Crowdfunding: Central Bank of Ireland announces new regulatory framework
The European Union (Crowdfunding) Regulations 2021 (the "Irish Regulations") came into force on 13 December 2021, giving effect to the EU Regulation 2020/1503 (the "EU Regulation") and marking the start of a regulatory framework for crowdfunding in Ireland.
On 13 January 2022, the Central Bank of Ireland announced details of its regulatory regime for crowdfunding service providers (“CSPs”).
What is Crowdfounding?
The EU Regulation recognises crowdfunding as an increasingly popular form of alternative finance for start-ups and small and medium-sized enterprises which typically rely on small investments from a large number of investors.
A crowdfunding arrangement will typically involve three types of players:
- the project owner (natural or legal person) that proposes the project to be funded;
- investors who fund the proposed project; and
- a CSP that brings together project owners and investors through an online crowdfunding platform.
The EU Regulation does not apply to crowdfunding where the project owner is a consumer (i.e. acting for purposes outside of its trade, business or profession).
The European crowdfunding framework consists of the EU Regulation (directly applicable across the EU as of 10 November 2021) and certain amendments to Directive 2014/65/EU ("MiFID II")(namely to exclude CSPs from the scope of MiFID II).
The EU Regulation lays down uniform requirements for:
- the provision of crowdfunding services;
- the organisation, authorisation and supervision of CSPs;
- the operation of crowdfunding platforms; and
- transparency and marketing communications in relation to the provision of crowdfunding services in the EU.
The Irish Regulations appoint the Central Bank as the competent authority in Ireland for the authorisation and supervision of CSPs.
Who is in Scope?
The new regime applies to CSPs who match business funding interests of investors and project owners using an online crowdfunding platform, and which consists of any of the following activities:
Crowdfunding services can only be provided by entities established within the EU and it is now an offence for entities to commence providing crowdfunding services until authorisation as a CSP has been obtained by the competent authority in their Member State. However once authorised, a CSP can provide crowdfunding services across other Member States in line with the cross-border requirements of the EU Regulation.
A transitional period is provided for by the EU Regulation which allows an entity already engaged in the provision of crowdfunding services, prior to the EU Regulation becoming applicable, can continue to do so on a transitional basis until 10 November 2022. After that date they will only be able to engage in such activities if authorised as a CSP.
Authorisation Process Summary
A dedicated section for CSPs has been added to the Central Bank’s website, detailing the authorisation process (which includes a guidance note on the application process) and a number of key FAQs.
An application for authorisation involves the following steps:
1. A preliminary meeting with Central Bank to discuss the proposed application. This involves the applicant submitting details of:
- high level background information on the applicant (and group where applicable);
- description of the services / activities to be provided at authorisation date and those; the applicant will look to provide in the future (if known);
- proposed business lines (if new) and current track record (if existing);
- revenue and regulatory capital projections;
- rationale for selecting Ireland as their European place of business;
- details of any proposed outsourcing arrangements;
- staffing and governance proposals; and
- any other information that the applicant considers pertinent.
2. Submission of:
- a completed application form for authorisation as a CSP (including all the specific information and documentation requested in the form);
- the applicant entity’s business plan and programme of operations; and
- individual questionnaires in respect of each person proposed to hold a PCF role in the applicant entity.
Where an applicant proposes to operate on a cross border (freedom of services) basis it will also need to submit the following information:
- a list of the Member States in which it intends to provide crowdfunding services;
- the identity of the natural and legal persons responsible for the provision of the crowdfunding services in those Member States;
- the starting date it intends to provide the crowdfunding services; and
- a list of any activities provided by the applicant not covered by the EU Regulation.
3. The Central Bank will acknowledge receipt of the application within 10 working days and assess the application for completeness within 25 working days.
4. Once the application has been deemed complete, the Central Bank will then assess it.
5. The Central Bank will make a decision within three months of receipt of a complete application. A letter of authorisation will be issued by the Central Bank to successful applicant(s) outlining the authorisation requirements and any applicable conditions.
CSPs must adhere to prudential requirements (unless the CSP is already subject to higher capital requirements e.g. where also authorised as a payment service provider) which includes the requirement to hold funds or have an insurance policy in place that is equal to the higher of:
- EUR 250,000; or
- one quarter of the fixed overheads of the previous year (including the cost of servicing its loans for three months where the CSP facilitates the granting of loans), reviewed annually.
Under the new regime, a number of provisions of the Consumer Protection Code 2012 will now apply to CSP advertisements. For example, CSPs must display a prominent warning message on all their advertisements (including the KIIS discussed below) that investment in crowdfunding projects entails risks, including the risk of partial or entire loss of the money invested; and that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme. In addition, the design, presentation and content of any advertisement must be fair and clear and must not mislead or seek to unduly influence consumers in their investment decisions.
The EU Regulation limits each project owner to raising EUR 5 million over a period of 12 months. Crowdfunding offers that exceed this threshold are to be regulated under MiFID II and Regulation (EU) 2017/1129 (Prospectus Regulation). In respect of crowdfunding offers not exceeding EUR 5 million (and therefore exempt from the application of the Prospectus Regulation), CSPs will need provide prospective investors with a key investment information sheet (“KIIS”) which is drawn up by the project owner for each crowdfunding offer. Annex 1 of the EU Regulation provides the content of what the project owner is to include in each KIIS.
The EU Regulation does not cover the scope of any payment services offered by a CSP. CSPs should therefore assess whether they will separately require authorisation as a payment institution or an electronic money institution or assign a relevant third-party provider who is authorised to provide such payment services.
Our Financial Regulation Team has considerable experience advising on regulatory and licensing requirements and related applications and engagement with the Central Bank for regulated firms. We would be delighted to assist you with any queries relating to the new crowdfunding regime.