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Capital Markets Union in Europe edited by Busch, Danny; Avgouleas, Emilios; Ferrarini, Guido (1st March 2018)

Part III Financing Innovation, Start-Ups, Non-Listed Companies, and Infrastructure Projects, 10 FinTech and Alternative Finance in the CMU: The Regulation of Marketplace Investing

Guido Ferrarini, Eugenia Macchiavello

From: Capital Markets Union in Europe

Edited By: Danny Busch, Emilios Avgouleas, Guido Ferrarini

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 30 May 2020

Credit risk — Capital markets — Financial regulation — Funds

(p. 208) 10  FinTech and Alternative Finance in the CMU

The Regulation of Marketplace Investing

I.  Introduction

10.01  In this chapter, we focus on FinTech as applied to alternative finance, that is to those areas of finance that offer alternatives to traditional banking and capital markets.1 It is true that capital markets transactions also represent an alternative to banking, to the extent that firms in need of financing can access these markets and have their debt instruments placed to investors. The Capital Markets Union (CMU) is precisely about developing capital markets in Europe, so as to find a new balance between their weight, which is presently modest, and that of banks, which still occupy a large share of enterprise financing in most countries.2 However, small and medium-sized enterprises (SMEs) find it difficult, if not impossible, to enter the capital markets, for the majority of investors do not know these firms sufficiently and transaction costs are too high for the relatively modest amounts of money sought by these firms.3 Hence, SMEs mainly rely on banks to satisfy their financial needs and inevitably suffer when banks reduce their credit activities, as they have substantially done after the great financial crisis.4

10.02  The development of FinTech will offer firms and individuals new ways of accessing alternative sources of finance, as also suggested by the European Commission in its 2016 CMU (p. 209) Communication.5 In the next section, we examine the main types of alternative finance which technology has helped to develop and could further complement the traditional markets, focusing on marketplace investing and its perspectives in Europe. In section III, we analyse Financial Return (FR) crowdfunding as an application of marketplace investing; its main business models, such as investment-based (IB) and loan-based (LB) crowdfunding; and the risks and benefits deriving from them. In section IV, we compare the different regulatory models applicable to crowdfunding at EU and Member State levels, distinguishing between the traditional (or conservative) approach, which extends existing banking or financial regulation to these new sectors, and the ‘innovative’ approach contemplating ad hoc regimes for FR-crowdfunding. In section V, we suggest a tailored policy approach to marketplace investing in the CMU and conclude.

II.  Economics and Technology of Alternative Finance

1.  FinTech as applied to alternative finance

10.03  Technology has had and is still having a profound impact on banking and finance. Bank business models are changing as a result of digitalization and the offer of online services. Financial markets infrastructures, including trading venues and central counterparties (CCPs), are evolving as a consequence of increased speed of execution and lower transaction costs. Blockchain will further transform the ways in which financial transactions of all types are concluded and registered. All this is ‘FinTech’ in a broad sense, that is technology as applied to finance or, from a different angle, finance as impacted by technology. However, the neologism at issue is more often used to identify a segment at the intersection of financial services and technology where start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry: ‘Cutting-edge FinTech companies and new market activities are redrawing the competitive landscape, blurring the lines that define players in the financial services sector’.6

10.04  The emphasis is therefore put on the disruption that technology companies (such as Google and Apple), innovative financial institutions (such as PayPal and Funding Circle), and technology-focused start-ups cause to the traditional financial system, forcing incumbents either to adapt to the new models of technology-driven finance and possibly cooperate or merge with new entrants, or retreat from wide areas of business. Such disruption targets mostly consumer banking and fund transfers and payments. Online platforms allow individuals and businesses to enter into P2P and P2B transactions through which they either borrow or lend money directly to each other. Lending innovation also manifests itself in alternative credit models, use of powerful data analytics to price risks, and rapid customer-centric lending processes. The payments industry is also experiencing a high level of disruption with the surge of new technology-driven payment processes and the increased use (p. 210) of electronic devices to transfer money between accounts. More recent areas for disruption from outside firms are asset management and insurance.7

