After presenting the legal framework of UK, we move on to examine Europe’s second largest crowdfunding market: France. The French crowdfunding market is a €253 million-worth market with seventy active platforms. Within the global renewable energy crowdfunding industry, French platforms like Lendosphere and Lumo are bright examples, having funded 12 and 6 projects respectively, according to Solarplaza’s Renewable Energy Crowdfunding Map. Although proper regulation was established only a year ago, the future of crowdfunding in France seems to be facilitated by a supportive legal framework. Below you’ll find an overview of France’s Legal Framework for Crowdfunding, conducted by Kramer Levin as part of our larger Crowdfunding Legal Framework Overview.
FRANCE CROWDFUNDING: UPDATE ON THE LEGAL FRAMEWORK
By Reid Feldman, Partner/Avocat à la Cour, Kramer Levin Naftalis & Frankel LLP
Hubert de Vauplane, Partner/Avocat à la Cour, Kramer Levin Naftalis & Frankel LLP
Although the European regulatory scheme insures some harmonization of the legal environment for finance throughout the European Economic Area (31 countries in all), including “passporting” of most regulated entities, country-specific rules are still important, particularly for crowdfunding and other forms of alternative finance.
In France the so-called “banking monopoly” prohibits anyone other than a licensed EEA bank (établissement de crédit) or certain other regulated entities including finance companies (sociétés de financement) from “habitually” extending interest-bearing loans in France, and courts have considered that the prohibition applies to the purchase and direct holding of all or any portion of unmatured bank loans (although arguably the prohibition does not apply to the purchase of indirect participations in such a bank loan, if signed outside France, with funds transferred outside France).
New regulatory regime
A new French regulatory regime for crowdfunding came into force in October 2014, which allows internet platforms to arrange up to €1 million in financing for businesses, via either loans (funded by individuals only) or issuance of securities. Internet platforms arranging loans must register with French authorities as a “crowd-financing intermediary” (intermédiaire en financement participatif or IFP) while those arranging securities offerings must obtain a license as a “crowd-sourced investment advisor” (conseil en investissement participatif or CIP) or hold a license as a financial services provider (prestataire de services d’investissement or PSI).
Crowdfunding via donations can take place without complying with the new regulatory regime, but donation-based sites have the option of becoming an IFP.
Crowdfunding sites registered or licensed as an IFP, a CIP or a PSI can use an officially sanctioned label (with a sketch of one well recognized French symbol, the “Marianne”).
The new regime for crowdlending
Rules applicable to an intermédiaire en financement participatif (IFP) include the following:
- Eligible borrowers are restricted to legal entities and individuals acting in a professional capacity (and those borrowing to finance professional training)
- Loans to businesses are permitted only for financing a “project” (purchase of goods and services for an operation predefined in terms of purpose, amount and timetable) at a fixed rate (within usury limits) for a maximum duration of seven years and up to €1M maximum per borrower.
- Eligible lenders are restricted to individuals acting outside their professional activities.
- Maximum loan is €1,000 per lender per project.
- The IFP cannot have any other activities than the following: credit institution, finance company, payment establishment (EP) or electronic money establishment (and in these cases, insurance intermediary); agent of EP; or CIP.
- Payments must not transit via the IFP, unless it obtains the status of payment establishment which is available with reduced regulatory requirements: a license from the ACPR ; capital €40K (which allows handling of an average of up to €3M per month in payments) or agent of payment establishment
- Obligations of the IFP include compliance with rules of good conduct (including supply of information and documents and follow-up of the project to its term); use of a tool for determining the financial capacity of lenders; use of selection criteria; providing a description of the project by an appropriate notice; providing a model contract; back-up for management of the IFP’s obligations to their conclusion by a payment services provider (PSP) or agent thereof.
Crowdsourced-lending outside the new regulatory regime is currently being carried out on internet sites which organize the funding of SMEs via commercial paper (bons de caisse), which offers an opportunity for funding by legal entities. However, new regulation in this area is expected in late 2015 or early 2016.
Another possible avenue of financing is profit-participating loans for certain borrowers, including commercial businesses; in such cases authorized lenders can include commercial companies (as well as certain banks and other institutions).
Also note that securitization vehicles (organisations de titrisation or OT) can allow a fund manager to assemble portfolios of loans or receivables funded by investors. An OT can be organized as either a securitization fund (fond commun de titrisation or FCT) or a (société de titrisation or ST). An OT is an alternative investment fund (AIF), not itself subject to licensing, but must be managed by a regulated management company (société de gestion) and its assets must be held by a licensed custodian (dépositaire).
The new regime for crowdfunding by issuance of securities
Rules applicable to a conseiller en investissement participatif (CIP) include the following:
- Issuers can include businesses organized as a société anonyme (SA) or société par action simplifiée (SAS) with two years of approved accounts (or certification from statutory auditor), or certain kinds of sociétés à responsabilité limitée (SARL).
- Securities that can be issued include common shares or fixed-rate debt instruments, up to a maximum of €1M maximum per issuer during a 12-month period.
- Investors can include individuals and legal entities.
- Payments must not transit via the CIP.
- The licensing procedure for a CIP currently review of the application carried out by the Autorité des Marchés Financier (the AMF, the French securities regulator).
- The CIP cannot have any other activities than the following: IFP (without payment services); advice to businesses relating to capital structure; handling share subscription forms.
- Obligations of the CIP include compliance with rules of good conduct rules (key words: fairness, equitable, skill, care, diligence, efficiency, warning, appropriate offer) and maintaining for its operations sufficient dedicated resources and appropriate procedures.
A site organizing crowdfunding by issuance of securities can also be run by an investment service provider (prestataire de service d’investissement, i.e. PSI, licensed by the ACPR, and having a minimum capital of €125K if funds are received from the public, otherwise €50K).
Securities-based crowdfunding without a prospectus is possible outside the new regulatory regime, under longstanding public-placement rules, if:
- the total amount issued in the UE is below €100K (over 12 months);
- the offer is addressed to qualified investors acting for their own account;
- the offer is addressed to a restricted circle of investors (fewer than 150 persons in France);
- the total amount of equity securities issued (over 12 months) does not exceed 50 % of the issuer’s pre-issue capital or €5M (€2.5M if the securities are listed on a multilateral trading facility – MTF); or
- the securities issued have a face amount of at least €100K per security or are subscribed in lots of at least €100K per investor.
Disclaimer: This paper gives only a brief summary of relevant French law and should not be considered as legal advice regarding specific transactions or matters.