Crowdfunding in the UK and Europe
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The document discusses the growth and regulatory landscape of crowdfunding in the UK and Europe, highlighting its types, investor risks, and future regulations. It outlines the FCA's upcoming regulations in the UK to make crowdfunding more accessible while ensuring investor protection. Additionally, it examines different European countries' regulatory approaches to crowdfunding, including licensing requirements and prospectus regulations.
Crowdfunding in the UK and Europe
- 1. Crowdfunding: its growth and challenges The UK and Europe 31 October 2013 Tony Katz, Partner Orrick, Herrington & Sutcliffe (Europe) LLP
- 2. Agenda What is crowdfunding? The current regulatory regime in the UK? The future of crowdfunding across Europe
- 3. What is crowdfunding? • An alternative means of raising capital • A way of connecting those who need financing with those in a position to give, lend or invest money • Usually achieved via a crowdfunding platform • Often small amounts by a large number of investors
- 4. Types of crowdfunding - Donation
- 5. Types of crowdfunding - Debt
- 6. Types of crowdfunding - Equity
- 7. How does it work? Introduction to the company Pitch Target funding: All or nothing model Keep it all model
- 8. Crowdfunding platforms • Assist in the presentation and design of the pitch • Put projects in touch with funding • Collect funds • Conduct due diligence • Screen investors • Take a cut
- 9. What are the investor risks in equity schemes? The FCA notes that: • • • • • • • Most start ups fail and investors might lose capital entirely Highly illiquid investment No short term gain Dividends unlikely Risk of dilution Risk of fraud No FCA authorisation means no access to the Financial Ombudsman Service or the Financial Services Compensation Scheme
- 10. When would a platform need regulation in the UK? • Financial Services & Markets Act 2000 (FSMA) (as amended) implications » Regulated activities examples: arranging deals in investments, safeguarding and administering investments and activities in relation to collective investment • Financial promotions » Unless exempt, marking must be approved by an authorised firm » Liability for firm approving financial promotion • Offers to the public » Prohibition for private companies offering securities to the public unless to platform members • Prospectus requirements » Exemptions normally apply
- 11. What’s the tax position for investors? • SEIS • • • • • Seed Enterprise Investment Scheme provides tax reliefs to individual investors when they purchase new shares in early-stage companies Significant tax relief for investment in start-ups Income tax relief; CGT exemption and CGT reinvestment relief Various conditions must be met by the investor and company EIS • • • • Encourages equity investment in new and small companies Unlimited deferral relief from CGT where gains are reinvested in newly issued eligible shares Taxpayers are entitled to certain relief from income tax on investment in EIS shares, provided that the shares are held for at least 3 years A company’s shares will be eligible if it is an unquoted trading company and meets various other conditions
- 12. The future of crowdfunding - the UK • • • • On 1 April 2014 FCA are taking over the regulation of the consumer credit market in the UK FCA current approach: current rules not designed with crowdfunding business models in mind. Imposes restrictions on crowdfunding platforms applying for authorisation on a caseby-case basis, tending to limit available clients to high net worth and/or sophisticated investors. FCA consultation on 24 October 2013 aims to: » Make the market more accessible to retail clients to help foster competition and to facilitate access to alternative investment options » Continue to ensure that only investors who can understand and bear the risks participate FCA proposals » Restrict the direct offer financial promotion of unlisted shares or debt securities by firms to one or more particular types of client (self-certified sophisticated investors, high net worth individuals, retail clients who receive regulated investment advice from an authorised person, retail clients who limit the amount invested in unlisted securities to no more 10% of their net investible portfolio) » Where advice is not provided the FCA will expect firms to apply an appropriate test before selling them promotions for unlisted securities – to ensure that only those clients who have the knowledge or experience to understand the risks can invest
- 13. Crowdfunding across Europe Germany France Italy Anyone intending to provide financial services requires a written licence from BaFin Provision of investment services restricted to firms authorised by ACP Anyone intending to provide investment services commercially or on a scale that requires a commercially organised business undertaking requires a written licence from CONSOB and./or Bank of Italy Statutory exceptions to licensing are available – these include if the platform only operates investment broking and contract broking (with certain requirements) or if the platform only offers silent partnerships or participation rights and the and the platform does not accept funds Hurdles to become authorised investment service provider for crowdfunding platforms include requirement of equity platforms to have €730,000 minimum capital in order to be authorised , stringent anti money-laundering and antiterrorism rules The operator of a crowdfunding platform could be subject to further regulations, in particular Italian Money Laundering Law, Data Privacy Law and Consumer credit regulation. Prospectus requirements and exemptions as per European legislation (Prospectus Directive) Prospectus requirements and exemptions as per European legislation (Prospectus Directive) Prospectus requirements and exemptions as per European legislation (Prospectus Directive) As a rule, capital investments may not be publicly offered for sale in Germany without publication of a prospectus with BaFin approval Additional prospectus requirements: approval by ACP if more than 99 investors investing and a maximum of 149 investors can ask for information on an investment The prospectus requirement does not apply to the offering of securities or investment products with a value of €5M or less within a period of 12 months Platforms accepting money directly from investors require authorisation under Payment Services Supervision Act Steps towards more specific regulation (May 2013) by the ACP when they published guidelines for PMs aiming to inform platforms and PMs about existing rules based on the form of crowdfunding (rewards, loans and equity) July 2013: further urgent measures for the growth of the country – Italy one of only countries to specifically legislative on crowdfunding – an opportunity for platforms to operate more easily in Italy September 2013: new status for securities crowdfunding organisations – Crowdfunding Investment Service Provider – special status with limited regulatory requirements – suitable for limited size platforms only Platforms raising capital for innovative start-ups: active companies less than 48 months old whose stock is predominately held by individuals and with a total annual output less than €5m September 2013: consultation launched to define regulation for securities crowdfunding; now nearing the end of a 6 week public consultation – change in regulation is likely forthcoming Further requirements: R&D expenses make up a large chunk of the company’s costs or 1/3 of staff hold a PhD/studying for PhD or company has been granted patent Platforms must be run by investment companies and are then permitted to carry out a public offering of financial instruments innovative start-ups up to €5m outside of existing regulation
- 14. What does the EU think? • • • EU Commission consultation to explore the added value of potential EU action Compatible with aims and objectives of the Commission Purpose of consultation: • Explore how EU action could promote crowdfunding in Europe • Explore possible soft law measures Deadline for response 20 December 2013
- 15. Conclusion • Questions? » Tony Katz » Partner » email: [email protected] » Telephone: +44 207 8624822 » Orrick, Herrington & Sutcliffe (Europe) LLP » 107 Cheapside » London EC2V 6DN » England