The crowdfunding regulation of the European Union (Regulation (EU) 2020/1503 on European crowdfunding service providers for business, "ECSPR") entered into force on 10 November 2021, which was a long-awaited legal development both within the European Union and on the Hungarian market. Even the Hungarian National Bank suggested in its Fintech Strategy that a regulatory framework for crowdfunding would be essential to assist financing of SMEs and therefore, enhancing competitiveness on the Hungarian market. Prior to the ECSPR, there was no uniform crowdfunding regulation within the European Union and Hungary did not have a regulatory framework for crowdfunding; thus, the Hungarian National Bank had to assess such activity pursuant to the already existing rules. The ECSPR established a directly applicable and uniform regulatory framework aiming to facilitate cross-border provision of services. We summarize below the latest legal developments in connection with the ECSPR.
EBA's final draft technical standards
The ECSPR mandated the European Banking Authority ("EBA") to develop two regulatory technical standards in close cooperation with the European Securities and Markets Authority ("ESMA"). EBA published the first draft technical standards of the two mandates in the last quarter of 2021. The technical standards support the ECSPR's goals, i.e. fostering cross-border provision of crowdfunding services through ensuring uniform conditions for crowdfunding service providers across the European Union and in the meantime, providing a robust framework for investor protection. Investors are exposed to risks in connection with the loans and projects in which their funds are invested. In order to enable investors to have access to all relevant information about the composition of their portfolio (including the projects where their funds are invested and the quality of the loans financing such projects), the technical standards specify information that crowdfunding service providers must provide to investors on each individual portfolio. Investors may also face the risks arising from the method of risk assessment of these loans and projects applied by the crowdfunding service provider. Therefore, the technical standards require crowdfunding service providers to disclose certain information in relation to the method of credit risk assessment (i.e. elements that the description of the credit risk assessment method must contain). Finally, the technical standards specify policies, procedures and organizational arrangements that crowdfunding service providers should have in place when managing contingency funds (to compensate investors in case of the borrower's default).
ESMA's final report on draft technical standards
ESMA published in November 2021 a final report on draft technical standards under the ECSPR. Such technical standards are also an important milestone towards a harmonized crowdfunding regulation across the European Union. The report covers all 12 mandates of ESMA assigned to it by the ECSPR; including four with a deadline of May 2022.
The technical standards covered by the report include complaints handling (specification of requirements, standard formats and procedures), certain aspects of conflict of interests regarding crowdfunding service providers, measures and procedures for business continuity plan (which needs to be submitted when requesting authorization to provide crowdfunding services), requirements for the application for authorization (including forms, templates and procedures), methodology for calculating the default interest rates of loans offered on the crowdfunding platform, entry knowledge test and simulation of the ability to bear loss for prospective non-sophisticated investors (arrangements necessary to carry out such assessment and simulation), the requirements for and content of the key investment information sheet ("KIIS"), , data standards, formats, templates and procedures for reporting information on projects to be made by crowdfunding service providers to competent authorities and by competent authorities to ESMA, and standard forms, templates and procedures of notification to be made by competent authorities to ESMA on national marketing requirements, exchange of information between competent authorities in relation to investigation, supervision and enforcement activities, and cooperation between the competent authorities and between ESMA and the competent authorities (specification of information to be exchanged and forms, templates and procedures of the cooperation).
Questions and answers published by ESMA
ESMA assists member states by responding inquiries of the general public, market participants and competent authorities and clarifying certain aspects of the ECSPR, aiming to achieve a convergent application of the ECSPR provisions within the European Union. To this end, ESMA published questions and answers in 2021, which addresses inquiries regarding special purpose vehicles, application of the transitional period, aspects of certain general provisions, organizational and operational requirements, and queries regarding investor protection. The ESMA updated the Q&A at the end of January 2022 by responding questions on the language of KIIS and marketing of crowdfunding projects.
Pursuant to the ECSPR, KIIS must be available for securities offerings. KIIS documents should be drafted in one of the official languages of the member state where the crowdfunding service provider is authorized, or another language accepted by the competent authority of that member state. The ESMA Q&A clarified that if the crowdfunding service provider promotes its services through a marketing communication in another member state, the KIIS documents must be made available in one of the official languages of that member state or another language accepted by the competent authority of that member state. The ESMA also disclosed the languages accepted by the competent authorities and even though Hungary accepts Hungarian and English languages, there are several other member states which only accepts their official languages and therefore, KIIS documents must be translated to their official language (e.g. Austria, Germany, Czech Republic, Romania and Slovakia). In addition, ESMA clarified that marketing communication disseminated in a member state must comply with the national laws, regulations, and administrative provisions of such member state. Thus, crowdfunding service providers need to ensure that the marketing language complies with all of the national marketing requirements where crowdfunding services are promoted. To assist crowdfunding service providers, ESMA disclosed a table summarizing the marketing regulations of the member states.
Next steps
Both EBA's draft technical standards and ESMA's final report have been submitted to the European Commission for endorsement process and the European Commission has three months to decide whether to adopt the technical standards. In addition, ESMA will continue to develop the questions and answers on crowdfunding topics that have not yet been addressed in the Q&A. The regulatory standards and the ESMA's Q&A are welcomed since the crowdfunding regulation was long awaited by market participants. It is expected that the uniform rules will enhance (cross-border) financing of SMEs and thus, the crowdfunding market will advance both within the European Union and in Hungary.
By Virag Palguta, Attorney at Law, Schoenherr