10.05  The notion of alternative finance is often used to identify those sources of finance that are either a substitute for bank financing or for traditional capital market transactions. To take an example of the first type, credit funds increasingly extend loans to industrial firms or subscribe their debt securities with the purpose of keeping the same to maturity.8 To take an example of the second type, alternative growth markets trade the equity securities of SMEs after they have been privately placed amongst institutional investors, generally investment funds specializing in this kind of securities.9 However, not all alternative finance activities are FinTech. Indeed, the example just given of SMEs accessing alternative markets requires an IPO of these firms’ securities executed in the traditional mode of a private placement. The second example of credit funds extending credit to SMEs refers to alternative asset managers who no doubt make use of technology, but are not driven by technology like say P2P lending platforms.10

10.06  The distinctive feature of FinTechs engaged in alternative finance, like P2P lenders, is that they employ digital platforms for connecting those in need of financing with investors and savers willing to take on the relevant risks. Digital platforms are the new instruments for financial disintermediation (or for new forms of intermediation), for they offer their services directly to existing and potential clients on the web. The firms running digital platforms generally do not undertake the risks of financial activities that are executed on them. They rather act like brokers between borrowers and investors, without facing the capital constraints that affect banking activities. In essence, digital platforms are ‘transparent’ intermediaries between borrowers and investors, while banks are ‘opaque’ intermediaries that extend credits to clients on their own books, while receiving deposits from savers as liabilities.11

10.07  Digital platforms do not create the stability risks typical of banks, which justify the capital requirements foreseen by banking and investment firms’ regulation.12 This explains, (p. 211) partially at least, the success of FinTechs operating as alternative lenders after the great financial crisis. While capital requirements for banks and other opaque intermediaries have been tightened as a result of the crisis,13 alternative lenders are able to operate without similar constraints. Their clients are protected mainly through other means, as we explain below in this chapter, such as the offer of diversified portfolios for investment and the creation of special guarantee funds (see section III). Moreover, the platforms specialize in assessing the credit risk of borrowers and producing scores to the benefit of investors. Banks perform similar tasks to their own benefit. However, digital technology allows firms to collect information, including big data, about recipients of funds in unprecedented ways, which FinTechs have been fast to exploit often better than banks. Other reasons for the development of FinTechs in alternative finance obviously include speed of execution and convenience for firms and investors, together with the attractiveness of financial democracy particularly after the crisis.

2.  Main types

10.08  As seen above, not all FinTechs operate in alternative finance and not all alternative finance operators are FinTechs. In this chapter, we only consider FinTechs which make some form of alternative finance available both to recipients of funds (individuals or firms) and to professional or retail investors. Specifically, we consider firms which are either active in FR-crowdfunding or in some other form of marketplace investing, representing a significant part of the FinTech industry.14 FR-crowdfunding includes either lending transactions, whereby investors/lenders expect to receive the principal and interest at the end of the lending period, or equity transactions, where a privately held company offers securities to the general public through the medium of an online platform. The distinction is consequently made between LB-crowdfunding, commonly referred to as peer-to-peer (P2P) lending, and equity crowdfunding or, more generally, IB- crowdfunding, which could also refer to bonds and other debt securities.15

(p. 212) 10.09  Marketplace investing includes both types of crowdfunding, but also other transactions, which do not necessarily involve the crowd. The key identifier of marketplace investing is the digital platform where financial transactions occur between recipient of funds and investors. The latter access the platform for executing either primary market transactions—such as the granting of a loan or the subscription of a bond—or secondary market transactions (such as the sale of a loan participation or of investment securities). The platform is similar to an exchange and marketplace investing presents similarities with exchange investing.16 However, market participants access the platform directly, that is without intermediaries, whereas an intermediary generally runs the platform. Moreover, transactions generally have a bilateral character, being intermediated by the digital platform, whereas exchange trading is by definition multilateral.17

10.10  In this chapter we mainly refer to marketplace investing, while focusing on crowdfunding for regulatory analysis. In fact, crowdfunding has attracted the attention of regulators due to its relevance and also the fact that retail investors are involved. However, other forms of marketplace investing also deserve careful analysis from a regulatory perspective. A good example is invoice trading, which increasingly occurs on digital platforms where investors purchase receivables generated by commercial transactions from suppliers of goods and services.18 This kind of alternative finance allows suppliers to cash out the price of goods and services prior to maturity, save for the discount aimed at remunerating the investor for the advance made. The relevant transaction is similar in structure to the ones traditionally executed by banks in this area, but its modalities are different and represent a form of marketplace investing. Receivables are traded like investment securities and investors purchase them for investment purposes. Yet, from a regulatory perspective, the transaction is often dealt with as a commercial transaction, rather than an investment one, leaving problems of investor protection largely unresolved.

