A European passport for crowdfunding

At last, a European passport for crowdfunding! As from 10 November 2021, it will be possible for both new and existing crowdfunding platforms to obtain a licence allowing them to carry out their activities in all EU countries. What does it mean in practice for SMEs, start-ups and potential investors? Catherine Houssa clarifies the main takeaways of this major step forward to (finally) boost crowdfunding in the EU.

Looking back

Without any doubt, it was crowdfunding that launched the Fintech movement. Crowdfunding facilitated access to funding for those who were excluded from the banking system via a digital platform, showing the possibility that finance could be done differently.

The Belgian legislator, like other national legislators, has taken up this new reality and transposed the requirements related to this new activity into Belgian law one step at a time (see our news published in 2016 on this subject here).

However, an inherently digital activity soon finds itself cramped when it is constrained within physical boundaries. The crowdfunding platform approved by the FSMA under the Belgian law of 18 December 2016 must limit its activities to the Belgian territory unless it meets the legal conditions applicable to crowdfunding platforms in each of the various European countries where it wishes to carry out its alternative funding activities.

After a certain enthusiasm, crowdfunding has therefore continued its national activities without going through the spectacular development one could have hoped for. One of the main reasons for this is, in particular, the lack of a European passport linked to national authorisation.

Harmonisation of participatory financing – a single European framework

From 10 November 2021 onwards, a crowdfunding platform will be able to obtain an authorisation entitling it to carry out its activities in all countries of the European Union.

On this date, Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers (ECSP) for business (the “Crowdfunding Regulation“) will become applicable.

By granting a European passport to ECSPs, the Crowdfunding Regulation makes it possible to overcome the barrier of fragmented national regulation. It undoubtedly creates a favourable environment for the emergence of new European crowdfunding players and facilitates the cross-border financing of small structures and startups. In other words, individual investors from different European countries will be able to participate in the financing of projects of companies established in other Member States.

Below, we provide a general overview of this new European regulation.

Scope of application

Actors

The project owner may be a natural person who is not a consumer. This is a first difference with the Belgian regulation which limits access to financing intermediated by platforms to legal entities. This will certainly raise questions regarding the Belgian regulation which does not allow the issuance of securities by natural persons.

On the other hand, ECSPs must be legal entities. This is also a difference from the Belgian regulation which also allows natural persons to offer alternative financing services, although it has to be acknowledged that, de facto, this possibility is not being used.

The Crowdfunding Regulation does not apply to participatory financing services provided to project owners who are consumers within the meaning of Directive 2008/48/EC, i.e. any natural person who acts for purposes not related to his commercial or professional activity.

This is a disappointment for peer-to-peer lending platforms which, provided that they are authorised to act as such by their national legislation, will have to pursue carrying out their activities exclusively within their national legal framework without benefiting from a European passport (for the lack of Belgian status of peer-to-peer lending, see our initial analysis of 2016 here).

Maximum amount collected

The Crowdfunding Regulation has opted to set a single collection threshold per project owner instead of per project. This threshold has been set at 5 million EUR over a 12-month period without the need to issue a prospectus.

This amount has been retained because this threshold is used by most Member States – as is the case in Belgium – to exempt the offers of securities to the public from the obligation to publish a prospectus. Moreover, this threshold is calculated to cover all offers made by the project owner, whether through ECSPs – in the form of loans or equity participations – or directly under the general exemptions provided for in the Prospectus Regulation.

Grant conditions

A European passport is something you have to earn! The Crowdfunding Regulation introduces extremely precise rules on transparency and investor protection. This Regulation also significantly strengthens the prudential and governance requirements with which platforms have to comply.

Investor protection and transparency

The process of a collection project always starts with the publication by the ECSPs of a Key Investment Information Sheet (KIIS) drawn up by the project owner. This document contains all the information listed in Annex I of the Crowdfunding Regulation, an exclusion of liability clause and a warning on the risks posed by the investment proposed by the platform. It must be kept up to date throughout the entire offer period. The ECSPs are closely involved. They are responsible for verifying the completeness, accuracy and clarity of the information contained in the KIIS. The KIIS must be published 7 days before the online publication of a project that coincides with the start of the collection.

The Crowdfunding Regulation also distinguishes sophisticated and non-sophisticated investors, who benefit from different levels of information and protection.

