Placement of securities through Crowdfunding platform: domestic players still face legal uncertainties

It is not easy for companies wishing to issue securities through community financing platform to raise funds for a new investment. Although Hungary has been applying the EU Crowdfunding Regulation for almost 2 years, community financing is still in its infancy in Hungary, one of the reasons thereof is the deficiencies of the Hungarian regulation, according to analysis of Kapolyi Law Firm.

Community funding is an alternative to the traditional financial intermediation system, making it easier and faster for good ideas and start-ups to raise funds for achieving their goals. As common practice abroad, fundraising can be achieved by donation, for example, (these are the best-known cases where micro-donations are accepted), but to raise larger amounts of capital, it may be necessary to provide loans or issue securities. While this form of financing is becoming more widespread in the United States and, over the last decade, in the European Union too, the EU is also trying to catch up in terms of regulation. The EU’s Crowdfunding Regulation,[1] which came into force two years ago, aims to bring together enterprises seeking funding and investors with resources across borders in the online space. However, the harmonisation of EU and national regulations in this area is not straightforward either, and number of questions regarding the domestic regulation has been raised according to senior attorney-at-Law of Kapolyi Law Firm, dr. Balázs J. Ferenczy.

A transaction involving the issue of securities on a crowdfunding platform is subject to both the community funding and the issuance of securities rules. According to the applicable Hungarian regulations (Capital Markets Act[2], Prospectus Regulation[3], Crowdfunding Regulation), when a company issues securities through a community platform, it is considered as public offering. This raises two questions: is it necessary to publish a Prospectus and/or to involve an investment service provider?

The first question can be answered clearly: according to the expert of Kapolyi Law Firm, the rules of the Prospectus Regulation shall apply in the case of a public offering of securities under the Capital Markets Act. Accordingly, there is no obligation to publish a Prospectus if the public offering of securities is taken place on a Community funding platform up to a threshold of EUR 5 million, authorised under the Crowdfunding Regulation.

However, the question on the involvement of an investment service provider is more complex and while the answer is clear if there is no exemption – yes, in this case the involvement of an investment service provider is required – the legal ambiguity of the roles creates uncertainty if the crowdfunding provider is not authorised by the appropriate Financial Service Authority to provide investment services, too.[4] In fact, the actors defined in the Crowdfunding Regulation do not specifically include an investment service provider, so the Regulation does not define any liability for such a party, emphasises the expert of Kapolyi Law Firm. So, the question arises: what is the liability of an external investment service provider in a crowdfunding transaction? Is it perhaps the same as the liability of an actor involved in the fundraising? Would the liability be joint and several, or subsidiary, in nature? Why exactly would it be responsible: for documentation, administration, allocation, or all these together? Perhaps the investment service provider would only supervise these processes as a transactional advisor?

Dr. Balázs J. Ferenczy believes that if these issues cannot be resolved in a satisfactory manner, the obvious solution for participants in similar crowdfunding transactions may be – as unfortunately happened in this case – that the issuer of the securities shall be the parent or sister company, or SPV, registered in the EU, rather than the Hungarian company. Once completed, the raised funds will be made available to the Hungarian project in another allowed manner. However, the above uncertainty is also detrimental to the Hungarian pioneers of crowdfunding platforms, since it is also a question of what will happen to domestic bond and share issues, how the above risks can be managed and how responsibility structures can be developed in relation to the scopes of activity of the various participants.

An important conclusion is that, in addition to clear guidance from the NBH as supervisory body, the remedying of the shortcomings may require amendments to the Capital Markets Act and the Act on Investment Undertakings and Commodity Exchange Service Providers, too.


on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937

[2] Act CXX of 2001 on the capital markets

[3] Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (Prospectus Regulation)

[4] Section (55) of the Regulation’s Preamble.