Despite – or perhaps even because
of – the Covid-19 pandemic, the fintech sector in Cyprus exhibited strong
progress in 2020. During the year, and throughout the beginning of 2021, the regtech
and cryptocurrency clusters have also grown and the Cypriot government has
played an important role in enabling the evolution. It aims to secure Cyprus’s
place as a leading international financial centre and as a result, it has promoted
a properly regulated fintech sector, as well as research and innovation.
Cyprus has established the Deputy
Ministry of Research Innovation and Digital Policy to promote, guide and
develop the digital transformation of Cyprus and to facilitate the start-up of
innovative businesses. There is also a generous EU and state financial support package
in place to fund specific projects in the next few years. However, funding gaps
remain, and with a historic lack of a venture capital or business angel culture
in Cyprus (or Europe), it is far from surprising, given the rapid advance of
technology, that a number of ‘crowdfunding’ platforms have emerged to fill the
While in many respects this is a
welcome development, it has raised legitimate concerns that some aspects of the
operations of such platforms fall outside existing investment and banking
regulations and may require specific regulation to ensure transparency and the
protection of investors.
Cyprus legislative initiatives
CySEC crowdfunding directive
As a clear example of the effort
to attract fintech companies whilst simultaneously promoting itself as a bona
fide, well-regulated destination for investors, Cyprus chose to take action to
regulate the crowdfunding sector in advance of any legislation on the part of
the EU. In January 2020, following stakeholder consultations, the Cyprus
Securities and Exchange Commission (CySEC) published the ’Directive DI87 – 10
on the provisions of crowdfunding services in respect of transferable
securities’ (the crowdfunding directive).
CySEC’s crowdfunding directive
relates solely to investment-based crowdfunding through transferable securities
and excludes loan-based, reward-based and donation-based crowdfunding. The crowdfunding
directive comprises a set of secondary rules for investment-based crowdfunding
under the law. It is complementary to MiFID II’s obligations, including but not
limited to: conduct of business rules; management of conflict of interests;
holding clients’ money and financial instruments and product governance. Under
the crowdfunding directive, if offering cross-border transferable securities
via investment-based crowdfunding, crowdfunding service providers and their
platforms are subject to prospectus thresholds governing the marketing, sale
and distribution of securities across the EU.
The crowdfunding directive also
imposes additional provisions aimed at ensuring investor protection on Cyprus investment
firms (CIFs) acting as crowdfunding service providers. Briefly, the most
significant of these include:
Measures to prevent conflicts of interest
CIFs are subject to neutral
intermediation through licensing and activities restrictions. CIFs are not
allowed to receive order routing benefits in respect of crowdfunding projects
in general. CIFs are not allowed to acquire (equity or debt as the case may be)
participation in crowdfunding projects on a platform or allow ’involved persons’
to act as project owners.
Measures to implement due diligence procedures
Additional customer and financial
due diligence in respect of both the crowdfunding project (including credit
risk) as well as the project owner, must be implemented before a project can be
listed on a platform. Identity verification and anti-money laundering checks
must be performed on both the end-investor and project owner.
Measures to ensure transparency
Project owners must produce a
standardised pre-contractual document (under the responsibility of the project
owner), including the natural persons effectively conducting the project
owner’s business. This must be detailed in a key investment information sheet
(KIIS). Certain procedures are in place to ensure that the content of KIIS is
up to date and for rectifying errors or omissions. CIFs acting as crowdfunding service
providers must ensure that the content of KIIS is clear, complete and accurate
before accepting a project on their platform. Marketing communications must be
clear, accurate and not misleading, and consistent with the content of
marketing communications and the KIIS.
Measures to safeguard clients’ funds and financial instruments
All monies raised via the
crowdfunding platform must be transferred by the CIF to the project owner only
after the successful closing of the relevant offer. Financial instruments (i.e.
transferable securities (TS)) are subject to safekeeping, and must be divided
into custodial and non-custodial transferable securities. CIFs acting as crowdfunding
service providers may only release the funds to the project owner where the TS
have been physically delivered or where sufficient evidence is provided by the project
owner to the CIF that the ownership of the TSs has been transferred to the
respective investors, in line with their contributions.
Measures to promote investor exit opportunities
CIFs which are crowdfunding service
providers may operate a bulletin board through which crowdfunding clients of
the CIF may advertise their interest to buy or sell (as the case may be)
transferable securities that had been made available through the CIF’s platform.
Such bulletin boards are to operate as information exchanges only, they are not
to be used as a trading venue.
CySEC’s crowdfunding directive
was introduced whilst the European Commission’s proposal for an EU Bespoke
Crowdfunding Framework (the framework) was still subject to an ongoing legislative
process. It was viewed as a bridging step necessary for the protection of
potential investors. Its contents took into consideration the content of the
proposed framework, without prejudice to the overall investor protection
offered by the MiFID II regime. The intention was to provide interim protection
in a manner designed to facilitate a smooth legislative transition at the
EU legislative initiatives: Regulation 2020/1503
On October 5 2020, with a view to
facilitating cross-border corporate financing, the European Parliament approved
Regulation 2020/1503 ‘on European
collective financing providers for business’(Regulation2020/1503).
Regulation 2020/1503 incorporates the framework. It enters into force on
November 10 2021.
The new EU framework is a key
element in the EU’s strategy for a capital markets union. It aims to eliminate
the fragmentation of the legal framework for crowdfunding and to promote
cross-border corporate financing, while improving investors’ protection and the
efficiency of the single capital market. In future, crowdfunding platforms
operating in more than one member state will be able to organise their
activities according to uniform rules – they will no longer have to comply with
national rules separately in each EU member state.
In contrast to the crowdfunding directive,
the scope of Regulation 2020/1503 captures both lending-based crowdfunding (facilitation
of lending not the provision of loans) and investment-based crowdfunding, with
a ceiling of €5 million (approximately $6.1 million). As with the CySEC crowdfunding
directive, reward and donation-based crowdfunding is excluded.
Key provisions of Regulation 2020/1503
The regulation introduces the
concept of authorised crowdfunding platforms and makes it clear that such platforms
are only permitted to facilitate the conclusion of loan agreements between
investors and project owners. At no time may the platform act as a creditor to
the project owner.
Accordingly, as is currently a
common occurrence in Europe, if the platform wishes to issue a loan to the
project owner and, after issuing it, offers the claims related to such a loan
to investors it cannot be authorised as a crowdfunding platform under
Regulation 2020/1503. If offering such a service a platform might meet the
characteristics of a credit institution or investment brokerage company, in which
case it would require a separate authorisation before it could operate. The
same would apply if, through the…
Read More:Cyprus: transitioning into a new crowdfunding hub