UPDATE ON INVESTMENT-BASED CROWDFUNDING
CYSEC FINALISES THE INVESTMENT-BASED CROWDFUNDING RULES
The Cyprus Securities and Exchange Commission (the “CySEC”) has issued a Policy Statement setting out its finalised rules for investment-based crowdfunding which will be implemented by the way of a CySEC Directive due to be published in the official Gazette imminently.
Crowdfunding may constitute an alternative method to traditional financing via which small and medium enterprises (“SMEs”) can obtain access to financing through the issuance of transferrable securities such as shares or debt instruments. Any potential investors can access these investment opportunities through an internet-based electronic information system, or alternatively via the online platform, whereby the crowdfunding service provider matches SMEs seeking financing with the interests of the various funding investors. In return for financing a business interest, a potential economic return is generated.
The CySEC’s Crowdfunding Directive will introduce a set of secondary rules which relate solely to investment-based crowdfunding via the issuance of transferable securities and excludes loan-based, reward-based and donation-based crowdfunding. The Crowdfunding Directive will set out complimentary provisions to MiFID II’s obligations, including but not limited to the following:-
conduct of business rules;
management of conflict of interests;
holding clients’ money and financial instruments and product governance.
In offering cross-border transferable securities via the investment-based crowdfunding, the crowdfunding service providers and their respective platforms will be subject to prospectus thresholds governing the marketing, sale and distribution of securities across the European Union.
Cyprus Investment Firms classified as Crowdfunding Service Providers
The Cyprus Investment Firms (the “CIFs”) dealing transferable securities may be acting as Crowdfunding service providers and will be subject to additional provisions aiming to safeguard the investor’s protection. The CIF classified as a crowdfunding service provider does not become a party to the transaction and does not participate in the execution of an order on behalf of the investor, but they are merely arranging the relevant transaction by bringing together the investor and project owner who is seeking funding in a fair, transparent and not misleading manner.
The CySEC’s ongoing review
The CySEC will commence to evaluate applications from existing or prospective CIFs in relation to crowdfunding services from February 2020. The CySEC will analyse the market practices and will review the effectiveness of existing rules and, where necessary, issue guidance for the compliance of supervised entities with the regulatory framework. This is designed to provide an effective, proportionate and evolving legal framework which aims to keep up with the industry’s pace of change and to ensure the investor’s protection is not compromised.
How MPC can help?
Advice CIFs on how to obtain the status of a crowdfunding service provider;
Advice CIFs on how to ensure and maintain compliance with the CySEC’s legal framework and regarding crowdfunding.
Advice to SMEs on alternative methods of financing;
Liaise with the CySEC regarding ongoing enquiries.
To view CySEC’s full announcement please click here.