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Crowdfunding has finally entered into Turkish
legislation through Omnibus Law no. 7061 dated 5 December 2017, by way of
amending certain provisions of Capital Market Law numbered 6362. Although the
amendments cover the mainframe of crowdfunding in a very basic form, detailed
secondary legislations and policies are needed to implement crowdfunding as a
successful system. In anticipation of the secondary legislation it would be
beneficial to look at the regulatory approaches to crowdfunding within European
Union (EU) Member States and United Kingdom (UK).
EU Level Legislative
Although the European Commission (through a
and two reports) and the European Parliament (through three resolutions)
considers crowdfunding a way to broaden access to finance for innovative
companies, start-ups and other unlisted firms, including small or medium size
there is no specific EU legislation for crowdfunding. Member States implemented
one of two main approaches to address concerns around crowdfunding. Some Member
States (Germany, the Netherlands and Belgium) adopted guidelines extending
prior banking and financial regulations and, amongst others (Italy, France,
Spain and UK) adopted specific regulations. However, differences exist amongst
the Member States adopting the same approach.
In addition to national legislation, crowdfunding
business models may also be subject to EU legislation such as;
2000/31/EC concerning electronic commerce;
2006/114/EC concerning misleading and comparative advertising;
2005/29/EC concerning unfair business-to-consumer commercial practices in
93/13/EEC concerning unfair terms in consumer contracts;
2003/71/EC on the prospectus to be published when securities are offered to the
public or admitted to trading;
2007/64/EC on payment services;
2004/39/EC on markets in financial instruments;
2013/36/EU on access to investment firms;
2011/61/EU on alternative investment fund managers;
2008/48/EC on credit agreements for consumers;
2002/65/EC concerning the distance marketing of consumer financial services;
(EU) No. 575/2013 on prudential requirements for credit institutions and
(EU) No. 345/2013 on European venture capital funds; and Regulation (EU) No.
346/2013 on European social entrepreneurship funds.
Furthermore, crowdfunding activities may be subject to
EU state aid and competition rules
The European Supervisory Authorities have also carried
out work on crowdfunding in their respective areas of responsibility. In
December, 2014, the European Securities and Markets Authorities (ESMA)
published advice and an opinion on investment-based crowdfunding, and in
February, 2015, the European Banking Authority (EBA) published its opinion on
Overview of Regulatory
Frameworks in a Selection of EU Member States
Two main categories of crowdfunding are donation and
investing. Donation crowdfunding raises non-equity capital for creative
projects and charity causes. In some business models, donations may support an early
stage company or product innovation. In most of the EU Member States, no
specific regulations exist for donation-based or reward-based crowdfunding.
Investing types of crowdfunding refers to raising
capital by selling financial instruments related to the company’s assets or
financial performance. Investing types may also include raising debt capital in
the form of peer-to-peer lending (“P2P” or “lending-based crowdfunding”) or
selling claims to the company’s intellectual property, and selling to investors’
ownership shares (investment-based crowdfunding). The investing type crowdfunding
is the most regulation oriented, either by way of extending prior banking or
financial regulations, or adoption of ad hoc rules or fully fledged bespoke
regimes to the crowdfunding
Lending-based platforms exist in the majority of
Member States. In most of the business models used for lending-based
crowdfunding, platforms act as intermediaries and do not lend money directly,
and only facilitate loans amongst their clients. In some business models,
either the platform takes participation in the loans made through it, or a bank
extends the loans on behalf of the crowd-lenders. A lending-based crowdfunding
usually procures borrowers to obtain a mostly unsecured loan, and lenders to
invest in the loan, in exchange for a financial return. The services, for which
the platforms charge a fee, include (i)
registration and checks of borrowers' identity and eligibility for the loan,
including their creditworthiness; (ii)
online tools enabling lenders either to choose which borrower(s) to lend to, or
to use automated bidding functions to better diversify their risk; (iii) setting an interest rate based
borrowers' credit profile or enabling online reverse auctions; (iv) processing of lenders' money onto
borrowers' accounts, and borrowers' repayments according to the agreed terms
and (v) debt collection on behalf of
lenders if borrowers do not repay on time. Depending on the business model,
some of these activities and services may also be outsourced to external
suppliers, including authorized payment service providers.
These investments have a higher return / higher risk than saving accounts
offered by banks as no regulatory safeguards such as bank deposit guarantee
schemes or investor protection schemes protect these investments. If the
borrower defaults or the platform becomes insolvent, the crowd-lenders risk
losing part or all of their investment. Some platforms offer provision or
contingent funds to cover, mostly in part, crowd-lenders' losses from
borrowers' defaults. However, the cumulative effect of the short history of a
platform, and the maturity of loans ranging up to five or more years, may
render some of these contingent funds incapable to cover losses in the event of
level of defaults higher than predicted. Management and money handling are,
therefore, vital for the viability of the platform in a longer run, and for the
protection of crowd-lenders and borrowers.
