At an EU level, political agreement was recently achieved between the European Commission, the European Parliament and the Council on the proposal for a regulation on EU crowdfunding service providers. The new EU-wide regime aims to improve access to crowdfunding and enable investors on crowdfunding platforms to benefit from a better protection regime and a higher level of guarantees.
The EU regulation on crowdfunding is still not law, however, and crowdfunding service providers are keen on launching in the EU. Cyprus is shaping up to becoming an ideal EU jurisdiction in which crowdfunding platforms can be established.
New national rules on crowdfunding
The European Commission envisages that given the need to ensure a clear separation of services in order to manage conflicts of interest and to ensure effective supervision, a person authorised as a crowdfunding service provider under the proposed EU regulation on crowdfunding should not be authorised under MiFID II and vice versa.
The Cyprus Securities and Exchange Commission (CySEC) has proposed the introduction of rules on investment-based crowdfunding. It is intended that these rules will come into place under the current regime regulating investment services, namely national legislation transposing MiFID II.
CySEC has designed its proposal to allow crowdfunding investors to make informed investment decisions based on standardised, concise and clear information, adhering to the spirit of the upcoming EU regulation on crowdfunding.
Cyprus is laying the groundwork for a seamless transition into the eventual EU-wide regime, while offering legal certainty, clarity and an accommodating framework for crowdfunding service providers that want to establish a regulated operation ahead of the EU regulation coming into play.
Licensed crowdfunding platforms
CySEC’s plans entail licensing investment-based crowdfunding service providers under the current framework of investment firms. Such MiFID II-based licensing will be a single authorisation that can be passported across the EU, allowing for the cross-border provision of crowdfunding services across all member states.
Crowdfunding services regulated under the proposed new rules will take the form of neutral intermediation. Crowdfunding service providers will not be a party to the transaction itself, but rather act as an intermediary between the investor and the business seeking funding.
Activities that are expected to be treated as crowdfunding services involve services provided to:
- businesses seeking funding by placing their (equity or debt) transferable securities through the crowdfunding platforms of licensed providers;
- investors wishing to acquire such (debt or equity) transferable securities issued by businesses on the crowdfunding platform.
The crowdfunding service provider will be offering MiFID-regulated services to both the businesses placing their securities on the crowdfunding platform as well as the investors acquiring such securities. In the first case, businesses will be receiving services of placement of a financial instrument with or without a firm commitment. In the latter case, the provider will be offering the reception and transmission of orders and safekeeping and administration of financial instruments for the account of clients, including custodianship and related services.
Ahead of the proposed EU crowdfunding regulation passing into legislation, providers will also have to consider any compliance requirements under the laws of other EU member states in which their Cyprus-licensed crowdfunding services will be offered. As is the case across the EU, crowdfunding service providers will also need to carry out anti-money laundering checks on their customers.
The proposed introduction of industry-specific crowdfunding rules and the deployment of a new framework for blockchain technology (in alignment with the country’s national blockchain strategy) position Cyprus as an EU jurisdiction offering legal certainty to crowdfunding platforms for their entry in European markets.
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