New European Regulation on Crowdfunding

On 7 October 2020, the European Parliament passed the Regulation (EU) 2020/1503 on European crowdfunding services (the “ECSPR”).

The ECSPR will come into force on 10 November 2021 and will lay down, for the first time, a regulatory framework at the European Union level for lending-based and equity-based crowdfunding services.

Crowdfunding typically involves (i) a project owner interested to receive funding, (ii) investors willing to provide funding for a project and (iii) a crowdfunding service provider (“CSPs”) that brings together project owners and investors through an online platform.

It constitutes an interesting form of alternative finance for start-ups, as well as small and medium-sized enterprises, which may face difficulties at the very initial stage of attracting external finance or financing their project with equity. When it comes to crowdfunding, no guarantees have to be granted and less pressure is put on project owners since funding is typically a medium or long term investment. For investors, the return on the investment may turn out to be much more lucrative than with classic investments. Crowdfunding also enables investors to more widely identify and choose projects in which they believe and are willing to invest in these projects because they see potential for growth commercially and ultimately growth on their return.

Funding could take the form of acquisition of transferable securities, loans or also shares in private limited liability companies not subject to transfer restrictions.

Each Member State of the European Union currently has its own national rules on crowdfunding services, thereby, creating substantial legal costs for CSPs willing to export their products cross-border whilst also discouraging investors from investing cross-borders due to legal uncertainties.

Although Luxembourg is a key player in the European Union for various types of investments, crowdfunding services are almost non-existent. Currently, CSPs willing to establish themselves in Luxembourg would certainly face difficulties with the Luxembourg Commission de Surveillance du Secteur Financier to obtain the appropriate authorisation to provide their services.

The entry into force of the ECSPR will bring considerable improvement for crowdfunding services by setting out uniform requirements in terms of:

  • organisation, authorisation and supervision of CSPs;
  • provisions of crowdfunding services;
  • operation of crowdfunding platforms;
  • transparency and marking communications;
  • investor protections; and
  • recognition of CSPs authorised in a Member State to provide services in other Member States.

If Luxembourg wants to continue to be a leading player in the finance industry, it needs to be at the forefront of every area of financing, including crowdfunding. The ECSPR will, without a doubt, be a great opportunity for Luxembourg to create an attractive environment to allow crowdfunding to develop and grow as an alternative financing option.

If you require further information on crowdfunding services, please do not hesitate to contact us.