Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Commission Proposed Legislation to Regulate Cross-Border Crowdfunding Service Providers
Financial Regulatory Developments Focus
  • European Commission Proposed Legislation to Regulate Cross-Border Crowdfunding Service Providers
    The European Commission has published a proposed Regulation on European Crowdfunding Service Providers for Business. The proposed ECSP Regulation is part of the EU Capital Markets Union initiative and the Commission's FinTech Action Plan. It aims to increase access to finance through crowdfunding for innovative companies, start-ups and SMEs.

    The Commission is seeking to introduce an "EU label for crowdfunding service providers" which would be authorized and supervised by the European Securities and Markets Authority and able to passport their services across the EU. Currently, different EU Member States apply different levels of regulatory requirements to CSPs. Some Member States require CSPs to comply with onerous obligations under the Markets in Financial Instruments package, some apply more lenient regimes, while others allow CSPs to benefit from exemptions and remain unregulated. The Commission's view is that this divergence hampers the potential scaling-up of crowdfunding activity, because CSPs need to comply with different legal and regulatory requirements and adjust their business models accordingly if they want to provide services in more than one EU Member State. The Commission is not proposing that current national frameworks be repealed. Instead, those frameworks can continue to exist, which will allow CSPs to choose to either provide or continue providing services on a domestic basis under national laws or to provide services under the proposed ECSP Regulation. However, the Commission is proposing that the MiFID II Directive be amended to exclude CSPs from its obligations.

    The proposed ECSP Regulation sets out the requirements for CSPs wishing to benefit from using the ECSP passport. The requirements cover authorization and ongoing supervision by ESMA, prudential management, conflicts of interest, investor protection, transparency and marketing communications. Furthermore, the proposed ECSP Regulation requires all payments for crowdfunding transactions to take place through entities authorized under the Payment Services Directive, which will bring such payments within scope of the EU's Fourth Anti-Money Laundering Directive. There are also provisions relating to ESMA's supervisory powers and the imposition of sanctions and administrative fines.

    The proposed ECSP Regulation is now subject to debate between the European Parliament and the Council of the European Union. The Commission is proposing that the ECSP Regulation would apply 12 months after it is finalized and published in the Official Journal of the European Union. As a regulation, it would apply directly across the EU.

    View the proposed ECSP Regulation.

    View the proposed MiFID II amendment.

    View the Commission's related CMU Communication.