News on Crowdfunding

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And what news: in our previous article we reported on the preparatory phase yet, however, on 7 October 2020 the EU has adopted its regulation on Crowdfunding service providers[1], which, due to its regulatory nature, must be directly applicable by all Member States from 10 November 2021.

  1. Uniform regulation at EU level

The Regulation, as planned originally, creates a single and uniform set of rules for crowdfunding providers and services at the EU level. While, pursuant to some previous concepts, national and EU rules would have co-existed, clause (76) of the Regulation’s explanatory part states that fragmented national provisions will be replaced by the common Regulation rules, providing transitional period until 10 November 2022 for the already authorized service providers  to convert their national licences into authorizations under the Regulation.[2] Another important change is that the authorizing authority shall be, instead of the ESMA, the financial supervisory authority of the Member State, where the service provider is established,[3] holding also all dedicated supervisory power related to the service.[4] ESMA’s roles include the registration of service providers,[5] the drafting of regulatory technical standards, close cooperation with the local financial authorities,[6] as well as the collection and publication of statistics related to the activity, among others.

  1. The most important provisions of the Regulation
  • crowdfunding activity means a publicly accessible internet-based information system (platform), operated or managed by the crowdfunding service provider;
  • crowdfunding service means the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of any of the following activities (a) the facilitation of granting of loans and/or (b) the placing without a firm commitment of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders in this regard;
  • client means any prospective or actual investor or project owner to whom a crowdfunding service provider provides, or intends to provide, crowdfunding services;
  • project owner means any natural or legal person who seeks funding through a crowdfunding platform;
  • investor means any natural or legal person who, through a crowdfunding platform, grants loans or acquires transferable securities or admitted instruments for crowdfunding purposes;[7]
  • crowdfunding service providers shall not have any participation in any crowdfunding offer on their platforms.[8] Crowdfunding service providers shall not accept as project owners in relation to the crowdfunding services offered on their platform any of the following: (a) their shareholders holding 20 %, or more, of share capital or voting rights; (b) their managers or employees; (c) any natural or legal person linked to those shareholders, managers or employees by control as defined in point (35)(b) of Article 4(1) of Directive 2014/65/EU.[9]

Crowdfunding service providers that accept as investors in the crowdfunding projects offered on their crowdfunding platform any of the above referred persons shall fully disclose on their website the fact that they accept such persons as investors, including information on the specific crowdfunding projects invested in, and shall ensure that such investments are made under the same conditions as those of other investors and that those persons do not enjoy any preferential treatment or privileged access to information;

  • the Regulation distinguishes between sophisticated and non-sophisticated investors: sophisticated investor means any natural or legal person who is a professional client by virtue of point (1), (2), (3) or (4) of Section I of Annex II to Directive 2014/65/EU or any natural or legal person who has the approval of the crowdfunding service provider to be treated as a sophisticated investor in accordance with the criteria and the procedure laid down in Annex II to this Regulation. Non-sophisticated investor means an investor who is not a sophisticated investor;[10]
  • financial products traded on crowdfunding platforms are not identical either in type or in risk to traditional investment or savings products. The Regulation therefore requires service providers to subject their prospective non-sophisticated investors to an entry-level knowledge test in order to identify and understand the higher risks associated with crowdfunding Providers should explicitly warn prospective non-sophisticated investors with insufficient knowledge, skills or experience that the crowdfunding service they provide may not be suitable for them. Crowdfunding service providers may only accept investments from non-sophisticated investors who have explicitly acknowledged that they have red and understood these warnings;[11]
  • as there is a significant risk that non-sophisticated investors will lose most, or even all amounts, originally invested, their excessive exposure to such projects should be avoided. The Regulation therefore provides for that in each case, when the non-sophisticated investor’s targeted investment exceeds a certain limit, set out in the Regulation, the crowdfunding service provider – among others – shall ensure that such investor receives a risk warning, and provides explicit consent to the crowdfunding service provider;[12]
  • however, the Regulation also states explicitly that “Prospective non-sophisticated investors and non-sophisticated investors shall not be prevented from investing in crowdfunding projects”[13] by which it places the responsibility for the risk of any particular investment primarily on the investor;
  • the service provider shall provide for a pre-contractual reflection period, during which the prospective non-sophisticated investor may, at any time, revoke his or her offer to invest or expression of interest in the crowdfunding offer without giving a reason and without incurring a penalty. This reflection period shall start at the date of the offer to invest, or the expression of interest by the prospective non-sophisticated investor, and shall expire after four calendar days;[14]
  • service providers shall provide prospective investors with a key investment information sheet drawn up by the project owner for each crowdfunding offer. The key investment information sheet shall be drafted in at least one of the official languages of the Member State, whose competent supervisory authority granted the authorization in accordance with Article 12, or in another language accepted by the authority;[15]
  • crowdfunding may be provided in the form of cross-border services;[16]
  • service providers shall have in place, continuously, prudential safeguards, equal to an amount of at least the higher of the following: (a) EUR 25 000; and (b) one quarter of the fixed overheads of the preceding year, reviewed annually;[17]
  • the authorizing supervisory authority has wide and extensive powers of control over the activities of the crowdfunding service providers.[18] The sanctions can range from the suspension of the financing offer announced by the project owner for several days, through the imposition of a fine, to the revocation of the license, granted to the service provider. In the latter case, the authority shall even have the power, with the consent of the clients and the accepting, other crowdfunding service providers, to transfer existing contracts to another crowdfunding service providers.[19]
  1. The Hungarian regulation