10.11  Another example is offered by the practice of club deals in equity securities, when digital platforms are used to propitiate the encounter of a firm (often a start-up) and its private investors. If a platform is used, its function is similar to that of crowdfunding platforms. However, the equity securities are not offered to the public investors, for the platform only publishes information about the firm and its financial data. A deal may then follow with a close number of investors who have contacted the firm through the platform and have subsequently and privately negotiated a deal with the same. The argument often goes that similar transactions are not intermediated by the digital platform, which only publicizes (p. 213) the financial data and other information about the issuer. Yet, from a regulatory perspective, the question should more often be asked whether these so-called club deals are in fact transactions whereby equity securities are sold to the investor community through a platform acting as an investment intermediary.

III.  Loan-based and Investment-based Crowdfunding: Characteristics and Comparison

1.  Business models in FR-crowdfunding

10.12  The two forms of FR-crowdfunding—LB- and IB-crowdfunding—share some common features.19 First, they both have a clear investment component, that is the expectation of profits from the efforts of others. Second, FR-crowdfunding platforms are a manifestation of direct finance and therefore of disintermediation relative to traditional intermediaries. Nonetheless, platforms play an important role in reducing information asymmetries between recipients and lenders/investors. In fact, the latter either rely on the platform’s checks of recipients and other information conveyed through the platform, including rating or scoring of recipients, or on automatic diversification of investments by the platform. In the absence of traditional intermediaries such as banks and the typical mechanisms of securities markets (including book-building and the aggregation of public information through secondary markets), crowd-lenders/investors would otherwise have difficulties in identifying the correct price, unless we assume that the ‘wisdom of the crowd’ is working here to the benefit of all.20

10.13  There are also relevant differences between the two types of crowdfunding, starting from the products offered: loans and profit-participation loans in LB-crowdfunding; equity/quasi-equity, debt securities (bonds, mini-bonds), investment funds/securitized debt in IB-crowdfunding. However, the two models appear to converge in practice when complex structures, including the use of special purpose vehicles (SPVs) or guarantee funds, and hybrid forms (such as profit-participation loans) make the transactions similar to investments of the quasi-equity type, often with a collective character.21 Moreover, illiquid debt securities of unlisted companies and illiquid hybrid/quasi-equity products offered by IB-crowdfunding platforms present similarities with LB loans.

10.14  In addition, the LB-crowdfunding market is currently registering a high level of participation from institutional investors (including banks and investment funds), both as (p. 214) crowd-lenders and platforms’ owners, a feature which is not found to the same extent in the IB sector, where however investment funds and venture capital funds are also present.22 Nonetheless, IB-crowdfunding is not primarily retail-based, as the average deal size in IB-crowdfunding is much higher than in LB-crowdfunding,23 signalling the prevalence of high-net-worth individuals.24

2.  Benefits and risks of FR-crowdfunding

10.15  Other elements of comparison between IB- and LB-crowdfunding emerge from an analysis of their respective risks and benefits. The two types of crowdfunding present similar benefits to investors. In fact, crowd-lenders and crowd-investors may receive higher returns, diversifications opportunities (investing in an alternative market, often resilient to changes of mainstream markets), and possibly emotional satisfaction from helping people and participating to a project in which they believe.25 Furthermore, crowdfunding could enhance financing opportunities for households and SMEs, also thanks to lower transaction costs, and serve as a market test and marketing tool for firms’ products. Finally, the system might benefit from increased competition in the financial market (in Europe mostly dominated by banks) and stimulus to innovation.26

