Streamlining Crowdfunding: The Impact of ECSPR and the Crowdfunding Service Providers Act in the European Union

The European Union market for crowdfunding lags behind other world economies in terms of development. A significant challenge for crowdfunding platforms aiming to expand their services internationally has been the diverging licensing requirements and the absence of unified rules within the EU.

This lack of uniformity has led to elevated compliance and operational expenses, hindering crowdfunding platforms from scaling their services efficiently. Consequently, this limitation has reduced financing options for small businesses and increased uncertainty for investors engaging in cross-border investments.

The European Crowdfunding Service Providers Regulation (“ECSPR”) and the Crowdfunding Service Providers Act (ACT No. XXV of 2023, “the Act”)

The ECSPR for business ((EU) 2020/1503) establishes uniform rules throughout the EU for the provision of investment-based and lending-based crowdfunding services related to business financing. It enables platforms to seek an EU passport under a unified set of rules, simplifying the process of offering services across the EU with a single authorization.

Anticipated outcomes of these new regulations include an increased availability of this innovative financing method, providing companies with alternatives to traditional bank financing. Investors participating in crowdfunding platforms will also experience benefits from a standardized and reinforced investor protection framework, including:

• clearly defined rules for information disclosures concerning project owners and crowdfunding platforms;
• regulations governing governance and risk management for crowdfunding platforms; and
• robust and harmonized supervisory powers for national authorities overseeing the operations of crowdfunding platforms.

The Crowdfunding Service Providers Act was enacted on the 14th of July 2023 with the purpose of implementing the relevant provisions of ECSPR.

Crowdfunding Rules

On the 24th of January 2022, the Malta Financial Services Authority issued the new Crowdfunding Rules under the Malta Financial Services Authority Act (European Crowdfunding Service Providers for Business) Regulations (S.L.330.15) pursuant to the MFSA Act (Cap. 330). These rules outline the obligations that authorized Crowdfunding Service Providers must comply with.

The Crowdfunding Rules reflect the provisions of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (the “ECSP Regulation”). The ECSP Regulation became directly applicable as of 10 November 2021.

The Rules contain provisions in relation to technical standards relating to the following:

• Complaints Handling
• Conflicts of Interest requirements
• Business Continuity Planning of Crowdfunding Service Providers
• Authorisation of Crowdfunding Service Providers
• the Entry Knowledge Test and the Simulation of the ability to Bear Losses
• the Key Investment Information Sheet
• Reporting by Crowdfunding Service Providers
• Information to clients on Default Rates
• Individual Portfolio Management of Loans offered by Crowdfunding Service Providers
• disclosure of information to investors and requirements on credit risk assessment, loan pricing and risk management

The rules also lay down the requirements relating to marketing communications, the information that is to be Included in any Marketing Communications and Warning Statements.