A non-sophisticated investor benefits from a higher level of information (more in-depth advice and guidance). He must take an appropriateness test to ensure that he understands the level of risk associated with a participatory investment, a test which should be renewed every two years. Unless the ECSP offers a discretionary loan portfolio management service, the non-sophisticated investor is given a withdrawal period of 4 days as from the day he makes an investment offer. If his investment exceeds 1,000 EUR per project or 5% of his assets, the ECSP is subject to additional obligations in terms of information and must obtain the explicit consent of the investor.

Prudential requirements

The Crowdfunding Regulation imposes many organisational and operational requirements on ECSPs. These include the obligation to put in place procedures to ensure the continuity of their activities. ECSPs must also ensure that they avoid any conflict of interest and, to this end, shall not participate in offers launched on their own platform, nor may their main shareholders, managers and employees act as a project owner of a project offered on the platform. When ECSPs engage in outsourcing, this must be documented and monitored at all times, with the ECSP remaining fully responsible for the outsourced activity. The custody of assets must comply with strict rules.

Evidence of compliance with these rules must be included in the application file submitted for approval to the supervisory authority of the Member State in which the applicant is established.

If the ECSP provides for payment services in relation to participatory financing services, the ECSP is logically obliged to obtain authorisation as a payment service provider within the meaning of Directive 2015/2366 (PSD II).

Gateway

Finally, it should be noted that the Crowdfunding Regulation offers crowdfunding platforms that have already been approved under their national legislation the ease of not having to provide again the information and documents they have already provided when applying for approval, on the condition, of course, that this information and these documents are up-to-date and available to the competent authority. Platforms which obtain the European passport will have to give up their initial national authorisation, while platforms which do not apply for the European passport will remain subject to their initial national authorisation.

The European authorisation as a provider of participatory finance services was long expected by the industry. Even if it imposes strict rules to ECSPs, this is a necessary evil to give them the credibility they need to finally access the “big league”.

Come and discuss this with our Digital Finance Team!

digitalfinance@simontbraun.eu
+32 (0)2 543 70 80

 

Simont Braun authors FinTech Belgian Chapter in The Legal 500

Have a look at the FinTech Belgian Chapter authored by Simont Braun in The Legal 500 Comparative Guide!

It’s a concise, pragmatic and yet comprehensive overview of FinTech in Belgium, and a must-read for all practitioners and actors of the sector.

The Belgian Chapter is available here.

Thank you, in particular, to Catherine Houssa, Philippe De Prez, Joan Carette, Thomas Derval, Jean-Christophe Vercauteren & Charlotte De Thaye for their work on this.

For any question or assistance, do not hesitate to reach out to Simont Braun’s Digital Finance Team: digitalfinance@simontbraun.eu

 

The European Commission issued its new Digital Finance Package

FLASH NEWS | Yesterday, the European Commission issued its new Digital Finance Package presenting a new digital finance strategy and new legislative proposals.

The key takeaways are:
1. Legislative proposals on crypto-assets including a regulated status for previously unregulated crypto-assets;
2. An EU regulatory framework on digital resilience;
3. A renewed strategy for retail payments to foster cross-border payment solutions (instant payments) and a proposal for “Open Finance” framework.

For more information, do not hesitate to contact our Digital Finance team: digitalfinance@simontbraun.eu

Simont Braun strengthens Financial Services and FinTech capabilities with top hires

Simont Braun boosts the capabilities of its Fintech and Financial Services practices by welcoming Partner Joan Carette and Senior Associate Jean-Christophe Vercauteren. These strong additions to the firm enhance our Digital Finance Team’s position on top of the Belgian market.

The highly respected Joan Carette joins our Fintech and Financial Services team as a partner next to Catherine Houssa and Philippe De Prez, where she will reinforce our regulation and FinTech skills and allow to improve our focus on the Tech aspect of our expertise.

Joan Carette has 20 years of experience in FinTech, payments, e-money, AML and more generally banking and financial services and the prudential supervision of financial institutions. She worked as a regulator in the prudential supervision department of the FSMA, and in Belgian and international law firms for over 15 years.

Clients admire her “very flexible, pragmatic approach,” as well as her “deep knowledge of financial regulation.” (Chambers & Partners)

FinTech, Payments and Financial Services play key roles in our economy and require to combine strong legal knowledge with tech-savviness and proactivity. In this context, I am delighted to join the strongest Digital Finance Team on the Belgian legal market. Together, we will be able to offer the best possible guidance to our clients,” says Joan Carette.

Jean-Christophe Vercauteren has solid regulatory expertise in FinTech, payment services and e-money, AML and more generally banking and financial services. He gathered experience as a lawyer in Belgian and international business law firms, and as a legal counsel in a Belgian bank.