10.16  The two forms of crowdfunding also share some risks. Firstly, crowd-lenders/investors might not be fully aware of the specific risks of their investment especially as a result of cognitive biases and/or of misleading advertisements or unchecked information. They might lose the capital lent/invested as a consequence of the recipient’s and/or platform’s negligence and the magnitude of the loss could be enhanced by the fact of concentrating investments on a single platform and a few borrowers/issuers. No doubt, equity-based crowdfunding is riskier to investors than LB-crowdfunding. Firstly, few small companies present characteristics making investment in their shares appear as relatively safe and feasible. Moreover, due diligence is more complex and time-consuming, therefore limiting the number of campaigns simultaneously present on the platform.27 Secondly, the universe of investible companies is limited, so that diversification of investments is more difficult than in LB-crowdfunding. Thirdly, lock-in periods may be longer than average loan maturity and the investees, generally start-ups and seed companies, are usually riskier than other companies and typically attract venture capitalists who factor in a high percentage of defaults.28 As a (p. 215) result, crowd-investors tend to attach particular importance to information made available by the platform in taking their investment decisions, while LB-crowdfunding models are moving also in Europe towards forms of automatic matching (‘auto-bid’).29

10.17  The two sub-sectors also show different risk-mitigation techniques, with LB-platforms being able to offer asymmetric information reduction through several instruments. Lending groups are groups of borrowers organized, supported, monitored, and also partially financed by a leader, which consequently attract, through good group rating and co-financing, additional financial contributions from the crowd. Crowd-lenders might also be able to rely on supporters sponsoring certain borrowers through social networks, but also directly financing the same, and on early financing to certain borrowers supported by factors signalling inside information of early funders (‘rational herding’).30 More recently, LB-platforms in most mature markets (UK) have also created guarantee funds ensuring repayment (even in case of exceptional events) or a given return.31 Furthermore, some platforms have started using big data in their credit scoring models.32

10.18  IB-crowdfunding platforms have started to offer crowd-investors the possibility to co-invest with business angels (as in the case of MyMicroInvest in Belgium) and to participate in syndicate deals (AngelList in the US). Under the latter scheme, angel investors lead a syndicate pulling together crowd-investors with the aim of investing together in projects selected by the leader business angel, who receives in exchange a 5–20 per cent carry per deal.33 Furthermore, crowd-investors appear to follow early investors’ picks, presumably or expressly (through social networks) determined by inside knowledge or high retention rates. However, the rationality of such behaviour still needs to be supported by ex post performance and consequent studies, although the preliminary evidence is positive.34

10.19  Furthermore, problems of collective action might arise. The small amount of the individual loans/investments and the dispersed and anonymous character of other participants make it unlikely that action is taken against the defaulted/failed recipients even collectively (p. 216) (unless the platform assumes such role and is not at fault). Sometimes there are also doubts about whom the platforms’ users should sue (borrowers/investors or only the platform). Especially in equity-based crowdfunding, typical shareholders’ rights could be limited or excluded to preserve the investment of venture capitalists or the founders’ decision power.

10.20  The investments at issue are also typically illiquid, since crowd-lenders may not withdraw the funds before the agreed maturity date in case of need, while crowd-investors either encounter lock-in periods or do not easily find a buyer for unlisted securities, also considering that no dividends are paid by start-up companies to their shareholders. Secondary markets or buy-back options are more common in LB-crowdfunding, but these mechanisms are still at an early stage in IB-crowdfunding.35

10.21  Also recipients face significant risks. Firstly, they may be required to publish unprotected corporate information on the platform to the benefit of competitors and, in the case of EB-crowdfunding, they may face governance problems due to the presence of a high number of shareholders. Secondly, borrowers in LB-crowdfunding may suffer from coordination problems in the case of debt restructuring or be subject to discrimination in the allocation of the credit by crowd-lenders (who for instance decide on the basis of disclosed ethnicity) or from abuses in debt collection (since loans are extended by unprofessional lenders who are not subject to consumer/client protection laws). Thirdly, there are risks of fraud, cyber-crime, and money laundering, while systemic risk is not an issue yet, given the small size of the relevant sector and the limited interconnectedness with the traditional ones.

IV.  Regulation of Crowdfunding Platforms: EU and Member States

1.  National approaches to loan-based crowdfunding

10.22  National approaches to FinTech and to FR-crowdfunding in particular vary substantially among Member States. We can distinguish between a ‘traditional’ approach extending prior banking or financial regulation to FR-crowdfunding and an ‘innovative’ approach consisting of the adoption of either ad hoc rules or fully fledged regimes for FR-crowdfunding. However, relevant differences exist even among the countries adopting the same approach (traditional or innovative).

