Crowdfunding: Recent developments in Cyprus and the EU


Crowdfunding is a campaign where a business owner can raise funds from the crowd, operated by a crowdfunding service provider through an online platform.  Crowdfunding has been established as an alternative and innovative financing model.  The participants of an investment based crowdfunding are the project owner, the crowdfunding service provider and the investor. 

  • Project owner: forwards information to the crowdfunding service provider regarding the project and issues the transferable securities. 
  • Crowdfunding service provider: operates the online crowdfunding system and provides investment services to both the project owner and the investor.
  • Investor: invests on the transferable securities of the project owner through the online platform.

Crowdfunding becomes more and more popular due to the efficient, fast, and direct way of raising funds as well as the unmatched funding opportunities it offers, opening projects to a significant number of potential investors.

Crowdfunding under the Cyprus law

Cyprus chose to regulate the crowdfunding sector in advance of any legislation of the EU (analysed below). Investment based crowdfunding platform providers are regulated in Cyprus by the Cyprus Securities and Exchange Commission (“CySec”) by the Crowdfunding Directive, Directive D187-10 (the “Crowdfunding Directive”) as well as by the Investment Services and Activities and Regulated Markets Law of 2017 87(Ι) of 2017 (the “Law”).  The Crowdfunding Directive regulates the provision of crowdfunding services by the crowdfunding service providers and constitutes a supplement of the Law, with the aim to enhance the protection of investors during crowdfunding.  It should be noted that the Crowdfunding Directive does not regulate other forms of crowdfunding such as loans, rewards and donations.    It also includes among others rules about conduct of business rules, conflict of interest, financial instruments and product governance.

According to the provisions of the Crowdfunding Directive, a crowdfunding service provider means a Cyprus Investment Firm (“CIF”) providing crowdfunding services. Every Cyprus investment firm that wishes to provide crowdfunding services must first receive authorization and approval by CySec by making the relevant application. 

Crowdfunding services are defined as “the matching of business funding interest of investors and project owners through the use of a crowdfunding platform and which consist of the following investment services and all or any of the following ancillary services (as the case may be):

(a)  Reception  and  transmission  of  orders,  as  further provided  under Paragraph 1 of Part Ι of the First Annex to the Law;

(b) The placing of financial instruments without firm commitment, as further provided under Paragraph 7 of Part Ι of the First Annex to the Law;

(c) Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management as further provided for under  Paragraph 1 of Part ΙI of the First Annex to the Law;

(d)  Provision  of  advice  to  undertakings  on  capital  structure,  industrial strategy  and related matters and advice and services  relating to mergers and the purchase of undertakings, as further provided for under  Paragraph 3 of Part ΙI of the First Annex to the Law.

Crowdfunding service providers offering such activities must establish and implement effective internal rules for the avoidance of conflict of interest, the safe-keeping of the securities acquired in the context of crowdfunding services and comply with transparency obligations with regards to the provision of information to clients as well as the conduct of due diligence.

The Directive specifically states:

  • Conflict of interest:  A provider must establish and implement effective internal rules for the avoidance of conflict of interest. CIFs are not allowed to acquire participation in crowdfunding projects or to allow related people to act as project owners.  CIFs are also not allowed to receive order routing benefits from crowdfunding projects.  
  • Customer and financial due diligence procedures must be implemented for the project, the project owner and the end-investor including identity verification and anti-money laundering checks.
  • Transparency obligations:  Project owners are required to produce a standardized pre-contractual document, including the natural persons conducting the project owner’s business.  This must be detailed in a key investment information sheet (KIIS).  Certain procedures are in place to ensure that the content of the KIIS is up to date and there is also a way to rectify errors and omissions.  Also KIIS must include clear marketing considerations.   
  • Investor protection:  All the fuds raised via the crowdfunding platform must be transferred by the CIF to the project owner only after the closing of the relevant offer.  CFIs may only release the funds to the project owner where the transferable securities have been physically delivered or where there is sufficient evidence provided by the project owner to the CIF that the ownership of the transferable securities has been transferred to the respective investors.
  • Record keeping in relation to the transactions during the provision of crowdfunding services for minimum of five years after termination.
  • Exit opportunities:  Crowdfunding clients should have the opportunity to buy or sell transferable securities available through the platform.

Crowdfunding under the European Union (“EU”) law

On 10 November 2020, the Regulation on European Crowdfunding Service Providers for Business/Regulation 2020/1503 (the “Regulation”) entered into force. After a transition period of 12 months, the rules entered into application on 10 November 2021, applying directly across the EU.  The Regulation lays down uniform rules across the EU for the provision of investment-based and lending-based crowdfunding services related to business financing. It allows service providers to apply for an EU passport based on universal rules, which makes it easier for them to offer their services across the EU with a single authorization.  Its accompanying directive (EU) 2020/1504 (the “Directive”) amending directive 2014/65 EU (MiFID II) had to be implemented into the laws of the member states by 10 May 2021.

The new rules are expected to increase the availability of this innovative form of finance, which will help companies seeking alternatives to bank financing. Investors on crowdfunding platforms, meanwhile, will benefit from an aligned and enhanced investor protection framework, based on:

  • clear rules on information disclosures for project owners and crowdfunding platforms;
  • rules on governance and risk management for crowdfunding platforms;
  • strong and harmonized supervisory powers for national authorities overseeing the functioning of crowdfunding platforms.

The Regulation does not apply to:

  • Other types of crowdfunding, such as donation-based crowdfunding (where the funders do not receive any consideration) or reward-based crowdfunding (where the funders receive a non-financial consideration);
  • Crowdfunding offers with a consideration of more than €5,000,000 over a period of 12 months (which offers will instead be subject to the rules set out in MiFID II and Regulation EU 2017/1129 (the “Prospectus Regulation”));
  • Crowdfunding offers where project owners are consumers.

In order to avoid a situation where the same activity would be subject to multiple authorizations within the EU, the Directive excludes legal persons authorized as crowdfunding service providers (the “CSPs”) from the scope of MiFID II.

Future of crowdfunding in Cyprus

A CSP falling within the scope of the Regulation will need to be authorized by the national competent authority (NCA) where it is established and, once authorized, it will be able to passport its services in other member states.  The Regulation contains a transitional period for CSPs that are already engaged in activities that will need authorization under the Regulation. Those CSPs can continue to engage in those activities on a transitional basis until 10 November 2022, following which they will only be able to engage in those activities if they have been received the relevant authorization by their NCA. 

Any provider authorized under Cyprus law for the provision of crowdfunding services shall bear minimum changes since the current crowdfunding regime in Cyprus overlaps with the majority of the provisions of the Regulation. 

Finally, CySec has created the “Innovation Hub” with the aim to encourage and support innovation in the financial sector to determine the future requirements for new legislative and supervisory priorities and ensure investor protection is never compromised.  CySEC  has  worked  with  the  Hub’s  members  to  outline  how  emerging  technological applications  to  both  regulatory  reporting  and  product  innovation  are  covered  by  existing investor protection legislation, and prior to any stage of licensing and ultimate supervision, what the requirements are to comply with national and EU rules and regulations.

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