I could not think of a more stimulating environment than Simont Braun’s Digital Finance Team to further develop my expertise. Being part of the pioneer FinTech law firm in Belgium will be a daily motivation, and I am happy to contribute to broadening its capabilities,” says Jean-Christophe.

We are proud to welcome top talents like Joan and Jean-Christophe in the team. With them on board, our Digital Finance Team strengthens both its financial services and tech capabilities,” adds Philippe De Prez, partner in FinTech and Financial Services.

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Simont Braun’s pioneer Digital Finance Team is one of the best and most-qualified teams in Belgium. “The firm has proven itself as one of the very leading players in the market, having advised on groundbreaking projects involving areas such as alternative lending, micro-savings, robo-advisory, blockchain, ICOs and virtual currencies.” Simont Braun is the only law firm ranked in Band 1 in Belgium in FinTech by Chambers & Partners. The firm is also ranked Tier 1 in FinTech by the Legal 500, and Tier 1 in Financial Services Regulatory by IFLR 1000.

Covid-19 & Banks: Emergency Response and Sound Management

The health crisis caused by Covid-19 and the economic and social consequences it has for banks oblige these financial institutions to inform their regulator of the specific measures, both internal and external, that they implement to address the situation.

Business Continuity – Regulatory Context

Given their essential role in the economic and financial system, banks are legally required to pay particular attention to the risks that are associated with a potential halt or slowdown of their activities.

This is an illustration of the banks’ more general obligation to have at all times adequate measures to ensure the maintenance or rapid restoration of their critical functions (Article 21, § 1st, 9°, of the Banking Act of 24 April 2014). This requirement results from the need for credit institutions to have a sound and prudent management in place.

  1. Contingency Plan

This obligation of continuity is reflected in the contingency, business continuity and recovery plan. This plan must be established by all banks on an annual basis under the responsibility of their Board of Directors. The contingency plan must demonstrate (and convince the supervisors) that the banks have the capacity to limit the operational, financial and legal consequences that would result from a disaster (we usually think of a fire at the head office, but also a severe computer bug, a terrorist attack or, in this case, a health crisis), or result from a prolonged unavailability of its resources leading to difficulties in ensuring the institution’s operations or, in the most serious cases, forcing the institution to interrupt its activities.

As risks are likely to change and evolve, credit institutions must of course regularly test their contingency plans to be able, in a given context, to document and analyse the shortcomings or errors that emerge during testing, and then update their plans accordingly.

  1. Preliminary risk analysis

The development and drafting of this contingency plan require banks to have first carried out a detailed analysis of their exposure to serious business disruptions and to have assessed how to address them, both quantitatively and qualitatively. It is the only manner for banks to be able to define their priorities and objectives should an incident occur.

The spectrum of risks that can hinder or even prevent the continuity of an institution’s activities is obviously very broad and depends above all on the activities carried out by the bank. The risks incurred by a private bank differ, at least in part, from those incurred by a bank whose main activity consists in granting mortgage loans to private individuals or by an institution specialising in export financing.

Covid-19: Emergency and continuity measures

The Covid-19 crisis is a severe test of the banks’ obligation of continuity and the accompanying duty of vigilance.

It is the duty of each bank to urgently establish and maintain, throughout the Covid-19 crisis, the necessary measures to ensure the continuity of their activities while protecting their staff and complying with the government measures.

The scenario of a health crisis of this magnitude and its important economic consequences was unlikely to be included in the banks’ contingency plans. Nevertheless, in theory, credit institutions must have appropriate tools to face it.

In practical terms, and without going into the details of each institution’s particularities, the following emergency measures are examples of what banks can do to deal with the current crisis – from a regulatory standpoint:

  • Raising staff awareness and implementing concrete measures to avoid the spread of the virus (teleworking, shift of teams, reduced flex-office, closure of branches, etc.);
  • Implementing reliable alternatives for customer communication;
  • Increasing IT capacity to cope with remote working;
  • Coordinating critical processes, resources as well as critical staff and their back-ups;
  • Reinforced assessment by the compliance of cyber-attack scenarios and implementation by IT of the measures internally (monitoring of operations) and externally (communication to customers). Risks of fraud such as phishing, identity theft, etc. increase in times of crisis;
  • Additional requirements for subcontractors performing critical functions (outsourcing). This is the case, for example, if customer data is stored in the cloud;
  • Setting up of a crisis committee that assesses the situation on a daily basis;
  • Communication of the measures implemented to the Board of Directors and possible convening of the risk committee and/or an exceptional audit committee;
  • Regular reporting to the competent financial supervisors (e.g. the National Bank of Belgium) on the implemented measures;
  • Assessment and possible adaptation of the emergency plan. This assessment is normally made on an annual basis, but it should also be carried out when the emergency plan is to be implemented.

