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Crowdfunding, literally funding or lending by the crowd, is an alternative financing method outside the traditional financial system of regulated banks and financial markets. It calls on a large number of people to raise funds to develop a project. A major player in this new model, crowdfunding platforms act as intermediaries between entrepreneurs seeking financing and investors. In Belgium, whereas only three crowdfunding projects were financed in 2012, there were 92 in 2017 for total funds of some EUR 20 million. In 2018, 273 campaigns were organised, of which 232 succeeded for a total of EUR 40,025,000, while 41 failed to raise the planned funds; of 17,389 projects proposed to the five licensed platforms in Belgium, only 273 were selected. Faced with this growth, various countries have introduced crowdfunding (or, more properly, alternative financing) regulation to frame the platforms, and the European Commission has presented a draft European Regulation.
2. The notion of crowdfunding
Behind crowdfunding lie several financing modes with different logics, the main distinguishing criterion being the consideration offered to the public in exchange for its commitment: donation-based crowdfunding (the public gives amounts, generally to associations, without consideration or for a marginal one such as advertising or a tax deduction); reward-based crowdfunding (raising funds while offering a non-financial consideration, such as products or services or a copy of an artist’s work); investment-based crowdfunding (the public invests in a company and receives shares, profit-sharing certificates, bonds or other financial instruments); lending-based crowdfunding or crowdlending (the public lends money to a company, repaid with interest); invoice trading crowdfunding (buying commercial claims put up for sale by companies on a platform, a form of factoring); and hybrid models combining elements of the others.
3. The regulation of crowdfunding and alternative financing in Belgium
Crowdfunding and crowdfunding platforms are generally regulated by the Act of 18 December 2016 (the Act), which frames alternative financing platforms and alternative financing services. (Update: the European Regulation has been in force since November 2021.)
3.1. Alternative financing platforms
Status. Persons who offer to provide or provide, on Belgian territory, as a habitual professional activity (even complementary or ancillary), alternative financing services are now subject to a control of access to the profession (a licence as an alternative financing platform). Professional implies the activity is carried on for remuneration, directly or indirectly. The Act regulates platforms allowing subscription to investment instruments (equity or debt securities) issued by companies. It thus covers platforms marketing instruments allowing a financial-type investment, but not those through which the public pays money expecting a consideration in kind (a copy of the work, a commercial gift, etc.), nor those on which the public makes a donation to a project or company, nor those financing projects through loans. The Act creates a single status of alternative financing platform, without distinguishing whether they provide services relating to financial instruments or to other investment instruments that are not financial instruments. It also introduces, for project-promoting companies, an exception to the obligation to publish a prospectus, and amends the intermediation regime for public offers.
What about other regulated undertakings? Regulated undertakings (credit institutions and/or investment firms, i.e. portfolio management and investment advice companies) may provide crowdfunding services without an additional licence, provided their regulatory status allows it, but must respect the conduct rules of the crowdfunding law and notify the FSMA in advance of their intention. Other intermediaries may only link up with a crowdfunding platform if they merely disseminate communications on offers of investment instruments and have no direct or indirect interest in the outcome of those offers. Thus an agreement between an alternative financing platform and a third-party intermediary that is not a regulated undertaking, paying the third party a client-referral commission or any other financial advantage linked to the outcome, is prohibited. On the other hand, using the intermediary’s website as a mere shop window to relay crowdfunding offers from licensed platforms, for a fixed advertising fee, is allowed without a licence, provided the intermediary plays no active role in bringing the issuer and investors together or in implementing the subscription. The Act’s aim is to catch only intermediaries playing an active role with a direct interest in marketing the investment instruments. Finally, platforms not addressing the mass (more than 150 natural-person investors), or only qualified investors, do not need an ad hoc licence.
