On March 31st, 2015 the Minister of Finance indicated his intention to adjust various rules for crowdfunding platforms by means of a letter to the Lower House. The goals of these changes are to encourage the development of these platforms as alternative sources of funding, especially SMEs (small and medium-sized enterprises), to promote a level playing field between platforms, and to improve the protection of the investors on these platforms. This news item will further discuss the proposed adjustments.
Background
The letter from the Minister of Finance to the Lower House is not a singular development. We have seen a large increase in the amount of initiatives on the base of crowdfunding amongst our customers over the last few years, as well as in the flow of funds that run through crowdfunding platforms. Depending on the structure and the exact activities of the platform, it is almost inevitable that they will come across laws and regulations that are included in the Act on Financial Supervision (Wft). Roughly speaking, two types of crowdfunding platforms can be identified: ‘equity-based ‘ and ‘debt-based’ platforms.
In the first type, the platform mediates in the issuing of financial instruments (securities) by an investor, meaning that the platform actually serves as an investment firm. These platforms are strictly regulated and supervised by the AFM and DNB.
In the second type of platform, the person requesting funding puts out a private loan with the public, in which the platform plays a mediating role between the requester and the investor. In this form of crowdfunding, the platform often makes use of the exemption regime for ‘mediation in attracting or obtaining callable funds from the public”. The exemptions are granted on an individual basis by the AFM.
In December 2014, the AFM sent a letter to the Minister of Finance to bring a number of problems, which the AFM and crowdfunding platforms have run across, to the Ministry’s attention. A number of these issues predominantly affect equity-based platforms that hold a licence as investment firms, while other issues involve the debt-based platforms.
The letter of the Minister of Finance to the Lower House, sent on March 31st, 2015, is in fact a response to the AFM’s letter sent in December 2014. In the letter, the Minister acknowledges the issues and announces several measures to resolve them. These measures are planned to be enacted on January 1st, 2016.
Below, we will highlight two of the issues that have been addressed.
Commission ban
Since January 1st, 2014, investment firms—like most equity-based platforms— are no longer allowed to receive commissions or other settlements from other parties than the client (investor). This means that these platforms are only allowed to charge a fee for their services to the investor, and not to the requester of the funds. In practice, it is difficult to explain this issue to the investors, which inhibits the growth of this type of crowdfunding.
In his letter, the Minister acknowledges this problem and proposes an exception to the commission ban for crowdfunding platforms. Apart from the fact that the current commission ban inhibits crowdfunding initiatives, the Minister also states that an exception to the prohibition is justified because the purpose of the ban is to protect the investor against the incentives that arise from commissions to third parties and which may result in a situation where the investment firm does not act in the interest of the customer. In the subject of crowdfunding, these incentives do not or hardly play a role, according to the Minister of Finance. During pre-selection of projects, for example, a platform has little reason to play a guiding role in the process. Additionally, a platform benefits from having as many projects as possible, because this will attract a larger possible group of potential investors which will in turn increase the likelihood of a successful completion of the projects.
A number of terms and conditions will apply to obtaining an exception to the commission ban, however. For example, this exception only applies to the investment service ‘receipt and transmission of orders in financial instruments’, it applies when the instruments are not listed on a stock exchange or a similar trading platform, and there cannot be secondary trade on these instruments. Additionally, crowdfunding platforms are required to clearly indicate the fees they have received from the fund requesters to the investors, and the platform needs to ensure that this commission aids in the platform’s service and does not inhibit the protection of the investors’ interests. Lastly, the AFM is required to be informed of the time at which the platform will receive this commission.
Expansion of exemption regime for debt-based platforms
Most debt-based crowdfunding platforms use an exemption that is granted by the AFM. After obtaining the exemption, these platforms can basically operate without any form of supervision.
The AFM and the Minister believe that this exemption regime is too light for crowdfunding platforms. Considering the desired professionalisation of these platforms, and therewith that of the protection of the investors and fund requesters, the Minister deems it desirable to tighten the exemption regime and to connect more concrete requirements to the exemption to make it more fully-fledged. This also reduces the difference in the severity of supervision between these platforms and platforms that hold an investment firm licence.
Although the Minister aims to tighten the exemption regime, the proposed rules are very similar to those that currently already apply to different types of parties that formally fall under a licensing system.
The proposed rules for debt-based crowdfunding platforms are focused on sound operational management and corporate integrity of platforms and are aimed to contribute to the prevention of dysfunction of and fraud by the platform.
Platforms are expected, for example, to structure their operational management in such a way that payments between fund requesters and investors can continue, even when the platform itself has stopped functioning temporarily or permanently. Furthermore, platforms will be required to have good ICT systems that are resistant against (some) failure, to guarantee security and continuity.
Platforms must also ensure that their staff members are reliable, that incidents are recorded, and that they provide a procedure for handling complaints.
Lastly, policymakers of platforms will be required to undergo a test of suitability, carried out by the AFM. This is quite a tough examination, in which policymakers are tested against a large number of criteria and competencies as formulated in the Suitability Policy Rule 2012, issued by the AFM and DNB.
Lastly
In his letter, the Minister of Finance also proposes a number of solutions for the various other issues that crowdfunding platforms and the AFM have come across under the current laws and regulations. Together with the intended solutions, the development of crowdfunding as an alternative channel for financing will be stimulated further, while the level of protection of the investors will be strengthened concurrently.
The adjustment of existing regulations will take place through an alteration of the Decree on Conduct of Business Supervision of Financial Undertakings and are expected to be enacted on January 1st, 2016.
The impact of the proposed rules will be especially large for debt-based crowd-funding platforms. Crowdfunding platforms that will have to face these rules are therefore advised to initiate their implementation on time.
Charco & Dique can help embedding the requirements that are established by the new proposed rules. Additionally, Charco & Dique can aid in the preparation for the suitability examination and in your communication with the AFM.
For more information, you can contact Charco & Dique by telephone at +31 (0) 20 416 5403 or via email at info@charcoendique.nl.