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The latest draft for a new EU crowdfunding regulation of November 9, 2018, does not now include the possibility of Token Sales for the crowdfunding platforms. Apart from that, however, the proposal is very generous. The potential investment volume has been increased to 8 million per project, without the need to prepare a prospectus. Moreover, there are no limits to the individual investments per investors.

The New EU Rules For Crowdfunding

As part of the FinTech Action Plan and the efforts of the EU Commission to establish a single capital market union, a proposal for a new EU crowdfunding framework as an alternative to the existing inconsistent national equity crowdfunding rules of the EU member states has been underway since spring 2018. Platforms will have to comply with only one set of rules, both when operating in their home market and in other EU countries. For investors, the proposal will provide legal certainty as regards the applicable protection rules.

To complement the new regulation on crowdfunding, the Commission has also adopted a proposal for a directive amending Directive 2014/65/EU on markets in financial instruments (MiFID 2). The EU Crowdfunding Regulation provides for the following core elements.

  • Crowdfunding platforms should in future be able to register with their national supervisory authorities as ECSPs in accordance with the draft rules and then conduct cross-border equity- and lending-based crowdfunding campaigns in accordance with the rules.
  • In addition, the national supervisory authorities will have extensive supervisory rights over crowdfunding service providers and issuers, including the right to carry out on-site inspections.
  • These crowdfunding platforms (ECSPs) can then carry out crowdfunding offers of up to EUR 8 million (within a 12-month period per project) throughout the EU.
  • For such offers, the publication of an information memo prepared by the project initiator, the content of which is defined in the new regulation, is sufficient. A securities prospectus will not be required.
  • With regard to the investors, there is no limit to the amount of the investment, but the crowdfunding service providers must inform themselves about the investor’s know-how by means of tests.

ECSPs Evolve Into “Small” Investment Banks

The European crowdfunding service platforms (ECSPs) will be subject to extensive requirements, etc., such as

  • ECSPs are required to disclose the failure rates of the projects offered on their platform each year.
  • ECSPs must also ensure that customers can file complaints against them free of charge. To this end, standard templates and minutes of all complaints received and actions taken should be provided.

In return for these requirements, ECSPs covered by this Regulation will be able to provide investment advice on tradable securities from project providers without MiFID II licenses. Extensive governance obligations and enhanced penalties will be introduced. These include, for example, recurring penalties to be paid until unlawful conduct is brought to an end.

Token Sales will not be part of The New Regulation

However, the Committee has rejected the proposal made by Ashley FOX, Member of the European Parliament (MEP), in August 2018. In it, it was suggested to allow ECSPs to carry out token sales for their clients and their projects:

Initial Coin Offerings (ICOs): ICOs shall be included in the scope of crowdfunding projects covered by the regulation. This would, for the first time, allow ICOs to be carried out on an EU-wide basis under the same conditions and under a single EU passport. ECON believes that the regulation is a good opportunity to provide regulations for ICOs by imposing standard rules and protecting clients and users.

The reason given for the rejection of this the token part of the proposal was that token sales would only be comparable to traditional crowdfunding methods to a limited extent. Above all, platforms would usually not be used for Token Sales

However, it was stated that an EU regulation for Token Sales should very well be considered:

“Crowdfunding service providers that use ICOs on their platform should be excluded from this regulation. To achieve efficient regulation on the emerging ICO technology, the Commission could in future propose a comprehensive Union-level legislative framework based on a thorough impact assessment.”

“The Commission should assess the need to propose a separate, Union legislative framework for ICOs. Increased legal certainty across the board could be instrumental in increasing investor and consumer protection and reducing risks stemming from asymmetric information, fraudulent behaviour and illegal activities.”

Preliminary Conclusion: Negligent Omission

We find it disappointing to say the least that the new EU regulation does not take account of developments in the field of fundraising. This not only neglects current developments in the market but also – and this seems even worse – refuses to set norms and standards for Token Sales as an alternative to other financial instruments.

It almost seems strange to argue that public token placements – Initial Coin Offering (ICO) and now increasingly as Security Token Offerings (STO) – are not a form of public crowdfunding and only comparable to it to a limited extent. Starting from the USA and the US Securities and Exchange Commission (SEC), there is a development to consider tokens as new securities and new asset classes. This would draw the largely unregulated placement of tokens with investors into the scope of the relevant securities laws and create legal certainty.

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