It is further encouraging that Act LVIII of 2021 on the amendments to the law related to the regulation of covered bonds and other legal harmonization measures affecting the financial intermediation system, which bring the above into line with Hungarian legislation has already been published on 28 May 2021 in the Hungarian Gazette No. 98.

The amendment of the law follows the path paved by the Decree: the crowfunding service is defined as independent activity to be performed under the Capital Markets Act, which is not subject to either the Act on the Investment Firms and Commodity Exchange Service Providers, or the Credit Institutions Act. For those who intends to provide the services from a Hungarian headquarter, the authorizing and supervisory authority shall be the National Bank of Hungary.

The amendment to the laws, implementing the crowdfunding services will enter into force on 10 November 2021.[20] The main provisions are as follows:

  • Capital Markets Act:
  • in the Hungarian legal system, the provisions of Act CXX of 2001 on the Capital Markets Act (Tpt.) shall apply to the crowdfunding service;[21]
  • devotes the full Part Eighth/A. to the rules on crowdfunding, in which it states, inter alia, that “provision of credit that may be mediated within the framework of Crowdfunding as defined in Regulation (EU) 2020/1503 of the European Parliament and of the Council, shall be construed as lending as defined in Section (40) (b) (ba) of Article 6 (1) of the Hpt.”[22] In addition, it is specified that “The project owner and its executive person shall be jointly and severally liable for the accuracy and completeness of the information precluding a different interpretation contained in the key investment information sheet set forth in Article 23 of Regulation (EU) 2020/1503 of the European Parliament and of the Council” [23]
  • Article 400 of Tpt. is supplemented with applicable measures and sanctions related to violations of legislation detected by the Supervisory Authority (the National Bank of Hungary) in connection with the crowdfunding service;[24]
  • according to the new paragraph (9) of Article 405 of the Tpt. “The maximum fine that may be imposed in the event of a breach of the obligation to provide a crowdfunding service amounts to
  1. twice of the profit arising from the infringement, if the profit can be quantified,
  2. b) if the profit cannot be quantified, then
  3. ba) in the case of a legal person, up to HUF 179,010,000 or up to 5% of the previous total annual turnover according stated in the last available financial statements approved by the decision-making body; if the legal entity is a parent company or a subsidiary of a parent company that is required to prepare consolidated financial statements under the accounting legislation, then the annual turnover to be taken into account is the annual turnover according to the latest consolidated accounts approved by the decision-making body of the parent company or the corresponding revenue according to the accounting legislation,
  4. bb) in the case of a private person, a maximum of HUF 179,010,000.”
  • Act CXXXVIII of 2007 on Investment Firms and Commodity Exchange Service Providers and the Rules on the Activities they may carry out (Bszt.):
  • the amendment to the law states that Community funding service providers defined in Section (1) (e) of Article 2 of the Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 are not subject to the Bszt.[25]
  • Act CXXXIX of 2013 on the National Bank of Hungary (MNBtv.):
  • The following par. (37) is added to Article 40 of the MNBtv.: “Within the scope of its tasks specified in Section (1) (h) of Article 39 the National Bank of Hungary shall perform the tasks related to the implementation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937”;
  • the amendment to the law further states that (This Act) “ together with the Act CXX of 2001 on the Capital Market and Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings lays down the necessary provisions for the implementation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937”[26]
  • Amendment of Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings. law
  • The following Section 6a is added to Article 6 of Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings (Hpt.): “(6a) Community funding services as defined in Regulation (EU) 2020/1503 of the European Parliament and of the Council shall not constitute financial intermediation.“[27]
  1. Conclusions

