We previously reported on the draft report of the ECON Committee published in August this year and the proposed amendments of the committee members to the draft EU Crowdfunding Regulation (Regulation) published by the European Commission in the following month (link to article – German only). The Regulation is intended to harmonise the crowdfunding regulation in the EU member states and thus create an attractive cross-border financing alternative for companies.
Following the ECON Committee’s publications, crowdfunding service providers from across Europe commented on the draft report and the proposed amendments. The expectations of the service providers of the Committee do not seem to have gone entirely unheeded, as can be seen from the Committee’s final report.
What are the key changes?
First, the members of the Committee agreed to extend the scope of the Regulation to cover crowdfunding projects up to EUR 8 million instead of the previous EUR 1 million. This step ensures the welcomed harmonising adjustment to the maximum threshold laid down in the EU Securities Prospectus Regulation, up to which the Member States can allow an exemption from the obligation to publish a prospectus. Germany has made use of this. In the case of an offer of securities, a prospectus requirement does not apply if the total consideration of the offer is less than EUR 8 million. The crowdfunding service providers are also likely to welcome this step, as it harmonises the increased capital requirements of the companies on the one hand and the interest of investors in investments of significant size on the other hand.
Another key point on which the members of the ECON Committee agreed and which was also called for by market participants is the transfer of responsibility for the approval of crowdfunding service providers from the European Securities and Markets Authority (ESMA) to the national competent authorities. Due to their experience in dealing with new financing methods they are in a better position to assess whether an approval should be granted or refused.
Another relief – at the urging of the crowdfunding industry – is expected to be the expanded opportunities for financial participation of service providers in the offers on their platform – for example in the form of performance-related fees or through their own investments in the context of financing rounds. Performance-based fees may now be agreed without further ado.
Furthermore, platform operators can participate in the financing of a project. However, this participation must not exceed 2% of the capital collected for the project. Such financial investments, though, are always subject to service provider informing the investors in this respect by publishing clear and transparent selection procedures.
Although the ECON Committee’s press release on the final report still referred to a recommendation on the publication of default rates, the final document shows that an obligation to publish default rates should indeed be anchored in the Regulation.
In the interests of investor protection, the obligation for platform operators to carry out – albeit brief – due diligence on the owners of the projects to be financed has been included, which is likely to entail increased costs for crowdfunding service providers.
ICOs not included within scope
Finally, it is notable that the ECON Committee decided not to include the Initial Coin Offering (ICO) within the scope of the Regulation. According to the Committee, the form of financing used by the ICO differs too much from that of crowdfunding, since an ICO does not normally involve an intermediary and often collects more than EUR 1 million. Accordingly, it is not feasible to adequately include ICOs in the Regulation.
At the same time, the ECON Committee’s final report at least expresses the effort – explicitly addressed to the Commission – that a timely regulation of the ICO is indispensable, particularly for reasons of investor protection. The inclusion of the ICO in the Regulation would have been highly desirable from a time point of view given the dynamic developments in the market. The technical errors such as the non-consideration of the secondary market and the non-resolution of the apparent contradiction with regard to the use of an intermediary could have been remedied in a constructive and self-regulating manner. After this missed opportunity, it is to be hoped at least that the ECON Committee’s appeal will soon bear fruit and that the first steps towards ICO regulation will be taken.
What happens next?
In the further course of the process towards a uniform Crowdfunding Regulation, the final report will now be submitted to the European Commission and the Council for further consideration. It is to be hoped that this hurdle will also be taken soon and before the EU Parliament elections in May 2019.