Until November 2021, crowdfunding activities (investment-based or lending-based) have not benefited from a dedicated regime and may interfere with the EU banking and financial services rules, triggering ultimately significant risks to all parties involved.
This context is about to change starting with 10 November 2021 when the EU Crowdfunding Regulation and the local laws for the transposition of the MiFID Amending Directive should also be in place. Apart from clarifying potential interactions with the existing rules, the EU Crowdfunding Regulation introduces the crowdfunding services as a new category of regulated services at EU level and creates a level playing field for crowdfunding activities, which will also be eligible for the European passporting regime. Investors on crowdfunding platforms, meanwhile, will benefit from an aligned and enhanced investor protection framework.
While not significantly departing from the regulation, the draft law for the implementation of the EU Crowdfunding Regulation (subject to public consultations until 9 September 2021) partially fails its objective in the current form. This is so mainly due to the failure of the draft to address the full correlation with the relevant existing legal framework, mainly related to the lending activities. Also, some other key concepts related to the structuring of investment-based crowdfunding platforms such as the use of limited liability company vehicles could still benefit of some clarifications in the draft to be finally enacted.
Despite the shortcomings of the initial draft law, we remain optimistic that the new EU and local rules will help boost the crowdfunding market by offering an alternative financing tool useful especially to start-ups and SMEs.
Currently there is no dedicated legal framework in Romania regulating crowdfunding activities, although there has been interest from local FinTech companies to develop such activities despite this legislative vacuum.
The EU Crowdfunding Regulation, which will become applicable directly across the EU as of 10 November 2021, aims to create together with the MiFID Amending Directive a harmonised regime applicable to investment-based and lending-based crowdfunding platforms.
Since the date which marks the start of the application of the EU Crowdfunding Regulation is swiftly approaching, Romanian authorities have published for consultations a draft law (the “Draft Crowdfunding Law”) aiming to implement the EU Crowdfunding Regulation since certain provisions of the regulation still require implementation into the national legal framework. This is a second local step in this area, after the public consultations launched in relation to the draft law amending the Romanian law no. 126/2018 on markets in financial instruments – aimed, inter alia, at transposing the MiFID Amending Directive.
Below we provide:
a summary of the status quo of the local crowdfunding legislative environment,
a summary of the relevant changes to become effective as of 10 November 2021 and
a general overview of the implementation measures contemplated by the Draft Crowdfunding Law.
A. Snapshot of the current regulatory framework related to crowdfunding activities in Romania
In the absence of a dedicated legal framework, currently the key players (the crowdfunding platforms’ operators as well as project owners or investors, as applicable) need to structure of the crowdfunding rounds and consider multiple regulatory constraints.
Essentially, the main regulatory constraints related to investment-based crowdfunding are related to:
EU Prospectus Regulation, applicable to crowdfunding rounds that contemplate offers of securities to the public with a total consideration in the EU of at least EUR 1,000,000 over a period of 12 months;
Law no. 126/2018 on market in financial instruments implementing the MiFID II (the „MiFID II Law”), potentially applicable to the crowdfunding platforms’ operators, to the extent their services qualify as “reception and transmission of orders in relation to one or more financial instruments”, “placing of financial instruments without a firm commitment basis” and “operation of a multilateral trading facility”;
Law no. 74/2015 on alternative investment funds managers implementing the AIFMD (the „AIFM Law”) and the national law no. 243/2019 on alternative investment funds (the „AIF Law”), potentially applicable to the crowdfunding platform operator and the SPV (for crowdfunding structures that interpose an SPV between the project owner and investor), respectively, to the extent the SPV qualifies as an alternative investment fund; and
Law no. 209/2019 on payment services implementing the PSD II (the „PSD II Law”), potentially applicable to the crowdfunding platform operator, to the extent their intermediation services carried out also include payment services such as “execution of payment transactions”, “money remittance” or “services enabling cash to be placed on a payment account”.
As concerns lending-based crowdfunding, the current regime is even more restrictive because Law no. 93/2009 on non-banking financial institutions grants a monopoly to regulated financial institutions carrying out that lending activity on a professional basis. Breaches of such regime may trigger criminal liability.
In the context above, the active local investment-based crowdfunding platforms generally propose a business model outside the above regulatory perimeter, while the lending-based crowdfunding remains currently unexplored.
B. New regime applicable as of 10 November 2021 under the EU Crowdfunding Regulation
The EU Crowdfunding Regulation creates a new category of regulated services – the crowdfunding services. The provision of such services will be subject to licensing requirements under the EU Crowdfunding Regulation and the crowdfunding service providers licensed under the new regime (the “ECSPs”) will benefit from the European passporting regime.