Two obvious conclusions can be drawn from the above, at least: (i) the fact that those service providers already present in EU Member States are entitled to convert their current, national authorisations to licenses granted under the Regulation and, to provide the services as cross-border activity in the designated/authorized Member States paves the way to the full European market. This offers huge growth opportunity for the already licensed and experienced service providers, which will certainly be exploited. (ii) On the other hand, the one-year transition period between November 2021 and November 2022 provides opportunity for those wishing to launch their service now to obtain their license in order to follow in the footsteps of those before them. Whatever happens, the forthcoming years will certainly be exciting in terms of crowdfunding, and we can only hope that the outcome of the competition will be positive for all parties.

[1] REGULATION (EU) 2020/1503 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937

 [2]„(76) In the interest of legal certainty and in view of the replacement of national rules by the rules set out in this Regulation insofar as types of crowdfunding services are concerned which are now included within the scope of this Regulation, it is appropriate to make transitional arrangements allowing persons providing such crowdfunding services in accordance with national law preceding this Regulation to adapt their business activities to this Regulation and to have sufficient time to apply for an authorisation thereunder. Such persons should therefore be able to continue to provide crowdfunding services that are included within the scope of this Regulation in accordance with the applicable national law until 10 November 2022. During that transitional period, Member States can put in place special procedures to enable legal persons, which have been authorised under national law to provide crowdfunding services included within the scope of this Regulation, to convert their national authorisations into authorisations under this Regulation, provided that the crowdfunding service providers meet the requirements set out in this Regulation.

(77) Crowdfunding service providers who have failed to obtain authorisation in accordance with this Regulation by 10 November 2022 should not issue any new crowdfunding offers after that date. To avoid a situation whereby the raising of target capital in relation to a particular crowdfunding project is not completed by 10 November 2022, the calls for funding should be closed by that date. However, after 10 November 2022 servicing of the existing contracts, including collecting and transferring receivables, providing asset safekeeping services or processing corporate actions, can continue in accordance with the applicable national law.” as well as Article 3. clause (1).

[3] Article 12. clause (1).

[4] Article 15.

[5] Article 14.

[6] Article 32.

[7] to points (i)-(v): Article 2

[8] Article 8 (1)

[9] Article 8 (2): DIRECTIVE 2014/65/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (Text with EEA relevance)

(35) ‘close links’ means a situation in which two or more natural or legal persons are linked by:

(a) participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking;

(b) ‘control’ which means the relationship between a parent undertaking and a subsidiary, in all the cases referred to in Article 22(1) and (2) of Directive 2013/34/EU, or a similar relationship between any natural or legal person and an undertaking, any subsidiary undertaking of a subsidiary undertaking also being considered to be a subsidiary of the parent undertaking which is at the head of those undertakings;

(c) a permanent link of both or all of them to the same person by a control relationship;

[10] Article 2

[11] Article 21, in particular par. (4)

[12] Article 21 (7)

[13] Article 21(6), second sentence

[14] Article 22 (2) and (3)

[15] Article 23

[16] Article 18

[17] Article 11 (the latter must include the amount of credit management costs for a period of three months if the Community funding service provider also mediates lending)

[18] Article 30 (2)

[19]Article 30 (2) (i) (if the licence of a Community funding service provider has been withdrawn pursuant to point (c) of the first subparagraph of Article 17 (1) of the Regulation)

[20] Article 139. (2) of the bill T/15973

[21] Article 24.: the new par. 78a. and 78b of Articles 1/B. and 5 (1) of the Tpt.

[22] Article 26.: according to Article 296/A. of the Tpt. and clause 40 of Article 6 (1) of the Hpt.: provision of credit and loans

  1. b) lending of loan: […] ba) making available an amount on the basis of a credit or loan agreement concluded between the creditor and the debtor that the debtor is obliged to repay on the date specified in the contract, with or without interest,

[23] Article 296/B. (1) of the Tpt.

[24] Article 30.: Article 400. (3b) of the Tpt. (in line with Article 30. (2) of the Regulation)

[25] Article 46. (2): new clause m) of Article 2. of the Bszt.

[26] Article 88.: new par. 22. of Article 185/A. of the MNBtv.

[27] Article 90.§.