By Chrysovalantis Papantoniou, Lawyer at S.Dionysiou & Partners LLC
Crowdfunding is one of the most innovative financial schemes, which provides the opportunity of increase in capital by expanding the pool of investors beyond the traditional circle of owners.
Most often used by startup companies or growing businesses, whose owners aim at obtaining alternative funds through online platforms.
The abovementioned services are regulated in Cyprus by the Cyprus Securities and Exchange Commission (“CySec”) under the Crowdfunding Directive D187-10 (“The Directive”). The main aim of the Directive is to heighten the guidance and protection already provided to investors by the Investment Services and Activities and Regulated Markets Law.It is important to point out that that the current legislation safeguards the interest of crowdfunding investors only through the issuance of transferrable securities and it excludes other forms of crowdfunding such as loans, rewards, or donations.
As per the interpretation of the law, a Crowdfunding Service Provider can be a Cyprus Investment Firm (“CIF”), which has obtained an operational license by CySec to provide crowdfunding service. Moreover, an existing authorized CIF is also eligible to apply for such license to be acquired and expand its line of authorized services. The CIFs that will obtain such license can also offer their crowdfunding services across the European Union, given that they comply with the obligations of MiFID II. Also, under the provisions of the Directive, a CIF acting as a crowdfunding service provider offering cross-border transferrable securities via investment-based crowdfunding will have to comply with the prospectus threshold of the European Union regarding marketing, sale, and distribution of securities.
The Directive, as mentioned above, has established a set of rules to ensure protection of the investors.The most significant of these measures include the prevention of conflict of interest, the implementation of due diligence procedures, the inurement of transparency, the safeguarding of client’s funds and financial instruments and the promotion of investors exit opportunities.
In an effort to promote cross-border corporate finance, on the 5th of October 2020 the European Parliament issued the Regulation 2020/1503 (“EU Regulations”), emphasizing at investment-based and loan-based crowdfunding services. The ultimate goal is to develop a single market for crowdfunding platforms who operate in more than one member state. It is widely understood that the scope of regulation in Cyprus will have to be amended in order to comply with the requirements of the new EU Regulations. Crowdfunding Service Providers who already have a license and offer their service in accordance with national law, will continue to do so until 10th of November 2021. CySec regulators have guaranteed to both service providers and potential investors for a swift and smooth induction of the new requirements of the EU Regulations so that the fintech hub of Cyprus will not be disrupted. (photo: pixabay.com)