Crowdfunding entails the assembly of supply and demand of funding via, normally, an Internet platform. In the current financial market conditions, alternative manners of funding are desirable. Crowdfunding enables demanding parties, both legal entities (such as small and medium enterprises and start-ups) and private persons, to receive required funding from other parties than the regular players on the market, such as lending financial institutions.
Crowdfunding can be structured in numerous ways. The manner in which it is structured highly determines the regulatory rules applicable to crowdfunding pursuant to Dutch law. Dutch law forms the point of departure for this newsletter. Crowdfunding may trigger different issues from a regulatory perspective in other jurisdictions.
2. The regulatory regime
Each of the parties involved in crowdfunding may be confronted with regulatory prohibitory and mandatory provisions: the investors, the recipient and the platform.
Determining factors in respect hereof are, amongst others, whether the recipient is organised as a legal entity or qualifies as a consumer. Also, it is relevant which type of financial product is used to structure the financing. Will the financing be done through borrowed capital (such as credit or debt securities) or equity capital (such as shares)? Will the recipient be offering securities (such as tradable shares and debt securities) to the investors in order to obtain its financing? Will the recipient offer (a right to) goods for which the recipient holds out the prospect of a yield in money? Or will the financing ‘just’ take place in the form of a loan provided by the investors to the recipient? The exact role of the platform is also of importance: will the platform only have a facilitating role, will it act as an intermediary or will the crowdfunding be structured in such manner that a two-step structure is created as a result of which the platform will in general be confronted with equal regulatory rules as the other parties involved?
2.1 The regulators
If the chosen manner in which crowdfunding is structured implies regulatory issues for one or more of the parties involved, the Dutch regulatory authorities will have a role in the crowdfunding structure as well. The Dutch regulatory model distinguishes prudential supervision by the Dutch Central Bank (De Nederlandsche Bank, “DCB”) from market conduct supervision by the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten, the “AFM”). The prudential supervision by DCB focuses on safeguarding the solidity of financial market parties and contributes to the stability of the financial sector. The market conduct supervision by the AFM focuses on the conduct of the financial market parties. The AFM supervises that the conduct of such parties is orderly, transparent, clear and careful.
Depending on the chosen manner in which crowdfunding is structured, the parties involved may be confronted with DCB or the AFM
3. The “10 Commandments” of crowdfunding
The regulatory regime of crowdfunding can be summarised in the following “10 Commandments”.
- Thou, investor, shall not offer credit to consumers;
- Thou, recipient, shall not receive a loan;
- Thou, recipient, shall not offer securities to the public;
- Thou, recipient, shall not offer investment products to consumers;
- Thou, platform, shall not advise;
- Thou, platform, shall not act as intermediary;
- Thou, platform, shall not render payment services;
- Thou, platform, shall not act as bank;
- Thou, platform, shall not receive funds for collective investment to the benefit of the investors;
- Thou, platform, shall not (also) take the role of recipient or of investor.
These “10 Commandments” are described in more detail below. The applicable prohibitory or mandatory provisions under regulatory law depend on the chosen crowdfunding structure. We emphasize that this does not provide a comprehensive overview of all regulatory provisions that may be applicable.
3.1 “Commandment 1”: Investors
Investors who act in the course of their profession or their business may be confronted with the prohibition to offer credit to consumers if the recipient qualifies as a consumer.
If the investors qualify as consumers as well, there is no regulatory issue for the investors. Consumers are investors who do not act in the course of their profession or their business. The AFM has shared its view that investors qualify as consumers if and to the extent that they have provided a maximum of 100 loans against a total aggregate value of not more than €40.000.
The main message therefore is: “Thou, investor, shall not offer credit to consumers”.
3.2 “Commandments 2 – 4”: Recipient
The recipient may be confronted with the prohibition to attract, receive and have the disposal of redeemable funds if it acts in the course of its profession or its business. Redeemable funds are funds that are to be repaid at a certain moment in time and which nominal amount is fixed beforehand. Credit qualifies as redeemable funds. But also notes, bonds or other debt securities do. Actually, any form of borrowed capital qualifies as redeemable funds.
