfunding Service Providers Regulation and the Future of Marketplace Lending and Investing in Europe: The ‘Crowdfunding Nature’ Dilemma," (April 2020), forthcoming in the European Business Law Review, I have analysed in detail the upcoming Regulation, discussing the implications of the different alternative versions of the proposed rules and advancing suggestions for adjustments, in particular in the recently updated version (to reflect the July 2020 text; also see my chapter ‘Disintermediation in Fund-raising: Marketplace Investing Platforms and EU Financial Regulation’, forthcoming in Chiu & Deipenbrock, eds, Routledge Handbook on FinTech and Law, 2020).
The Regulation will introduce a mandatory European regime for crowdfunding platforms, requiring any legal person willing to offer crowdfunding services covered by such Regulation to apply for the new authorization from the national competent authority (NCA) of the Member State of establishment. Doubts exist, however, about the survival of national crowdfunding regimes for services (e.g. investment advice exempted under Art. 3(1) MiFID II) and offers (e.g. between €5 million and €8 million). The new version makes the authorization also conditional on evidence of complying with certain prudential safeguards and with a long list of new organizational and conduct duties.
The ECSPs Regulation covers offers not above €5 million in total consideration within 12 months presented on platforms carrying out activities consisting in: the ‘facilitation of granting of (business) loans’, which now can also consist in the scoring/pricing of loans and individual portfolio management of loans (subject to additional requirements); MiFID II placement without firm commitment and reception and transmission of orders (also resorting to filtering systems) pertaining to transferable securities and the new category of ‘admitted instruments’ (ie shares of limited liability companies not considered financial instruments under national law).
ECSPs are subject to a regime mimicking that found in MiFID, but simplified. Nonetheless, the approved version, following the Council’s suggestions, has significantly expanded ECSPs’ duties: not only duties of conduct, but also in terms of organizational, risk management and prudential requirements (e.g. CET1/insurance for operational risk), especially in the case of marketplace lending (e.g. ‘appropriate systems and controls to assess the risks related to the loans intermediated on the crowdfunding platform’) and more complex models (with detailed prescriptions about creditworthiness assessment, parameters for managing the portfolio, etc.). The adopted version has introduced the duty of ECSPs to undertake a minimum level of due diligence in respect of project owners, as regards criminal records and establishment in AML/CT non-cooperative jurisdictions. The Key Investor Information Sheet (KIIS) to be provided to investors will be prepared by the project owner (other than in cases of portfolio management of loans, where the ECSP prepares it) but ECSPs are required to verify not only the completeness and clarity of the KIIS but now also the ‘correctness’ of the same.
Special protective measures are now reserved to the new category of ‘non-sophisticated’ investors, corresponding to investors other than professional investors and investors declaring to be aware of relative consequences and with evidence of high net worth or investment experience. In addition to an ‘entry-knowledge test’ (aiming at verifying whether and which crowdfunding services are appropriate for un-sophisticated investors) and a loss simulation test (verifying their ability to bear loss, calculated as 10% of their net worth), the adopted Regulation inserts a warning (followed by an explicit client’s consent) in case of investment above €1,000 or 5% of the client’s net worth and a 4-day withdrawal right.
As better discussed in my original paper and its updated version, the original ECSPs Proposal had tried to characterise marketplace lending/investing platforms as more ‘neutral’ financial intermediaries (i.e. with a limited role, involvement and consequent responsibility) and to balance, on the one hand, a light regime with relevant limitations in terms of maximum offering size, permissible products/activities; and, on the other hand, investor protection with ECSPs and project owners’ costs, through new, technologically-based and simplified measures (e.g. entry-knowledge test, loss simulation system) and synthetic and comprehensible information, also in consideration of the existing differences in the respective frameworks of loans and investments.
The approved version, while filling some relevant gaps (sophisticated/non-sophisticated investors, investment limits: see the recommendations in my paper), seems to share the same vision only partially and ends up ‘re-intermediating’ marketplace lending/investing. ECSPs are looked at as gatekeepers and closer to traditional financial intermediaries (in terms of conduct and organizational requirements, liability, language rules). In fact, it significantly increases and details ECSPs requirements, making the regime more inflexible and costly. This might end up limiting the need for (and platforms’ interest in) such Regulation, since platforms (at least marketplace investing platforms), obtaining a MiFID II license instead, would be able to offer more services, across borders, with fewer restrictions and benefit from public support/safeguards under similar requirements. The approved version of the Regulation raises the level of investor protection and increases comparability (especially for marketplace lending platforms) but might curtail, on the other hand, innovation and financial inclusion. Designing a legal framework for ‘disintermediated’ intermediaries is not an easy task.