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On October 7th, 2020, the European Parliament and the Council approved the new Regulation 2020/1503 on European crowdfunding service providers for business, with the aim of eliminating existing barriers to cross-border financing access between Member States.

Crowdfunding has become regulated in Spain since 2015, introduced by Law 5/2015 of 27 April, on the promotion of business financing. Under the name of crowdfunding platforms (“CP”) we find a type of legal entities whose aim is to connect – through digital platforms – project promoters with a plurality of natural and/or legal persons who wish to obtain a financial benefit in exchange for an investment.

There are two regulated forms of such fundings, those in which the company promoting the project demands the funds by means of (i) issuing securities or shares; or (ii) applying for loans, which should be noted that they cannot be considered as raising repayable funds. In any case, we can observe that this type of financing allows a massive participation of investors, given the easy access to it, but at the same time it also consists on a high risk investment, since the CP does not guarantee the solvency or viability of the promoters beyond the legal diligence required from them, therefore, a situation may arise in which the promoter is unable to return or remunerate the funds received.

Which projects can be the object to crowdfunding? The legislation establishes four main requirements:

  1. That they are addressed to a plurality of natural or legal persons;
  2. That they are requested by the promoter himself, who may be a natural or legal person;
  3. That the purpose of the fundraising is:
    • Business, training or consumer.
    • Under no circumstances may it consist in the financing of third parties; in the acquisition of financial instruments admitted to trading on a regulated market, in a multilateral trading system; nor in the acquisition of shares or units in collective investment institutions or their management companies, venture capital institutions, other closed-end collective investment institutions and management companies of closed-end collective investment institutions.
  4. That they apply for their financing by means of:
    • issuing or subscribing to securities or shares; or
    • applying for a loan.

It will be a requirement that the promoters – legal entities – that instrument their participations by means of a subscription offer of securities representing capital, recognize in their Articles of Association the following rights:

  • Right to attend the general meeting by telematic means;
  • Right to representation at the general meeting by any person; and
  • Establish that the shareholders’ agreements that aim to exercise the right to vote at general meetings or that in any way affect the transferability of shares, company holdings or other securities representing capital must be immediately communicated to the company itself and by it to the other shareholders.

What are the requirements to become an investor in a participatory financing project? Any natural person – with full capacity to act – or legal entity, can be an investor. However, the regulations establish a differentiation between sophisticated and non-sophisticated investors. Sophisticated investors are those who meet the legal requirements regarding their income, assets or annual turnover. Those who do not reach the amounts established by legislation will be considered non-sophisticated investors. In order to restrict the activity of the latter, the legislation establishes economic investment limits per project and an economic investment limit for a period of 12 months, a restriction which sophisticated investors do not have.

The same as Spain has regulated the crowdfunding, other Member States have also regulated it, respectively. This has created that the current national rules are divergent across the EU with regard to the conditions for the operation of participatory financing platforms, the activities allowed and the requirements for obtaining authorizations. As a result of the differences between national rules – which have been adapted to the needs of national markets and investors – this type of financing has now become mainly national given the high legal costs of cross-border investments for both investors and crowdfunding service providers.

Regulation 2020/1503 on European providers of equity financing services to businesses, amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, has therefore been approved. The purpose of this regulation is to unblock the cross-border provision of crowdfunding and to facilitate the exercise of the freedom to provide and enjoy such services by removing existing obstacles in the internal markets.

Among the main highlights we can find the following:

  • As for the crowdfunding service providers
    • Prudential requirement: they must have at their disposal at all times (i) EUR 25 000, and (ii) one quarter of the fixed overheads of the previous financial year, reviewed annually, which must include the cost of loans per service for three months where the crowdfunding service providers also facilitates the provision of loans.
    • Authorization: the application must indicate the Member States in which the provider intends to provide the services, so that once he has obtained authorization in one Member State, he can start providing the financing services in the other Member State.
    • Registration: the national competent authority will inform ESMA of all authorizations granted. ESMA will establish a register of all crowdfunding service providers authorized on its website.
  • As for the promoters and financing offers
    • The offers may not exceed 5,000,000 euros, calculated over a period of 12 months.
    • They must prepare a key investment information sheet in at least one of the official languages of the Member State which has granted the supplier’s authorisation and of all Member States in which the offer is advertised.
  • As for the investors:
    • Sophisticated investors will be considered:
      • Legal entities that meet one of the following minimums, (i) equity 100.000€, (ii) net turnover 2.000.000€, or (iii) balance sheet 1.000.000€;
      • Individuals who meet two of the following criteria, (i) gross personal income of 60.000€ or financial instruments over 100.000€, (ii) work or have worked for at least 1 year in the financial sector, or (iii) have conducted significant capital market transactions at an average frequency of 10 times per quarter over the previous 4 quarters.
    • If the above requirements are not met, investors will be considered non-sophisticated.
    • There is no limit on the amount to be invested by non-sophisticated investors. However, a warning mechanism is established for them when the investment they are going to make is higher than 1.000€ or 5% of their net worth. Such a mechanism will require express consent and a demonstration that the investor understands the risks.

The regulation will enter into force on November 9th, 2020 and will apply from November 10th, 2021.

In conclusion, we can see that the new regulation aims to emphasise the existence of a European market, and not therefore to limit crowdfunding to a national level, as has been happening in practice up to now. Certainly, crowdfunding is an alternative to bank financing for companies – especially for start-ups, innovative companies and SMEs – which, through the use of digital platforms, can gain massive access to investors in the various Member States.

We believe that Regulation 2020/1503, can be a very practical solution for those companies and professionals who need to finance their project, especially in the current context of the global crisis, caused by the COVID19 pandemic.

Este artículo está disponible en: Castellano Català