10.23  Starting from LB-crowdfunding, the activities performed by the platforms and their business models are diverse, but generally entail the following: screening of applicants based on pre-established criteria; matching of applicants and online lenders either through automatic diversification tools and algorithms or by allowing lenders to directly select their beneficiaries; provision of contractual documentation to the parties; transfer of money from lenders to borrowers (unless a bank or payment institution is employed for this purpose); handling of post-loan activities such as the collection of debts. In Europe, platforms generally do not lend money directly, but only facilitate loans amongst their clients. Nonetheless, in some business models either the platform takes a participation in the loans (p. 217) made through it or a bank extends the loans on behalf of crowd-lenders.36 In other models, the platform either issues notes to crowd-investors that are backed by a loan originally made by a bank (the prevailing model in the US) or assigns investors the right to a return calculated on the performance of either individual loans or of a pool of loans.

10.24  These activities can in principle trigger the application of a number of laws and regulations concerning different areas (such as banking, payments, financial services and markets, consumer protection, anti-money laundering (AML)). However, different business models and different legal traditions determine substantial differences between the regimes applicable to LB-crowdfunding platforms around the world.

A.  Banking regulation approach

10.25  According to this approach, LB-crowdfunding is seen as falling under banking law. In the case of Zopa Italia, for instance, the Bank of Italy as a banking supervisor held that the receipt of funds by a P2P platform, in view of transferring the same from lenders to borrowers, gave rise to the receipt of repayable funds from the public, as such prohibited to undertakings other than banks under Italian banking law.37 This type of breach of the banking monopoly could be found in cases of imperfect separation of the funds of clients from those of the platform, determining an obligation on the latter to repay the relevant amount of money, as well as in cases where clients are entitled to choose between reimbursement of the funds and re-investment of the same in the system (de facto a form of deposit).38

10.26  Belgian authorities similarly identified a violation of the banking monopoly but in crowd-borrowers’ offerings to more than fifty persons with a view to receiving repayable funds from the public. This was made possible by the non-existence in Belgian law of the ‘business/professional activity’ requirement for banking activity now included in Article 9(1) of the Capital Requirements Directive IV (CRD IV).39 In the Netherlands, the businesses of receiving repayable funds requires a no action letter from the Dutch Banking Authority under the Financial Supervision Act, a requirement that applies also to crowdfunding platforms provided that they comply with stated conditions concerning business conduct, information to clients, and prudential aspects.40 In other EU countries, (p. 218) the banking monopoly traditionally covers also the mere extension of credit (eg in France and Germany). Platforms generally do not directly extend loans; however, in France, the granting of loans between individuals (except for the case of ‘family and friends’ or the absence of interest rates) used to be considered in violation of the banking monopoly and therefore illegal.41

10.27  From a policy perspective, prudential regulation has been designed for banking firms, which undertake the risk of lending money collected from the public through deposits. Banks also transform maturities and have a special role in liquidity formation, transmission of monetary policy, and payment systems. Extending the banking regime to crowdfunding platforms, which do not lend money at their own risk and formally do not accept deposits, appears to be overreaching and unjustified. LB-crowdfunding would rather require specific measures tailored to its peculiar features and risks (eg special warnings to crowd-investors as to the risks undertaken by the same).

B.  Payment regulation approach

10.28  Given the problems just highlighted concerning the banking monopoly, some national authorities (including the Bank of Italy) and the European Banking Authority (EBA) consider crowdfunding activities as subject to payment services regulation, based on the argument that these activities might include the execution of payments on behalf of lenders and borrowers on the platform. Another reason for preferring this type of regulation and asking platforms to apply for authorization as payment institutions can be found in the special treatment of money held by these institutions on behalf of their clients. In fact, the funds received by payment institutions from payment service users with a view to the provision of payment services do not constitute a deposit or other repayable funds within the meaning of CRD IV.42 Moreover, the relevant regime ensures money segregation, continuity of payments, and cyber-security provisions. Nonetheless, the regulation of payment services does not satisfy the need for borrowers’ protection and crowd-lenders’ transparency, while the definition as payment institutions only covers some of the platforms’ activities, which also include inter alia credit checks/due diligence on borrowers, demand/offer matching, and publications of offers.43

C.  Securities regulation approach

10.29  In the US, the SEC considers the notes issued by SPVs for loans made on P2P platforms as investment securities,44 subject to the regulation of securities offerings and registration (p. 219) under the 1933 Securities Act. Moreover, depending on the business model, the 1934 Securities and Exchange Act applies to issuers, underwriters, and brokers of these securities.

