EU: New rules to improve crowdinvestors protection

The European Council, a collective body that defines the European Union’s overall political direction and priorities, adopted new rules to improve the way crowdfunding platforms operate across the EU.

The new framework, which is part of the capital markets union’s project and aims at providing easier access to new financing sources, will remove barriers for crowdfunding platforms to provide their services cross-border by harmonising the minimum requirements when operating in their home market and other EU countries.

The new rules will cover crowdfunding campaigns of up to EUR 5 million over 12 months. Larger operations will be regulated by MiFID and the prospectus regulation.

Reward- and donation-based crowdfunding fall outside the rules’ scope since they cannot be regarded as financial services.

INVESTOR PROTECTION

Among the main things of interest, there are new rules to provide investors with higher layers of protection. Those include transparency and accessibility to information; a credit risk assessment; and the issue of a risk warning where necessary.

1. TRANSPARENT INFORMATION (INCLUDING DEFAULT RATES)

With regard to the information provided to non-sophisticated investors (i.e. retail clients), crowdfunding services have to disclose the default rates of the crowdfunding projects offered on their platforms over the last 36 months.

Moreover, they have to keep all records related to services and transactions for a period of at least 5 years and make them immediately accessible by the client at all times.

2. CREDIT RISK ASSESSMENT

Crowdfunding marketplaces have also to assess whether and which services offered are appropriate for the prospective non-sophisticated investors.

In this regard, they have to require them to simulate their ability to bear losses, calculated as 10% of their net worth.

3. RISK WARNING

Where prospective non-sophisticated investors do not provide such information or where they have insufficient knowledge, skills or experience, a risk warning has to be issued stating the risk of losing the entirety of the money invested.

THE NEW ROLE OF ESMA

The framework defines common authorisation and supervision rules for national competent authorities. The European Securities and Markets Authority (ESMA) will have an enhanced role to facilitate coordination and cooperation, through a binding dispute mediation mechanism and the development of technical standards.

Find out more here.