Participatory financing or crowdfunding has been booming for over 10 years now. Until now, only the local regulations of the European Union (“EU”) countries provided a framework for crowdfunding platforms, but the ECSP Regulation of 7 October 2020 has recently facilitated the development of these platforms by providing a single regulatory framework. Let’s decipher it.
Why the ECSP Regulation?
About ten years ago, crowdfunding quickly became attractive to small businesses struggling to find the investments they needed to grow with banks. Individuals were strongly attracted to this option by promising attractive returns on investment. However, the weaknesses of the system soon became apparent. Investors were reluctant to invest their money for fear of being ripped off, illegally reproducing projects, etc. All these reasons quickly led EU countries to regulate crowdfunding platforms at a national level.
In France, Ordinance 2014-559 of 20, May 2014 provided the first legal framework for crowdfunding. It then gradually secured the system until the Pacte Act of 22 May 2019. Many European countries such as Germany and Spain have followed this pattern. In France, two approvals were then proposed:
The status of Participatory Investment Advisor (CIP) for crowdfunding platforms
The status of intermediate participatory finance (IFP) for crowdlending platforms
Faced with the growing development of platforms throughout the EU, the European Commission, followed by the European Parliament, has proposed a harmonised legal framework. Regulation 2020/1503 of 7 October 2020 on European providers of participatory finance services for entrepreneurs was thus born.
What is new in the ECSP Regulation?
PSFP: creating a new single status
The ECSP Regulation harmonises the regulatory framework for crowdfunding platforms and encourages investors to extend their investments cross-border. Most importantly, it has led to the creation of a single status that each crowdfunding platform will have to obtain to continue its activity: that of a participatory finance service provider (PSFP).
This new status allows platforms to operate on a European scale without needing further authorisation. A French platform will first have to obtain authorisation from its country’s regulatory authority (the AMF) and then inform it of its intention to provide its services in another EU member state such as Germany. The AMF will then contact the BaFin (German regulator) and inform it of the project. Only when the AMF confirms that BaFin has authorised the export will the French platform be able to operate in Germany.
The new investment threshold
Each platform will be limited to an investment threshold of €5 million per project per year, contrary to French regulations, which, until now, set the amounts per project at €1 million for the PFI status and €8 million over 12 months for the CIP status.
The difference between the two categories of investors
The ECSP Regulation has therefore created two new categories of investors:
Sophisticated investors: the amount of their investments is not limited.
Unsophisticated investors: they can finance up to 1,000 euros or 5% of their net assets per project. The challenge is to make them aware of the consequences of their investments with a battery of knowledge tests on the financing risks and to provide them with a set of informative documents on the project. In addition, they will have 4 days to withdraw their investment without giving reasons and without risking penalties.
The ECSP Regulation, therefore, imposes on platforms an obligation of transparency towards investors, particularly by communicating a key information sheet (KIIS) – sufficiently clear and precise – drawn up by the project leader of each participatory financing offer. This document must be published seven days before a project is launched online.
ECSP: which platforms are concerned?
The ECSP Regulation is intended to apply to crowdlending (lending) – including real estate crowdlending – and crowdfunding (investment) platforms but excludes platforms that offer donations with or without consideration. In practice, contacting the country’s regulator (AMF in France) is always advisable to define with them whether your platform is excluded from this regulation.
If non-European platforms wish to access the European market, they must set up their legal entity in the country they want to enter. It is via this subsidiary that the application for approval will be made. Its new status will give it a European passport, and the company will be able to extend its activity more efficiently throughout the European Union. A new ecosystem may emerge with even stronger Asian and American markets in this context.
ECSP Regulation: what is the timetable for compliance?
The ECSP Regulation entered into force on 10 November 2021. In this context, all existing platforms wishing to continue their activity were initially given 12 months, i.e., until 10 November 2022, to obtain their authorisation as a provider of participatory finance services. The European Commission reversed this date by a decision of 12 July 2022, granting an extension of the compliance period for platforms. The transition is now extended to 10 November 2023. New platforms must comply directly with the Regulation by 10 November 2022.
In practice, these platforms will have to apply for authorisation to their national regulatory authority (AMF in France, BaFin in Germany, Consob in Italy, etc.), which will have 25 working days from receipt of the application to examine the documents attached to the file, and then three months from the date of receipt of a complete application to give its decision.
What are the consequences for payment processes?
The ECSP Regulation is not intended to change the payment processes used by platforms. The Regulation states that an authorisation to provide crowdfunding services cannot be equated with an authorisation to provide payment services. In this context, crowdfunding platforms will have to either obtain a payment service provider (“PSP”) authorisation or declare to the competent authorities their intention to subcontract such services to an authorised third party such as Lemonway.
As a pan-European payment service provider, Lemonway supports you in creating and complying with your crowdfunding platforms. Choosing Lemonway means benefiting from the skills of our experts and the European license to expand your activity in all member countries. Contact us now!
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