A New Era In Crowdfunding Begins: The Single European Regulatory Framework – Finance and



A New Era In Crowdfunding Begins: The Single European Regulatory Framework

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Crowdfunding is a type of intermediation where the service
provider operates a platform (e.g. website) open to the public. The
purpose of that platform is to match enterprises seeking financing
with prospective investors. The enterprises typically receive small
amounts of money from many investors (usually natural persons), via
lending (lending-based crowdfunding) or investment into shares
(investment-based crowdfunding). By introducing a single European
regulatory framework, the uncertain Hungarian legal environment
might change, potentially giving a boost to the crowdfunding

The Hungarian legislator recently harmonised the national laws
to comply with Regulation (EU) 2020/1503 of the European Parliament
and of the Council. The goal is to establish a single regulation on
crowdfunding within the European Union, thus facilitating
cross-border crowdfunding services.

Single European regulation

Previously, there was no uniform regulation on crowdfunding at
the EU level. The existing rules vary between different Member
States. Some have introduced a separate regulatory framework for
crowdfunding, while others (like Hungary) assess such activity
pursuant to the existing rules. As a result, the national rules
differ to such a degree that the cross-border provision of
crowdfunding services is obstructed. Nevertheless, crowdfunding is
an increasingly established form of alternative financing for
start-ups and SMEs. The regulation establishes a uniform regulatory
framework for crowdfunding services, aiming to facilitate
cross-border provision of services (and cross-border investments)
and eventually the free movement of capital.

The regulation is applicable from 10 November 2021. It
covers crowdfunding services involving only enterprises (i.e. not
consumers) seeking financing of up to EUR 5m. The regulation
covers both lending-based and investment-based crowdfunding.

Authorisation is mandatory

The regulation aims to introduce uniform, proportionate and
directly applicable requirements for crowdfunding service providers
(i.e. platform operators). Pursuant to the regulation, crowdfunding
service providers must obtain authorisation from the supervisory
authority of the Member State where the service provider is
established. To obtain it, the service provider must comply with a
number of conditions (e.g. have internal policies and internal
procedures complying with professional requirements). The European
Securities and Markets Authority (ESMA) maintains a register of all
crowdfunding service providers.

Once the crowdfunding service provider has obtained the
authorisation, it does not need to obtain further authorisations
from other Member States to provide cross-border services. By
notifying its supervisory authority, the service provider may
provide its crowdfunding services to other Member States on a
cross-border basis.

Investor protection

The regulation further aims to ensure a high level of investor
protection. It therefore distinguishes between sophisticated and
non-sophisticated investors and introduces stricter rules for the
latter. Crowdfunding service providers are required to run an entry
knowledge test of non-sophisticated investors to ascertain their
understanding of the investment. In addition, crowdfunding service
providers are required to issue risk warnings. A reflection period
must be ensured for non-sophisticated investors during which they
may revoke their offer to invest without stating a reason or being
penalised. Conversely, an entry knowledge test and risk warnings
are not required in the case of sophisticated investors.

To ensure a high level of investor protection, the regulation
requires enterprises seeking finance to draw up a key investment
information sheet. This document enables investors to make informed
investment decisions. Key investment information sheets do not
require supervisory approval.

The Hungarian regulatory environment

Hungarian law does not contain any rules on crowdfunding,
meaning it is assessed pursuant to the existing rules. The
Hungarian National Bank did conclude that certain elements of
crowdfunding may require authorisation. For example, in the case of
lending-based crowdfunding, the investor’s activity may be
deemed a lending activity, which requires authorisation. In such a
scenario, the platform operator is deemed an agent of the investor
(which also requires authorisation or notification). Plus, in
certain cases the Hungarian National Bank regarded the activity of
the enterprise seeking finance as collecting deposits from the
public, which requires authorisation as well. In that case, the
platform’s operator will be the agent of the enterprise. Since
investors are typically natural persons and enterprises are SMEs or
start-ups, complying with the necessary requirements for the
authorisation is not possible for them. This strict interpretation
undermined the crowdfunding market in Hungary.

With the application of the regulation, the above practice will
be replaced by a single European regulation. Since the regulation
introduces a completely new regulatory regime that is directly
applicable, only a small number of changes were necessary in the
Hungarian rules. Crowdfunding falls under the scope of the
Hungarian Capital Markets Act, which sets forth liability rules and
the supervisory competence of the Hungarian National Bank. The
Hungarian rules derogate from the EUR 5m threshold of the
regulation for a limited time and apply a EUR 1m threshold
until 10 November 2023.

What the future holds

Due to the new regulatory framework, the crowdfunding market
will probably boom within the European Union, particularly
cross-border crowdfunding. This also means that there will be a
completely new basis to the regulatory requirements in Hungary. The
Hungarian market will likely heat up as well, since market
participants that were scared away by the regulatory environment
will now easily access the Hungarian market with their
authorisation obtained in another Member State.

Originally Published by CEE Legal Matters

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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