There are several approaches in the Member States how
to define lending-based crowdfunding, and which legislative framework to be
applicable. In some Member States, lending-based crowdfunding is seen as
falling under the banking law or subject to payment services regulation or
securities regulation. Another approach is to create bespoke regimes for
lending-based crowdfunding. France, the United Kingdom (UK), Spain and Portugal
have adopted special regimes for lending-based crowdfunding.
The bespoke regimes foresee a new type of intermediary
to define the platforms, subject to lighter regulation than the banks and
investment firms. The platforms should have authorization from, and/or
registration to, financial regulators or intermediary associations. For example,
in the UK, authorization by the Financial Conduct Authority (“FCA”) is
necessary. Platforms may also need other permissions, depending upon the
activities they undertake. In France, registration with ORIAS (the association
in charge of a single register of finance intermediaries) is necessary. ORIAS
has to check if the platform is fit for the legal requirements (knowledge and
competence, duty and professional indemnity insurance). Checks are carried out
on a declarative basis. Platforms are regulated by the Bank of France – Autorité
de contrôle prudentiel et de résolution – ACPR and supervised by the Direction
générale de la concurrence, de la consommation et de la répression des fraudes –
DGCCRF for consumer protection purposes. No ex-ante authorization is required.
In the UK, when handling money platforms, borrowers
are responsible for client money and are subject to the rules in the FCA Client
Assets Sourcebook (CASS), as well as the client money rules (CASS 7), which
ensure adequate protection of client money.
In France, platforms may provide payment services, and must follow the specific
rules applying to such a service (credit institution, payment institution, or
electronic money institution).
The bespoke regimes often limit the scope of newly
regulated businesses with respect to either the size of the loan obtainable by
each borrower, or to the volume of the offer, to the sums investible by each
lender in a project or per year, and to permissible activities. There are
minimum capital requirements or professional indemnity insurance requirements
In France, the size of loans is limited to €1 million
per year per project, and a term of up to 7 years. Maximum investible amount
per lender is limited to €1.000 per project if the loan is with interest, and
up to €4.000 per project for an interest-free loan. In the UK, there is no
upper limit, and the minimum capital requirement is €50,000, or a percentage of
loaned funds (whichever is higher). In France, there is no minimum capital
requirement, but the borrower must hold professional indemnity insurance.
The bespoke regimes concentrate on the disclosure
obligations mostly imposed on platforms helping the adoption of an informed
decision by the lenders. In France, the platforms should warn the lender about
the risks, and provide to lenders the tools to assess the possible loan amount
they can afford, given their income and expenses; the relevant elements
enabling them to assess the economic viability of the project, in particular,
the business plan. In the UK, where creditors do not lend in the course of
business and borrowers are consumers, the platform must provide adequate
pre-contractual explanation to the borrower. In addition, all communications by
the platform must meet FCA requirements to be clear, fair, and not misleading;
where the creditor lends in the course of business the full protections
required by the Credit Consumer Act and FCA rules apply.
Due diligence obligations in the selection of
borrowers by the platforms are recognized in France, while in the UK platforms
need to disclose their selection criteria to the public, and warn of the need
to conduct additional due diligence before investing, unless a creditworthiness
assessment obligation exists on the platform, or on institutional crowd-lenders
under the applicable consumer credit law.
The bespoke regimes provide, to a certain extent,
responsibility to the platforms regarding the know-your-customer-rules and/or
anti-money laundering checks. In France, platforms are subject to anti–money
laundering rules; however, no appropriateness or suitability test is foreseen.
In the UK, firms providing personal recommendations to invest in P2P agreements
will also be providing a regulated activity. No appropriateness test for
lending-based crowdfunding, however platforms are established, implement and
maintain adequate policies and procedures sufficient to ensure compliance of
the firm, including it managers, employees and appointed representatives (or
where applicable, tied agents) with its obligations under the regulatory system,
and for countering the risk that the firm might be using to further financial
Furthermore, almost all of the bespoke regimes foresee professional integrity
on the platforms and, as well, be of good repute and experience. In the UK,
platforms should have appropriate resources to employ people who are competent,
fit and proper for their role, and have a suitable business model. Furthermore,
the employees controlling the business must exhibit honesty, integrity, and be
of good reputation. They must be financially sound and have appropriate
competence and capability for their role.
The different business models and national approach to
the fundamental notions, such as investment product, financial instrument, and
investment service creates regulatory differences in the Member States
regarding investment-based crowdfunding.
There are mainly four models of authorization of
crowdfunding platforms in EU Member States that are not mutually exclusive and,
in practice, they are combined in certain Member States. Some
Member States, like the Netherlands, apply securities laws to crowdfunding
activities, and require investment-based crowdfunding platforms dealing with
financial instruments to hold a Markets in Financial Instruments Directive (“MiFID”)
license, and be compliant with the relevant regime. In two Member States,
platforms can be authorized under a national bespoke regulation developed in
accordance with the exemption in Article 3 of MiFID. Other Member States do not
enforce MiFID and/or prospectus requirements with respect to investment-based
crowdfunding, because either of the products offered by the platforms are not
considered as financial instruments under MiFID (e.g. profit-participation
loans, silent partnerships or non-readily realizable securities), or a general
exemption exists for brokers not handling client money.