10.30  No doubt, an investment component is generally present in LB-crowdfunding, which entails investment of money with expectation of a profit. It is no surprise, therefore, that the Italian Securities Commission (Consob) defined P2P loans as financial products (the Italian equivalent of the US investment security) and held that the public offer of the same is subject to the prospectus obligation.45 Nonetheless, at EU level, the Prospectus Directive (more recently, the Prospectus Regulation No 2017/1129/EU) and the Markets in Financial Instruments Directive (MiFID) only apply to offers of, and activities in financial instruments and have therefore a narrower scope of application than US securities regulation, which extends to investment securities in general. Under EU law, financial instruments include shares, bonds, notes, and derivatives, but not ‘investment contracts’, which per se are not transferable on secondary markets.46 Yet, some LB-platforms are presently developing secondary markets for their products (see section III.2), which would then become financial instruments, while other platforms have adopted complex business models close to collective investment schemes.47 However, concepts such as ‘financial instrument’ and ‘investment (or financial) product’ vary in latitude amongst countries48 and the definitions of investment service are also divergent in practice despite EU harmonization (see section IV.2.A). Even in countries where the prospectus obligation extends to the offerings of investment products, the same often does not apply to LB-crowdfunding either because the lending volumes fall below the exemption thresholds49 or special exemptions are in place.50 (p. 220) In any case, EU securities law was modelled on traditional securities markets and intermediaries and would require adapting to the specificities and needs of LB-crowdfunding. In particular, the disclosure duties should be amended to reflect the needs for protection of crowd-investors, who may require specific warnings while avoiding the risk of information overload, but also the interest of crowd-borrowers to avoid full treatment as issuers, as the relevant duties and costs could make the whole business model impracticable.

D.  Bespoke regimes

10.31  Several Member States (such as France, the UK, Spain, and Portugal) have adopted special regimes for LB-crowdfunding, while others (including Germany, Austria, and the Netherlands)51 have only issued ad hoc provisions for some LB- and IB-crowdfunding products (especially with regard to investment limits and the prospectus exemption: see section IV.1.C).52 The first group of countries commonly foresee a new type of intermediary, subject to lighter regulation than banks and investment firms and to registration duties conditional on compliance with a few special requirements (such as a ‘fit and proper’ test for executives). Moreover, business continuity arrangements are foreseen, together with some kind of supervision by financial markets authorities. A mandatory minimum capital is generally not required.53 However, Spain and Portugal require adequate resources and organization.54 Furthermore, the UK is considering introducing ‘bank-like’ requirements as to the crowd-lenders’ right to take out money with thirty days’ notice.55

(p. 221) 10.32  In addition, Member States limit the scope of the new regulated business with respect to either the size of the loan obtainable by each borrower (France)56 or to the volume of the offer in a twelve-month period (Portugal and Spain);57 to the sums investible by each lender in a project (France, Spain, and Portugal)58 or per year (Spain and Portugal);59 to permissible activities, since platforms generally are neither allowed to handle client money (unless authorized as a payment institution (PI)) nor to offer investment services.

