Crowdfunding on the BlockchainRelated Practice Area: DLT & Fintech
Tags: Crowdfunding, Blockchain, Decentralization
Crowdfunding may easily represent the most accessible way for SMEs to raise financing. Blockchain is a highly effective and arguably revolutionary technology. Together, crowdfunding and blockchain, are an effective medium between the person launching an idea and those people who intend to participate in that idea.
A crowdfunding structure is generally comprised of three elements: (a) the person launching an idea; (b) the investor who intends to participate in the idea; and (c) the platform where these are brought together.
The regulator in Malta has recognized the potential of crowdfunding options in finance and in 2018 has enacted requirements that set specific criteria aimed at ensuring market integrity and investor protection (the “Requirements”). Instead of creating an entirely new regime, the regulator sought to interpose crowdfunding platforms within the ambit of existing legislation and rules which draw mainly from MiFID II. The Requirements set out the r the circumstances under which a crowdfunding platform that plans to provide investment-based crowdfunding services shall be operated.
Here’s a run-through of the detail:
Licensing requirements: In order to provide investment-based crowdfunding services, a platform shall apply for a license under the Investment Services Act. Given that business models for crowdfunding platforms may vary from one case to another, it is recommended that a detailed description of the nature of the services being provided by the platform and an overview of the proposed operational model is presented to the Authority at the pre-application stage. The nature of the license required will depend on the range of activities provided by the prospective license holder, either on a stand-alone basis or as a part of a group of providers.
The Application: An application shall be submitted to the regulator in Malta and shall be accompanied by a detailed business plan. Each application is reviewed by the regulator on a case-by-case basis in terms of objectives and strategy, target market and customers, governance-management, key dependencies, and business risks.
The MiFID Passport: There is currently no EU-level framework that would ensure the possibility of passporting crowdfunding activities throughout the internal market. Applicants should therefore verify the requirements that apply to the carrying out of investment-based crowdfunding services in the EU Member State where they intend to provide such services.
Capital Requirements: The platform shall be subject to the capital requirements applicable to the relevant license category. The required capital should be satisfied on an ongoing basis and not just at the licensing stage.
Disclosure requirements: Applicants are required to demonstrate that businesses offering securities through the proposed crowdfunding platform would be subject to minimum disclosure requirements tailored to investments of this nature. In cases where the offer triggers the application of the Prospectus Regulation, the general EU requirements in this regard would be applicable. Where no such Prospectus is required, the issuer is expected to provide the platform with an information document containing full details on the identity of the issuer, including full contact details, as well as all the relevant information on the business activity of the issuer, the project in relation to which the investment offer is being made as well as the potential risks and rewards associated with it.
Instruments: Instruments to be marketed on investment-based crowdfunding platforms should be non-complex instruments. Only the following instruments shall be marketed on these platforms and be considered to be non-complex instruments: i. shares in companies (excluding convertible shares, shares in collective investment undertakings, and shares that embed a derivative); ii. bonds or other debt instruments (excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved), provided that there are no restrictions on the transferability of the instruments eligible under subparagraph (i) and (ii) of this paragraph.
Caps on investable amounts: The following limits shall apply with respect to issuers and investors as the case may be:
i. a cap on the maximum investable amount (allowable) per individual investor;
ii. a cap on maximum project size in terms of the total value of securities issued.
In particular, the following limits shall apply:
a) an investor cannot invest more than € 5,000 over a period of 12 months in any issuer listed on an investment-based crowdfunding platform; and
b) an investor cannot invest more than 20% of their net annual income through an investment-based crowdfunding platform over a period of 12 months; and
c) an offer of securities made on an investment-based crowdfunding platform cannot exceed the value of € 1,000,000 over a period of 12 months; and
d) an issuer shall only be allowed to place a project on one crowdfunding platform.
Measures a) and b) above shall not apply to professional clients as defined in MiFID II.
A crowdfunding solution may be even more advantageous when the instruments marketed on the investment-based crowdfunding platform are on the blockchain. Blockchain brings a number of advantages which improve and support crowdfunding such as:
• Decentralisation – increases visibility, transaction fee deduction;
• Asset Tokenisation – provides wider investment opportunities;
• Wider Availability – anyone with an internet connection can contribute to the project;
• Immediate Settlement – settlement of funds and promised asset/product;
The workable nature of investment-based crowdfunding and blockchain can be of great benefit to the Maltese post-COVID 19 economy as it provides an alternative mode of financing for unlisted entities, small and medium enterprises, and start-ups.
Reach out for more about crowdfunding and blockchain and how these can be the right solutions for your business.