Crowdfunding is a relatively new concept but one which is attracting significant attention from individuals and companies. Peer-to-peer lending has allowed investors and borrowers to cut out the middleman, i.e. banks and other financial institutions, allowing third parties to deal directly and reduce dealing costs. If we consider Latvia, a vibrant market for www.crowdestor.com, there are some local regulations but nothing dealing directly with crowdfunding. We will now take a look at the European Union and the Latvian authorities as they tackle the difficult issue of regulating crowdfunding lending and equity-based models.
Regulations and maintaining market principles
There is a difficult balancing act for regulators and crowdfunding companies. It is the need to introduce regulations which will protect investors while allowing the markets to be extremely flexible and fast-moving. While there are many benefits of crowdfunding, the speed at which funds can be raised is central.
Current regulations in Latvia
Latvia operates under the regulations of the European Union and we know that the European Commission and the European Parliament are currently working on crowdfunding specific regulations. These will be implemented across the European Union although so far draft proposals have yet to be rubberstamped and written into European law. So, the Latvian authorities have quite correctly taken it upon themselves to release some form of guidance with regards to regulations and crowdfunding operations. Many people will be unaware that a 2016 study by KPMG and the University of Cambridge showed Latvia to be the seventh most popular country by capita when it comes to alternative finance. This suggests that the Latvian authorities have been proactive in the past and are currently looking to tackle the balancing act of regulations and market freedoms. At the moment the bullet point regulations regarding crowdfunding operations are as follows:
- The Financial and Capital Market Commission (FCMC) is actively looking at legislation which will see crowdfunding platforms licensed under the Financial Instrument Market Law (FIML)
- Debt instruments would not normally qualify as investment services under FIML but the execution of orders for investors and “dealing on own account” may well fall under FIML regulations
- Depending upon the specific structure, loans do not generally qualify as financial instruments under FIML regulations, therefore, no prospectus would be required
- Peer-to-peer assignment based crowdfunding lending will likely fall under the FCMC regulations as this will may be classed as the provision of investment services
- There are regulations covering the depositing of investor funds into a crowdfunding controlled bank account. This would deem the crowdfunding company as a “credit institution” and bring in an array of new protections
- Civil law
- Commercial law
- Money-laundering regulations
- Natural persons data protection law
- FCMC regulations regarding investment services and payment institutions
- Consumer rights protection law
- Unfair commercial practices prohibition law
- Law on advertising
- Law on corporate income tax
While the vast majority of crowdfunding opportunities emanate from Latvia, Crowdestor is based in Estonia. This ensures that investors are covered by the relevant Estonian and Latvian laws. In order to ensure as much protection as possible, all loan security is held by CROWDESTOR SECURITY AGENT OÜ, a totally separate company. In the unlikely event that new regulations were implemented, in countries where Crowdestor is active, which may impact company operations, investors would still have the loan security to fall back on.
Co-financiers or co-developers
Transparency is a vital element of any crowdfunding platform and Crowdestor will be either a co-financier or co-developer in all opportunities offered to investors. The details of any relationship between Crowdestor and companies looking to raise funds will be highly visible in offer literature. This also introduces an array of confidence as well as accountability when investors see Crowdestor involved in all listed projects. There are many projects which are rejected because of various issues including quality. At the end of the day, if it is good enough for Crowdestor to invest in then it is something for serious investors to consider.
Pan-European crowdfunding regulations
All crowdfunding operations across Europe are keeping a very close eye on developments with the European Commission and the European Parliament. At this moment in time, the Latvian authorities have a draft law awaiting confirmation which will limit the amount an investor can lend to an individual to €10,000. There will be a limit of €100,000 if the funds are being used to implement a project which is announced with the fundraising. At this moment in time, there are no local laws in Latvia limiting crowdfunding investment for companies. The European Crowdfunding Service Providers (Crowdfunding Regulation) is currently open to feedback from member states. There is a particular focus on the limit of €1 million over a 12 month period above which crowdfunding regulations will not apply. This would likely see many start-ups and companies exit the industry although there is significant pressure to see this limit increased to around €8 million. The future licensing of crowdfunding platforms will give greater confidence to investors, specific regulations will increase confidence and ultimately encourage more crowdfunding activity.
It is encouraging to see countries such as Latvia introducing their own draft crowdfunding regulations to maintain control of a sector which has shown significant growth. The introduction of local regulations will in due course be superseded by European regulations but in the meantime, this gives more confidence and transparency. The fact that crowdfunding operations such as Crowdestor invest their own money in every project a list helps both confidence and transparency. The initial quality test for crowdfunding listings ensures that those promoted on the Crowdestor offer exactly what they promise. It is then down to investors to do their own research, consider their own risk/reward ratio and which investment opportunities best suit their long-term investment goals.