Lithuania: Is the EU’s New Crowdfunding Regulation an Opportunity for Lithuania?

Lithuania: Is the EU’s New Crowdfunding Regulation an Opportunity for Lithuania?

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On the 5th of October, the new regulation of the European Parliament and of the Council on European crowdfunding service providers for business was approved. Although crowdfunding activities are already regulated in Lithuania by national laws, this new regulation represents a real opportunity for Lithuania and Lithuanian crowdfunding service providers.

The New Regulation Will Bring More Expenses on Compliance

Crowdfunding service providers (CSPs) have been regulated in Lithuania for almost four years. During this period, the CSP market has been developing at a rapid pace. The amounts invested using CSPs have risen 12 times, from just over EUR 1 million in 2017 to over EUR 16 million in 2019. Such a rise in a short three-year period shows that the current regulations are enough to facilitate the growth of the CSP market. Nevertheless, considering the fact that under the EU’s new regulation all current CSPs will be required to receive a EU-level license to continue their services, one must wonder whether new, stricter, and more detailed regulations will not adversely affect the local market. Compared to the current regime, the regulation will introduce more detailed and strict requirements regarding project owner evaluation, investor assessment, the provision of information to investors, and rules on messaging and loan portfolio management, as well as more comprehensive requirements for internal procedures and policies. All these differences mean that crowdfunding operators will need to invest significant funds to improve their current systems and to initiate relicensing (although the regulation allows national supervisors to apply a simplified procedure). The period for preparation is only 24 months after the regulation enters into force. It is also noteworthy that the scope of Lithuanian and European regulations slightly differ. Under Lithuania’s regulation, the threshold for the maximum amount gathered by one project owner is set at EUR 8 million, compared to only EUR 5 million in the EU’s regulation – a reduction which can also be considered a negative change for the Lithuanian market.

The Benefits Outweigh the Additional Costs

Although there will be additional requirements and expenses related to aligning existing procedures with the requirements of the EU’s new regulation, the positives outweigh the negatives. Under the current legal regime, unless they are willing to invest in complying with the different requirements of each EU member state, CSPs are constrained to the market of only one member state. Under the regulation, CSPs will be able to use passporting to provide services in all EU member states. This will help to save costs and time for CSPs and will expand the choices for other interested parties (project owners and investors). Due to differences in legal regimes and language barriers, project managers have been unable to make easy use of CSP services within the EU, and investors were also restricted (for various reasons) to investing in their own home countries. The new regulation introduces various new possibilities for current CSPs, such as integrating messaging boards into their crowdfunding platforms and providing loan portfolio management services. The latter change in particular has been eagerly awaited by Lithuanian CSPs, as the sole sanction applied by Bank of Lithuania against a CSP during the entire existence of the national crowdfunding regulation was related to the CSP’s attempts to provide loan portfolio management services. Moreover, the new services that will be allowed under the regulation, along with the increased amount of information that CSPs and project owners who use CSP services will need to provide, will encourage more people to consider investing in CSPs, which in turn should increase CSP market services.

A New Possibility for Lithuania’s Thriving FinTech Sector?

Lithuania already positions itself as a European FinTech hub. The local regulator has proven that even though it applies strict standards when it comes to compliance (especially money laundering and terrorist financing prevention), it welcomes financial innovation and FinTech companies. This means that there is still room for new market players – and that local Lithuanian CSPs can use their experience and know-how to expand their activities to new markets within the EU. Combined with the local regulator’s friendly attitude and experience in dealing with CSP-regulation matters, Lithuania is perfectly positioned to become not only the go-to place for electronic money and payment institution licenses, but as a European CSP center as well.

By Akvile Bosaite, Partner, and Robertas Grabys, Associate, Cobalt

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.