A unified European regulation on crowdfunding will enter into force on the 10th of November: an EU regulation will allow a crowdfunding platform already licensed in one country to operate in any other Member State.
The Hungarian legislator has recently harmonised Hungarian legislation to comply with Regulation 2020/1503 adopted by the European Parliament and the Council, which aims to create a single set of rules for crowdfunding services in the European Union, thereby facilitating the cross-border provision of such services.
But what is crowdfunding?
Basically, any form of financing in which the investors with funds and the businesses or individuals seeking financing are connected not by a bank or stock exchange, but by an online social platform. Businesses therefore typically receive small amounts of investment from a large number of people, and funding can be provided through crowdlending or social lending or equity crowdfunding.
Why was regulation at EU level necessary?
The equity-based community financing in most cases involves the issuance of some kind of security, which is subject to strict conditions in all countries, as is the case for loan brokerage in the course of social lending. When issuing a security, the company must prepare an announcement and prospectus under the Capital Markets Act, which must contain all relevant legal and financial information about the issue in a way that is understandable to investors and which must be approved by the Hungarian National Bank (MNB). Preparing this documentation, which in practice can run to more than a hundred pages, is a major task involving financial and legal experts, and the costs are not necessarily proportionate to the amount of resources planned.
Many countries have therefore created special rules to allow start-ups to be financed by crowdfunding, but Hungary has not been one of them. Thus, according to the practice of the Hungarian National Bank (MNB), credit-based crowdfunding could be considered as lending subject to authorisation, equity-based crowdfunding as collection of deposit, and the activities of platforms intermediating projects as either loan brokerage or investment services.
However, the new EU regulation will bring crowdfunding services under a single set of rules to facilitate cross-border financing for businesses and ultimately promote the free movement of capital. The scope of the regulation includes crowdfunding schemes for businesses up to a maximum of €5 million whereas consumer loan brokerage is excluded. As far as the size of investments is concerned, Hungary has exercised its right to opt for a transition period and intends to apply the Regulation only to investments below EUR 1 million until 10 November 2023.
What is the regulation all about?
The main objective of the Regulation is to set directly applicable, uniform requirements for platform operators. According to the Regulation, in order to provide crowdfunding services, the operator must obtain a licence from the supervisory authority of the Member State where he is established (in Hungary, the Hungarian National Bank). To obtain a licence, the platform must meet a number of conditions – for example, it must have internal rules and procedures, and meet professional requirements. Crowdfunding providers are registered with the European Securities and Markets Authority (ESMA).
Once the licence has been obtained, the crowdfunding provider does not need to obtain a new licence to provide cross-border services in another Member State. By notifying the supervisory authority of its place of establishment, it can obtain a “passport” to provide crowdfunding services in other Member States.
In order to ensure investor protection, the Regulation obliges the firm seeking finance to prepare a key investment information sheet. This document aims to enable investors to make informed investment decisions. The biggest advantage of the new regulation for start-ups is that this document does not require approval by the supervising authority, unlike the issuance of securities under the Capital Markets Act. However, the company and its manager are jointly and severally liable for the accuracy and completeness of the information contained in the document and, if the document is published in a foreign language, the person responsible for the translation is also liable for any errors in translation, together with the company.
What can we expect after November?
Once the Regulation enters into force, it is expected to boost the market of crowdfunding within the European Union – especially in terms of cross-border services. In addition, the legal framework of crowdfunding in Hungary will be put on a completely new legal basis, so it is to be expected that crowdfunding will get a kick in Hungary too, since service providers who have so far shied away from the Hungarian regulatory environment will be able to enter the Hungarian market easily in the future, once they have obtained a licence in their Member State.