COT's Top Four Commercial Issues - March 2018

The snow has retreated, Spring is in the air. What better way to start your weekend than reading this month's edition of our commercial review.

FinTech - New crowdfunding regulations

FinTech remains a hot topic for 2018, and the European Commission (Commission) has identified that (a) many nascent businesses struggle to find investment when going through the early stages of growth; and (b) small-scale investors can find it difficult to find appropriate investment opportunities. With this in mind, the Commission has set out its proposal for the regulation of crowdfunding service providers in the EU. Crowdfunding is a method of raising funding for a project or venture by asking large numbers of people to contribute towards the project, and has become a popular alternative to more traditional fundraising practices.

Crowdfunding typically takes place via online platforms, and is currently regulated by national legislation, with the variances between these different laws making it difficult for crowdfunding platforms to operate and provide services across borders. As such, the Commission has determined that rules with EU-wide application will make it easier for crowdfunding platforms to operate across member states, thereby introducing more investors to a wider range of potential investment opportunities. The Commission has stated that the proposed regulation will protect investors by virtue of the following protections:

crowdfunding websites will need to display disclaimers and warnings informing investors about the risks involved with crowdfunding; potential investors will need to take a knowledge test to assess their understanding of financial products, and may also be offered the opportunity to assess their ability to bear financial losses; crowdfunding service providers and project owners will be subject to a duty to disclose comprehensive information about each crowdfunding offer in a clear and transparent way to allow investors to assess the risks before investing; crowdfunding service providers will need to obtain the best possible result for their clients when exercising discretion in how they carry out their clients' orders, with a duty to avoid and prevent conflicts of interests; and platform managers will be subject to reputational obligations. Another facet of the proposed regulation is that all crowdfunding transactions will need to take place through entities that are authorised as Payment Service Providers under the Payment Service Directive (PSD2).

The proposed...