Thursday, August 25, 2016
The Department of Finance is liaising with the Central Bank to explore how best to regulate crowdfunding in Ireland. This comes on the back of the European Commission’s recent conclusion that there is no strong case for a pan-European policy intervention in the area. There are five key issues at play for Ireland in respect of crowdfunding regulation.
Investors do not like uncertainty. Ireland’s regulatory framework on crowdfunding lacks certainty. To date (and leaving Brexit aside), an investor from overseas who is considering Dublin or London as a place to set up a crowdfunding platform has a clear choice — London with defined rules on the area and a booming industry vs. Dublin with no specific rules and an industry in its infancy. Easy decision thus far.
Earlier this month, Crowdcube, the UK’s leading equity-based crowdfunding platform, received an authorisation to operate its crowdfunding business in Spain. In Crowdcube’s press release, they cited the local regulations, saying “Spanish start-ups and SMEs can benefit from a regulated market, where capital increase operations can be undertaken in an orderly way”. Now Crowdcube has a European base with access to the common market — regardless of how Brexit plays out. That base could have been Ireland.
For crowdfunding to work on a large scale, ordinary individuals should be able to invest alongside experienced and/or institutional investors. This is what is happening in the UK, where 45% of platforms recently reported institutional investor involvement.
However, a balance needs to be struck between opening up the investor pool and putting in place appropriate safeguards that do not suffocate the industry. The types of protections in place across Europe vary from country to country and include both risk warnings and an adequacy test to ensure the investor understands the basic nature of the transaction. The size of permitted investments and the experience of the investor are also relevant considerations.
Across the EU, the restrictions generally vary between investment amounts of €1,000 – €10,000, or a certification process that addresses the investor’s net worth or investment experience. Such restrictions have come in for criticism as many argue that provided the investor is a consenting adult and understands the risks involved, he or she should be able to invest as much as they like.
How much due diligence should be carried out by the platform? For example, should the platform be required to carry out credit or litigation searches on the issuer and/or the promoters? In the UK, firms must disclose information in a fair, clear and not misleading manner so the investor is reasonably able to understand the nature of the risks involved and therefore make an informed decision.
In my view, a balance between this type of approach coupled with some basic checks against issuing companies and their promoters makes sense. Crowdfunding platforms will ultimately live and die by the success of the projects on their sites; so competition will also help drive this area.
Crowdfunding regulations across Europe adopt a mixed approach and the requirements are a minimum capital amount, appropriate insurance or a combination of both. The amounts vary and start from €50,000. The key point is that there should be an amount of capital or appropriate insurance protection to address the possible failure of a platform and/or to meet potential investor claims. In Ireland, neither the deposit guarantee scheme nor the investor compensation scheme specifically extend to crowdfunding activities.
Segregation of client funds is also an important issue. In the UK, the FCA is currently looking at ways to make this area more efficient for platforms.
The most common vehicle used by issuing companies is the private limited company, and as the name suggests, there is a general prohibition (with certain exemptions) from making offers to the public. The very nature of crowdfunding allows companies to make offers to the world at large. Providing clarity in this area for private companies offering equity via crowdfunding would be a welcome development.
The regulations should also provide for exemptions on the need to prepare a formal prospectus to avoid the costly and timely requirement of putting in place a regulatory-approved prospectus. In my view, offers of less than €5,000,000 in a 12-month period (provided for in the Irish prospectus regulations for pan-European offers) is a sensible level, below which no prospectus should be required to be required.
Adopting the new Companies Act 2014 rules for local offers of less than €5,000,000 would also make sense for crowdfunding purposes.