The main message therefore is: “Thou, recipient, shall not receive a loan”.
One of the manners to be exempt from this prohibition is to attract the loan by offering securities to the investors. However, in that case, the recipient may be confronted with the obligation to publish a prospectus, unless an exception or exemption applies. One of relevant exemptions is the offering of securities against an aggregate value of not more than €2,500,000 (on an annual basis). In each documents in which reference is made to the offering, a predescribed warning and pictogram needs to be included aiming at warning the investor that the offering falls outside the supervision of the AFM.
The main message therefore is: “Thou, recipient, shall not offer securities to the public”.
Yet another manner to obtain financing by the recipient is by offering investment products. If the recipient acts in the course of its profession or its business and subject to the investors being consumers, the recipient will in principle need a license. Investment products are, summarised, a (right to a) good for which the recipient holds out the prospect of a yield in money and the management of which is not performed by the investors who obtain the investment products.
The main message therefore is: “Thou, recipient, shall not offer investment products to consumers”.
3.3 “Commandments 5 – 10”: Platform
Depending on the role of the platform, the platform may be confronted with regulatory rules and regulations in several manners.
For example, if the platform takes an advising role it may face the obligation to obtain a license as a financial services provider or as an investment firm.
The main message therefore is: “Thou, platform, shall not advise”.
If the platform takes a role as an intermediary aiming at more than just assembling supply (investors) and demand (recipient), it may face a similar obligation to obtain a license as a financial services provider or as an investment firm. This applies both to acting as an intermediary in respect of a loan and in respect of investment objects, and to acting as an intermediary in respect of financial instruments, such as securities. The platform may act as an intermediary in respect of securities if it, for example, acts as broker or as underwriter. Also, the platform acting as an intermediary in respect of the receipt of ‘a loan’ by the recipient from the investors is, generally taken, prohibited.
The main message therefore is: “Thou, platform, shall not act as intermediary”.
It is conceivable that the platform takes the role to structure the payment flows, such as interest payments on the loan or dividend payments on shares, through the platform. This may, for example, take away administrative issues for the recipient. In such case, the platform should be careful not to violate the prohibition to render payment services without a license.
The main message therefore is: “Thou, platform, shall not render payment services”.
Also, two-step structures are conceivable in which the platform takes a more active role. If, for example, the platform receives the ‘loan’ from the investors and on-lends funds to the recipient on its own account, the platform may qualify as a bank. In order for this to be the case, the platform must make its business by acting in such a way. In other words: one of the main activities of the platform is acting in the way as described above. The platform acts on its own account if it itself bears the risk of on-lending funds.
The main message therefore is: “Thou, platform, shall not act as bank”.
Another two-step structure which may apply is when the platform obtains funds from the investors for collective investment in, for example, one or more of the (businesses of) the recipients with the aim of letting the investors share in the yield on such investment. In such case, the platform may qualify as an investment institution. In general, the platform cannot offer participation rights in the investment institution without a license.
The main message therefore is: “Thou, platform, shall not receive funds for collective investment to the benefit of the investors”.
In each two-step structure in which the platform takes the position of recipient against the investors on the one hand and takes the position of investor against the recipient on the other hand, the platform should take into account the same mandatory and prohibitory provisions as described above in respect of the investors and the recipient respectively.
The main message therefore is: “Thou, platform, shall not (also) take the role of recipient or of investor”.
It may be clear: the applicable regulatory regime highly depends on the manner in which crowdfunding is structured.
Eversheds Faasen is pre-eminently fit to assist you in structuring your crowdfunding ideas in a legally accurate manner contributing to a trustworthy and a high quality crowdfunding platform.
We endorse creative, high quality and pragmatic advice and an on-the-ball mentality with a view to the commercial side of the transaction. And all of that against competitive fees.
For more information contact
+31 20 5600 636
Visit Matthijs Bolkenstein profile