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EU crowdfunding regulations proposed alongside new fintech action plan

Crowdfunding platforms will be able to provide their services across the whole of the EU via a system of regulatory 'passporting' under new laws proposed by the European Commission.08 Mar 2018

The Commission published a draft new regulation on European crowdfunding service providers for business (62-page / 901KB PDF) on Thursday. Platforms active in both the loan-based crowdfunding and investment-based crowdfunding markets would be subject to the new rules. The proposals include requirements on acting in the best interests of clients, complaints handling and management of conflicts of interest, as well as duties to disclose certain information to clients and records management.

Alongside the draft new regulation, the Commission has also set out a further legislative proposal (7-page / 205KB PDF) to exempt crowdfunding service providers from the obligations of the EU's MiFID II regime, which otherwise sets rules for investment services.

The Commission said, to-date, 11 EU countries, including the UK, have developed bespoke rules on crowdfunding at national level. However, it said that crowdfunding platforms struggle to operate on a cross-EU basis because of the "compliance and operational costs" involved in conforming to the various national rules.

The national rules on crowdfunding are tailored to "the characteristics and needs of local markets and investors, which results in differences of how the rules are designed and implemented with respect to the conditions of operation of crowdfunding platforms, scope of permitted activities and licencing requirements", it said.

The Commission said that "a large number of respondents" to a consultation it ran last year on fintech matters "highlighted that investment-based and lending or loan-based crowdfunding activities would benefit from a sound and proportionate EU regulatory framework"

It said: "The EU framework proposed … will offer a comprehensive European passporting regime for those market players who decide to operate as European crowdfunding service providers (ECSP). This framework will provide incentives for crowdfunding service providers to scale-up while ensuring sufficient protection for investors and project owners."

Financial services and technology law expert Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said: "As we have seen with other areas of regulation that touch upon fintech – for example data protection and the GDPR, and payment services and PSD2 – it is likely that proposals around regulating crowdfunding at an EU level will result in a lengthy period of debate."

"As these debates take place and as the EU bodies negotiate the key issues, the objective of establishing a transparent and workable regulatory framework which genuinely helps innovative businesses raise capital quickly must be kept at the forefront," he said.

"While any regulatory regime that is put in place must be grounded and include appropriate investor protections, whether it be a particular crowdfunding model, initial coin offering or token sale, new and innovative ways of raising finance have the potential to speed up the process for investment in innovation. The competitive advantages to be gained from a more efficient and widely accessible investment regime backed by a transparent regulatory framework cannot be underestimated," Scanlon said.

The European Commission's plans for crowdfunding were published alongside its new EU fintech action plan (18-page / 552KB PDF). The contents of that finalised action plan are similar to those set out in a draft version that was leaked earlier this year.

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