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Crowdfunding regulation in Ireland


Wednesday, August 23, 2017

In Ireland there is currently no regulation of the crowdfunding market. However due to the development of the industry in Ireland, the Department of Finance recently invited submissions for the potential regulation of the industry.

In total, there were nine submissions made. Philip Lee was the only law firm to address the consultation in its entirety.

Many of the submissions identified the same issues, although the approach to resolving these issues differed in certain aspects.

In this note, we identify the common risks, the main recommendations and points to note arising from the submissions.

Risks identified
The submissions identify various risks including platform failure, appropriate disclosure, due diligence and investor awareness.

A common issue discussed throughout the submissions is the level of information that should be provided to investors. Currently, it is at the discretion of the business as to what information they provide, although many crowdfunding platforms do require certain information be disclosed. Opinions varied in terms of those preferring a principles based approach to those recommending a more prescriptive approach.

There was general support for investor protections in the event of platform failure, including appropriate insurance, platform continuity or contingency plans and proportionate minimum capital requirements.

Recommendations
All submissions agreed that there should be some form of regulation. However, due to the nature of the crowdfunding market, the submissions differed in terms of how to best regulate the platform without placing undue hardship on the industry.

One of the main outcomes of the submissions was that there should be a certain amount of disclosure in terms of the information that businesses are required to provide to investors. The level of disclosure differed in many of the submissions, however there was a general theme that there should be enough information to provide investors with a full understanding of the company and risks involved.

Most submissions agreed there should be some form of due diligence. Most crowdfunding companies already require a certain level of due diligence. Due to the nature of the crowdfunding market there was a strong emphasis that any due diligence should not be overly burdensome.

Also mentioned and highlighted in a number of submissions was the potential to adopt the UK approach. A number of the submissions recommended implementing the principles and rules under the Financial Conduct Authority (FCA), in particular with respect to disclosing information, ensuring the information is not misleading and placing the obligation on the investor to demonstrate that they understand the risks involved in investing in the business.

There were diverging views on whether the SME regulations should be applied to the crowdfunding industry. The recommendations varied with some against and some in favour of the SME regulations applying to crowdfunding. A common view amongst those against was that the principles of the regulations could be suitably adapted to the crowdfunding platform.

There were calls for government financial support for the industry as has been done in the UK plus calls for changes to the tax code to incentivise investment.

Philip Lee Submission
In terms of due diligence, we note that a certain level of due diligence should be undertaken by platforms on the businesses raising finance such as the business providing the latest financial statements, companies office searches, credit checks and litigation searches.

Disclosure of information should be provided however there should not be a requirement whereby the obligation to disclose information becomes over burdensome on the business. If a business represents that it holds certain assets (e.g. intellectual property), it should be required to verify this.

We believe that placing restrictions on the amount a person can invest in a 12 month period will be practically impossible to regulate. We refer to the practice in other jurisdictions for guidance and we note the strong argument that consenting adults should have sufficient discretion in this regard.

As with a number of the submissions, we emphasised the success of the UK approach and the potential to implement many of the rules and principles under the FCA.

We note the need to address other existing legislative issues such as the Companies Act 2014 and the rules on prospectuses.

One point which we made which was not addressed within any of the other submissions was the role that insurance companies may be able to play in the future of crowdfunding.

Next Steps
The Department of Finance will now review the submissions to determine whether or not to pursue regulating the crowdfunding industry in Ireland. Currently there is no date for the Department to respond to the submissions. We will continue to monitor developments in this area.

 


Author

Eoghan Doyle

PARTNER


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