New rules for crowdfunding in the EU

ECSP Regulation

Crowdfunding for capital financing has been growing in popularity, particularly among newly founded and innovative companies, especially start-ups and ventures, and now represents an attractive alternative to bank loans. However, crowdfunding is making inroads not only in the area of corporate financing; given the lack of viable alternatives, private investors are also increasingly turning to various forms of crowd investing.

In light of this, it should come as no surprise to learn that now the EU has also taken the initiative by adopting the Crowdfunding Service Provider Regulation (ECSP Regulation) at the EU level. It will enter into force on 10 November 2021, which is why existing crowdfunding platforms will have to focus on ensuring that the necessary business processes and approvals are in place within the next twelve months. But just what will the new regulation address?


The cornerstone of the ECSP Regulation is the so-called European Passport, which will enable crowdfunding platforms to offer crowdfunding using certain defined instruments throughout the EU in a (reasonably) uncomplicated manner. The prerequisite for the European passport is the successful completion of a licensing process with the Austrian Financial Markets Authority (FMA), which will be responsible for regulatory approval in Austria. Under the current legislation, a company specialising in crowd investing is still required to obtain a separate license for each country in which it intends to operate. For this purpose, the Alternative Financing Act has been in force for crowd funders in Austria since 2015 and will remain in force alongside the ECSP Regulation.

Concession Requirements

The licensing process is reminiscent of the approval process to which an investment firm is subject and in some cases strict requirements are imposed. This is hardly surprising given the fact that legal entities with this license provide services that are reserved for investment firms or, in some cases, banks.

In the following, we provide a brief overview of the key requirements and the documents required:

- Crowd financing service providers may only operate as a legal entity.
- Business plans and details of internal company processes that ensure there are no conflicts of interest have to be submitted.
- In addition to their professional qualifications, managers must also demonstrate their personal reliability and provide proof of their relevant experience (fit & proper).
- Crowd financing service providers must provide regulatory collateral of at least EUR 25,000 or one quarter of the annually reviewed fixed overheads for the previous year.
- At the time of registration, information setting out suitable corporate processes must be submitted to enable the platform to meet its information and transparency obligations.
- The operator must provide a description of the risk management and accounting procedures.

Advantages of the concession

In particular, big "players" who want to operate internationally will benefit from this EU concession. In addition to approval in all 27 member states, the concession also brings with it other advantages:

- The offer volume is limited to EUR 5 million per project and is therefore significantly higher than the EUR 2 million under the Alternative Financing Act.
- The range of instruments eligible for crowdfunding under the Regulation is wider than those eligible under the Alternative Financing Act. European crowdfunding is limited to transferable securities under MiFID II (e.g. shares, bonds and securitized participation certificates), credit brokering and other instruments approved for crowd financing services. The latter refers to GmbH shares that are not subject to effective transfer restrictions, which means that shares in an Austrian GmbH (limited company) are not included.

In this context, qualified subordinated loans, which are particularly popular in German-speaking countries, should also be mentioned. Such loans are also not covered by the new regulation.

- It is possible for crowd financing service providers to offer projects throughout the European Union by producing a so-called Key investment information sheet. This is similar in nature to the information sheet required under the Alternative Financing Act, but it goes one step further by also requiring the main risks to be clearly set out. The platform itself must check this key investment information sheet. In view of potential liability, both the project sponsor and the platform should ensure that the information presented is "fair, clear and not misleading" within the meaning of the ECSP.

In summary, the new regulation is particularly relevant for large platforms that wish to operate internationally. However, there is no obligation for market participants to have their business model licensed under the EU regulation. This ensures that small platforms can continue to survive in the market and that large platforms are not prevented from expanding within the EU.

Finally, the details and further explanations are still to be regulated in European level II acts and must then be implemented by national legislators. Therefore, the ECSP regulation is associated with uncertainties that will be clarified in the course of the next twelve months. Overall, the new regulation is to be welcomed and may bring new momentum to the capital markets.

For any queries, please get in touch with your local CERHA HEMPEL contact. We look forward to advising you.