We briefly summarise below few specifics of the regime contemplated by the EU Crowdfunding Regulation, particularly for the purpose of highlighting the business models subject to licensing requirements under the new regime.
The EU Crowdfunding Regulation covers the intermediation through a crowdfunding platform of both investment-based and lending-based crowdfunding models, as follows:
lending-based crowdfunding services in-scope: facilitation of granting peer-to-business and business-to-business loans. Peer-to-peer consumer lending and donation/reward-based crowdfunding are out of scope.
investment-based crowdfunding services in-scope: defined by reference to the intermediation services covered by the MiFID II consisting in the placing without a firm commitment basis and the reception and transmission of client orders in relation transferable securities and a new category of instruments representing admitted instruments for crowdfunding purposes.
Until 10 November 2023, the EU Crowdfunding regulation shall apply in Romania to crowdfunding offers with a consideration of up to EUR 1,000,000 calculated over a period of 12 months. As of 10 November 2023, the threshold will increase up to EUR 5,000,000.
Instruments subject to investment-based crowdfunding offers
As noted above, investment-based crowdfunding offers that fall under the EU Crowdfunding Regulation refer to (a) transferable securities and (b) admitted instruments for crowdfunding purposes.
(a) transferable securities: defined by reference to the well-known provisions of MiFID II. The qualification of the investment instruments issued by the domestic companies under this category should, in general, be straight forward.
The shares issued by the joint stock companies incorporated in Romania in accordance with Law no. 31/1990 on companies will, in principle, be eligible for crowdfunding offers under the EU Crowdfunding Regulation.
(b) instruments admitted for crowdfunding purposes: a concept newly introduced by the EU Crowdfunding Regulation which does not have a specific correspondent in other EU pieces of legislation. In general terms, it covers companies’ shares that are not subject to restrictions that would prevent them from being transferred, including restrictions to the way in which those shares are offered or advertised to the public, but do not necessarily qualify as transferable securities in the meaning of MiFID II.
As far as Romanian law is concerned, the new concept appears to target the shares issued by limited liability companies (in Romanian: părți sociale) organised in accordance with Law no. 31/1990 on companies. However, the general rule is that the transfer of such shares to third parties (outside the shareholders’ perimeter) is subject to the prior approval of the general assembly of shareholders (unless there is an express exemption under the constitutive act) which is likely to be considered as a restriction that would prevent the shares from being transferred. At a first glance, the shares issued by the Romanian limited liability companies may however be eligible for crowdfunding offers under the EU Crowdfunding Regulation, particularly considering the relatively recent amendments to Law no. 31/1990 on companies that opened the option for the shareholders to deviate from the above-mentioned restriction (see also comments under (ii) below on further clarifications needed under the Draft Crowdfunding Law).
The use of SPVs for crowdfunding purposes
The EU Crowdfunding Regulation allows special purpose vehicles (“SPVs”) to be interposed between the project owner and the investors only subject to certain restrictive conditions. In brief, the SPVs are defined as entities created solely, or that solely serve, for securitisation purposes (in the meaning of ECB relevant regulations) and can be used for an investment-based crowdfunding projects where they only allow investors to acquire an interest in one illiquid or indivisible underlying asset which could not otherwise be offered to investors easily. The first edition of ESMA’s EU Crowdfunding Regulation Q&As is dedicated to conditions under which the SPVs may be utilised for crowdfunding purposes. The input from the competent authorities and future practice (including in other EU jurisdictions) will hopefully clarify how the SPV based crowdfunding structures will work under the new regime.
Interaction with the existing legal framework
When designing the type of crowdfunding platform/services to provide, the ESCPs will need to consider the interactions between the crowdfunding services to be provided and the existing financial services regulatory framework.
Essentially, for investment-based crowdfunding, the ECSP should pay attention to the interactions between EU Crowdfunding Regulation and MIFID II, Prospectus Regulation and AIFM Law and AIF Law in order to make sure that their activity does not exceed the perimeter of the activities covered by the ECSP license and/or not no trigger the application of financial services regulations.
For lending-based crowdfunding, the EU Crowdfunding Regulation is set to accommodate this crowdfunding model also in jurisdictions where the professional lending activity is a regulated service and expressly requires that competent authorities shall ensure that national law does not require any other individual authorization for investors that grant loans to project owners facilitated by ECSP.
Organisational and operational requirements
Under the EU Crowdfunding Regulation, the ECSPs will be subject to several organisational and operational requirements and, as typical for regulated entities in financial services, will have to ensure and effective and prudent management and have in place adequate policies and procedures to this end.