3.2. Alternative financing services
Notions. By alternative financing service the Act means any service consisting in carrying out, through websites or other electronic means, the marketing of investment instruments issued by entrepreneur-issuers, within an offer, whether public or not. Marketing means any presentation of an investment instrument to induce an existing or potential investor to buy or subscribe it. Merely bringing a potential issuer into contact with potential investors for a bilateral negotiation between them falls outside the concept of alternative financing service.
Other services? Licensed platforms may not, in principle, provide investment services within the meaning of MiFID II, which requires the status of investment firm or credit institution. Two investment services are exceptionally allowed: investment advice (personalised recommendations to a client on transactions in financial instruments) and reception and transmission of orders. In accordance with MiFID, the directive does not apply to persons providing those two services provided they are not authorised to hold clients’ funds or financial products. These two services may only be provided as a complement to the main alternative financing service; obtaining a platform licence does not automatically authorise providing only investment advice and/or reception and transmission of orders without the alternative financing service. Licensed platforms cannot therefore, apart from these two exceptions, carry out other investment services, such as placing financial instruments for an issuer with the public, unlike credit institutions and investment firms.
3.3. Cross-border provision of alternative financing services
The Belgian law only applies to platforms offering or proposing to offer their services on Belgian territory. That notion remains vague; the explanatory memorandum indicates the assessment will be based on subjective indicators such as the use of a .be website, the geographic location of the project promoters, the platform’s promotion of the tax incentives offered by Belgian law, etc. Article 8 provides that any platform must have its registered office in Belgium to validly carry on its activities. A Belgian platform intending to operate in another EU Member State must first notify the FSMA. Platforms from another EEA Member State intending to operate in Belgium must be authorised in their home State to provide analogous services, be licensed in Belgium and comply with the Act’s conditions, subject to information the FSMA may obtain from the home-State authorities and a special listing by the FSMA. Platforms from non-EEA States must also establish a branch in Belgium.
4. The regulation of crowdfunding in Europe
In March 2018 the European Commission published a proposal for a regulation setting up, for investment-based and lending-based crowdfunding platforms, a European label allowing cross-border activities. The Commission stresses that differences in national rules prevent the cross-border provision of crowdfunding services, directly affecting the internal market. The draft aims to establish uniform EU rules but not to replace existing national crowdfunding rules. A crowdfunding service provider may therefore choose either to start or continue providing services under the applicable national law (including where the Member State applies MiFID II to crowdfunding), or to apply for a licence under the proposed regulation; the EU licence covers provision both in a single Member State and cross-border. If the provider chooses the EU rules, the licence obtained under national rules is withdrawn. This EU regime does not modify the national frameworks, the various regimes coexisting while offering platforms that wish it the possibility to develop at European level and operate cross-border.
Scope. The regulation would apply to both investment-based and lending-based crowdfunding platforms. It would not apply to crowdfunding offers whose amount, calculated over 12 months for a particular project, exceeds EUR 5,000,000. To avoid the same activity requiring different licences within the Union, crowdfunding services provided by persons licensed under MiFID II or provided in accordance with national law are excluded from the draft’s scope. The regulation only covers crowdfunding services relating to transferable securities. As under the Belgian law, it would not allow crowdfunding services to receive deposits or other repayable funds from the public unless licensed as credit institutions. To hold client funds and provide payment services, a licence as a payment service provider under PSD2 would be needed.
Conduct rules. Crowdfunding service providers must organise an entry knowledge test to establish investors’ investment knowledge. To let them decide with full knowledge, providers must give them a key investment information sheet. The project owner, best placed to provide this information, is responsible for drawing up the sheet, the providers remaining responsible for the information given to potential investors and ensuring the sheet is complete; the sheet need not be approved by a competent authority. Providers should keep all relevant records of their services and transactions. To ensure fair and non-discriminatory treatment, a provider promoting its services through advertising communications should not favour a particular project by giving it more prominence than others on its platform. Finally, to ensure compliance with the licensing and service-provision requirements, the European Securities and Markets Authority should be given licensing and supervisory powers. (Update: the regulation entered into force on 10 November 2021.)
This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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