Additionally, investment services to be provided in investment-based
crowdfunding might differ among Member States, always depending on business
models, with variations in terms of capital requirements, conduct of business
rules, conflict of interest rules and organization requirements and available
exemptions. As the ESMA suggested, the service of reception and transmission of
orders would better suit investment-based crowdfunding, but other services
could also fit, depending on the business model adopted, such as execution of
orders, placement without firm commitment, investment advice, and operating a
multilateral trading facility. In some cases, also the management of a
collective investment scheme might be identified.
The Member States that have adopted a bespoke regime
(Austria, Belgium, Spain, France, the UK, Italy, Germany, Portugal) show
relevant differences as to the approach followed and the solutions adopted. For
example, in the UK, investment-based crowdfunding fell within the scope of FCA
regulations, where platforms allow people to invest in new or established
businesses by buying shares or debt securities.
In 2014, the FCA introduced a special regime for investment-based crowdfunding
where new customer protection rules for the sale of non-readily realizable
securities are applied. In principle, investment-based crowdfunding is regarded
as a regulated activity, the type of which depends on the business model
adopted, and may not even coincide with one of MiFID’s activities, being
subject to a lighter regime (e.g. financial promotion and ‘arranging deals in
investments’ when intermediaries only bring together an issuer with potential
sources of funding). Moreover, the tied agent exemption is applicable under
Art. 29 MiFID to platforms acting as agents of an investment firm and,
therefore, under the latter’s responsibility.
France adopted a non-MiFID bespoke regime for
investment-based crowdfunding using the exemptions foreseen by Article 3 of
MiFID by defining crowdfunding services as investment advice.
On the other hand, common trends are identifiable in
most of the Member States where Directive 2003/71/EC and MiFID do not apply to
crowdfunding, and national laws stipulate bespoke obligations. Some of the Member
States foresee new dedicated providers (as in Italy, France and Spain), while
others do not (the UK, Austria, Germany).
The new dedicated providers are restricted in terms of permissible products and
activities, and they are not allowed to offer other investment services, nor to
hold clients’ money or securities unless they have been authorized as payment
institutions. Furthermore, platforms are subject to the supervision of a
financial markets authority.
Most bespoke regimes allow traditional financial
institutions to conduct crowdfunding operations (except for Spain); however,
extending to them the special crowdfunding requirements, in addition to the
Bespoke regimes for investment-based crowdfunding are
generally concentrated on disclosure obligations on the risks, costs and fees,
past performance, as well as special warnings regarding the issuer. Most of the
bespoke regimes foresee information requirements and risk warnings by the
platforms. Many Member States also stipulate limits to the sums investible by
retail investors, while there are no limitations for professional investors,
high-net-worth individuals or legal persons, and in some jurisdictions, persons
receiving regulated advice. Similar to lending-based crowdfunding, such limits
are generally referred to as investments per project and per year, per issuer
and per platform, or only per issuer, with some limits, depending on income.
Limits are often set also with regard to the amount that each issuer can obtain
through the platform or on a given platform, or in general through crowdfunding
Investor tests or appropriateness assessments are required only in some
countries, while in France, platforms, being investment advisors, need to
perform a suitability assessment.
EU Member States have adopted a range of measures to
promote the growth of crowdfunding, protect investors, and regulate
crowdfunding. They are either implementing the EU legislative framework, or creating
national regimes. These national frameworks are generally consistent in terms
of the objectives and outcomes they seek to accomplish; however, they are mostly
customized for local markets. European practice in crowdfunding shows that existing
financial regulations can be successfully adapted to financial technology innovations
without wide-ranging amendments.
(First published on the website of Erdem&Erdem Law Office in March 2018: http://www.erdem-erdem.av.tr/publications/newsletter/regulatory-approaches-to-crowdfunding-in-european-union/)
 Unleashing the potential of
Crowdfunding in the European Union, p.2. http://ec.europa.eu/internal_market/finances/docs/crowdfunding/140327-communication_en.pdf.
 Action Plan on Building a
Capital Markets Union, COM(2015)468/2, 30.09.2015.
 Commission Staff Working
Document Crowdfunding in the EU Capital Markets Union p.8.
 Ferrarini, Guido, Regulating
FinTech: Crowdfunding and Beyond – European Economy 2017,p.2., http://european-economy.eu/2017-2/regulating-fintech-crowdfunding-and-beyond/
 Working Document, p. 47,49.
 Ibid, p. 48.
 Ibid, p. 18.
 Markets in Financial Instruments
 Ferrarini, p.3.
 İbid, p.3.
 FCA, A review of the regulatory
regime for croedfunding and the promotion of non-readily realisable securities
by other media, February, 2015,p.2.
 Ferrarini, p.4.
 Ibid, p.4.