Additionally, investors will benefit from several safeguards, differentiated by reference to sophisticated and non-sophisticated investors. Among others, the investors will need to be provided with certain information prescribed by the EU Crowdfunding Regulation, including with a key investment information sheet (“KIIS”).
C. Implementation measures contemplated by the Draft Crowdfunding Law
The Draft Crowdfunding Law addresses, in principle, matters that expressly require national input and implementation measures under the EU Crowdfunding Regulation and contemplates a conservatory approach with no major additional details to or deviations from the terms of the EU Crowdfunding Regulation.
In general terms, the Draft Crowdfunding Law aims mainly to:
designate the competent authority for the purposes of the EU Crowdfunding Regulation. It is proposed that Romania will opt for a single competent authority in relation to both investment-based as well as lending-based crowdfunding, namely the Financial Supervisory Authority (in Romanian, Autoritatea de Supraveghere Financiară) (the “FSA”);
set out the domestic correspondent of the newly introduced concept of admitted instruments for crowdfunding purposes. The Draft Crowdfunding Law confirms that the shares (părți sociale) issued by the limited liability companies (societăți cu răspundere limitată) organised in accordance with Law no. 31/1990 on companies may qualify as instruments admitted for crowdfunding purposes to the extent these are not subject to restrictions that would prevent them from being transferred, including restrictions to the way in which those shares are offered or advertised to the public. However, the Draft Crowdfunding Law does not bring any additional clarifications on whether the mere derogation in the articles of association from the general rules (imposing that the transfer of such shares to third-parties is subject to the prior approval of the general assembly of shareholders) will actually make such shares eligible for the offers under the EU Crowdfunding Regulation;
regulate certain aspects related to the authorisation of the ECSPs. It aims to give full effect to the provisions of the EU Crowdfunding Regulation that contemplate a simplified authorization process for regulated entities functioning under the PSD II, E-money Directive or CRD IV regimes and sets out that the FSA will cooperate with the National Bank of Romania (“NBR”) in case the authorization application is submitted by an entity authorized by the latter under such regimes. It alsorequires credit institutions licensed by the NBR to obtain the prior approval of the NBR for supplementing its scope of activity before submitting the application for the ECSP license.
regulates the withdrawal of the ECSPs authorisation. In addition to the situations that may trigger the withdrawal of the ECSPs authorisation under the EU regulation, the Draft Crowdfunding Law proposes a very broad ground that covers a scenario which is not specified, deviating significantly on this point from the principles imposed by the EU Crowdfunding Regulation.
implements the investors’ protection measures on the liability related to the KIIS. The Draft Crowdfunding Law appears to deviate from the principles set out in the EU Crowdfunding Regulation because they fail to prescribe the liability for the general KIIS and for the KIIS at platform level that should be incumbent upon the relevant legal person (i.e., the project owner / the crowdfunding service provider, as the case); currently the Draft Crowdfunding Law only prescribe the liability for the individuals within such entity and not for the legal entity itself; and
contemplates the national approach on the applicable sanctions. The Draft Crowdfunding Law includes no additions in terms of the scenarios that may trigger the administrative liability, nor in terms of the applicable penalties and measures or the upper limits of the administrative fines. However, as compared to the EU Crowdfunding Regulation, under the Draft Crowdfunding Law, the carrying out of activities or provision of services that are specific to ECSPs is set to trigger the criminal liability and be sanctioned in accordance with the Romanian Criminal Code. The relevant wording for the criminal sanction is not very straight-forward and may leave room for broader (however debatable) interpretations.
In light of the above, for the time being the Draft Crowdfunding Law fails to bring the necessary amendments required to allow the proper functioning of the lending-based crowdfunding platforms. Another point of concern is related to the lack of transitional measures applicable to the crowdfunding platforms currently operating in Romania on the basis of the general legislation.
The public consultations period in relation to the Draft Crowdfunding Law ended on 9 September 2021. Now the draft should enter the legislative process within the Romanian Parliament and, unless other changes are made, will enter into force within 30 days as of the publication in the Official Gazette. Considering the timing constraints triggered by the date set for the entry into force of the regulation, it is possible that the legislative procedure is finalized rapidly.
In this context, entities seeking to obtain authorization as ESCPs should start preparing for the authorization procedure and continue to monitor the developments at the EU level (e.g., consultation papers issued by ESMA /EBA, Q&As etc.).
By Simona Petrisor, Partner, Diana Ispas, Partner, and Alexandru Achim, Senior Associate, Bondoc si Asociatii