Conclusion

Banks are subject to very burdensome and stringent regulatory requirements. These include the detailed assessment of their risks and the implementation of necessary measures to address the risks identified. This obligation is complex because the regulator requires a risk-based approach that is both concrete and detailed. However, it is in days like these, when a concrete risk arises that the full usefulness of these regulatory requirements becomes apparent. Afterwards, useful lessons will most probably be learned as to the effectiveness of the current regulatory framework in this respect, and possible modifications can be proposed.

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For any question or request for assistance, please contact Catherine Houssa or Philippe De Prez:
Catherine Houssacho@simontbraun.eu
Philippe De Prezphde@simontbraun.eu

Simont Braun assists AION in building the new next generation Challenger Bank

Brussels, 10 March 2020  |  Simont Braun successfully assisted AION in building an entirely digital and mobile bank, making it the first of its kind next generation Challenger Bank in Belgium. AION has officially launched its services on 3 March 2020.

AION is the former Banca Monte Pasci Belgio and was purchased by the American fund Warburg Pincus in 2018 in order to transform it into a fully digital financial services provider. AION offers an unrivalled broad spectrum of financial products and services, and beyond banking services, benefitting from an impressive technology and IT support.

Simont Braun’s team has been involved for over a year in developing the new digital products and services in close and successful collaboration with AION’s team,” comments Philippe De Prez, Partner at Simont Braun in Digital Finance and Financial services. “We had the pleasure to collaborate with a very motivated and talented group of people at AION, all working towards an ambitious goal. It has been an intense ride during which we often explored innovative solutions which were so far not available on the Belgian market. This is a space where our team is at its very best. We would like to sincerely thank our clients for this great opportunity to both assist and learn.”

Simont Braun’s Digital Finance Team advised AION on the compliance of their services and products with the applicable regulation, was involved in numerous contract drafting, screen-by-screen compliance analysis and negotiations with the regulator.

The Simont Braun team was led by partner Philippe De Prez, with the assistance of partners Catherine Houssa and Axel Maeterlinck, counsel Thomas Derval, and associates Sander Van Loock, Charlotte De Thaye, Amine Chafik and David-Alexandre Sauvage.

For any question, please contact Nelly Chammas (Marketing & Communication Manager).

Simont Braun assists TransferWise with their arrival in Belgium

Simont Braun successfully assisted TransferWise, the global technology company that moves money internationally, in obtaining a licence as a payment institution in Belgium. TransferWise officially launched its Brussels operations in October 2019.

TransferWise is an international money platform. The company decided to establish as a payment institution in Belgium to continue serving their European customers as before, even in the event of a no-deal Brexit.

In this framework, Simont Braun’s Digital Finance Team assisted TransferWise with their licence application procedure before the National Bank of Belgium and the incorporation of their Belgian corporate entity. Simont Braun also advised the FinTech company on connected financial regulatory, corporate and labour law matters.

Our Digital Finance Team is happy to have contributed to this significant step in TransferWise’s development strategy in Europe. This licence is also the achievement of a fine-tuned collaboration, both with TransferWise and the National Bank of Belgium,” says Philippe De Prez, Partner.

The Simont Braun team was led by partners Philippe De Prez and Catherine Houssa (Digital Finance), with the assistance of partner Axel Maeterlinck (Corporate M&A).

From left to right: Philippe De Prez (Partner at Simont Braun), Catherine Houssa (Partner at Simont Braun), Gordon Youngson (Head of legal Europe at TransferWise), Axel Maeterlinck (Partner at Simont Braun), and Anna Doyle (EU Compliance lead at TransferWise).

Our Digital Finance Team interviewed on the latest FinTech Trends

Catherine Houssa, Partner in our Digital Finance Team, was interviewed on the latest FinTech trends by La Libre Belgique in a special edition dedicated to the take-off of tech in Brussels.

An opportunity to also highlight the advantages of Brussels as a set-up point for FinTechs willing to reach all of Europe.

The full article is available here.

Catherine Houssa takes part in Belgian State visit in South Korea

Catherine Houssa took part in the Belgian State Visit to the Republic of Korea, presenting the Belgian FinTech regulatory landscape to Korean FinTech companies and startups in Seoul. An opportunity to place Belgium at the centre of Europe, and to discover striking differences between the Belgian and Korean most popular FinTech activities.