10.33  The regimes at issue focus on disclosure obligations facilitating the adoption of an informed decision by the lenders. For instance, the platform must generally disclose, in a clear, fair, and not misleading way, its legal status to the lenders; the due diligence performed and the criteria for selecting borrowers; the main contractual terms including costs, maturity, guarantees. Moreover, platforms should warn retail investors against specific risks and the lack of safeguards typical of other regulated entities. In Spain, platforms are explicitly accountable for the completeness of information, but borrowers remain responsible for the information provided.60

10.34  In general, platforms do not need to assess the appropriateness of the lenders’ investment; however, in France they need to provide lenders with the means for self-assessing the affordability of their investment.61 In the Netherlands, platforms need to develop and perform an investor test when the investment exceeds EUR 500; however, a negative result of the same would only require the platform to issue a warning.62 In Spain, platforms have to assess the experience, knowledge, and ability to take investment decisions of lenders who ask to be considered as ‘acreditatos’ and therefore not subject to investment limits. In Portugal, platforms simply need to receive from the lenders a declaration that they understand the conditions of the business, including risks.63 In the UK, the Financial Conduct Authority (FCA) is considering an extension of the appropriateness test, which is already applicable to IB-crowdfunding, to LB-crowdfunding.64 Platforms often need to disclose also historical data about defaults and performance and annually report about their activity.

10.35  Platforms need to provide borrowers with information about applicable interest rate, costs, and main contractual terms (eg repayment plan and duration) and warnings about the consequences of a default (France, UK, and Spain).65 The UK has extended its consumer credit regime to the platforms, so that borrowers can also benefit from advice referral and (p. 222) creditworthiness assessment obligations as well as a right to withdraw.66 Spain considers the platform as a financial intermediary from a consumer credit law perspective, but applies a simplified regime (imposing a warning about over-indebtedness).67

10.36  Due diligence obligations in the selection of borrowers by the platforms are recognized only in France and partially in the Netherlands,68 while in the UK platforms simply need to disclose their selection criteria to the public and warn about the need to conduct additional due diligence before investing, unless a creditworthiness assessment obligation exists on the platform or institutional crowd-lenders under the applicable consumer credit law. Some countries impose additional conduct rules such as sound business conduct (Netherlands) and client’s best interest (Spain), redress mechanisms obligations (UK, Spain, Portugal, and the Netherlands), and withdrawal rights.69 Some legal systems’ regimes also entail provisions about conflict of interests (Spain, Portugal, and the UK),70 Anti-Money Laundering and Combating Terrorism (AML/CT) provisions (France), or a general duty to avoid money-laundering and financing terrorism (UK, Spain, and Portugal).

10.37  Also traditional financial intermediaries can generally offer crowdfunding services (with the exception of Spain), subject to their specific regulation and to ad hoc crowdfunding provisions.71

2.  National approaches to investment-based crowdfunding

10.38  IB-platforms’ activities are defined differently under national laws and regulations, but generally include the selection of applicants and support of the same in the drafting of business plans and publication of projects; the matching of offer and demand of investment products (such as shares, bonds, rights to profit-participation, subordinated loans, and hybrid instruments); the offering of contract documentation to the parties and relationships handling. The wide variations in national practices not only derive from different business models, but also from regulatory differences, particularly with regard to key concepts such as ‘investment product’, ‘financial instrument’, and ‘investment service’.

A.  Securities regulation approach

10.39  Some countries, like the Netherlands,72 apply securities laws to crowdfunding activities and require IB-platforms dealing with financial instruments to hold a MiFID licence (p. 223) and fully comply with the relevant regime (in addition to complying with prospectus obligations, save for the relevant exemptions: see section IV.1.C). However, other countries do not enforce MiFID and/or the prospectus requirements with respect to IB-crowdfunding, either because the products offered by platforms are not considered as financial instruments (eg profit-participation loans in Germany and silent partnerships in Austria) or a general exemption exist for brokers not handling client money (Germany).73

10.40  Moreover, answers as to which investment service is performed in IB-crowdfunding might differ among countries, also depending on business models, with variations in terms of capital requirements, conduct rules, liability rules, and available exemptions. As suggested by the European Securities and Markets Authority (ESMA), the service of reception and transmission of orders would better suit IB-crowdfunding,74 but other services could also fit depending on the business model adopted, such as execution of orders, placement without firm commitment (France and, before the 2014 reform, Belgium),75 investment advice (France)76 and operating a multilateral trading facility (MTF) (Belgium and Luxembourg).77 In some cases, also the management of a collective investment scheme might be identified (UK, Belgium).

B.  Ad hoc regimes

10.41  Also the countries that have adopted a special regime for IB-crowdfunding show relevant differences as to the approach followed and the solutions adopted. To start with, the UK introduced a special regime for IB-crowdfunding in 2014, which however reflects the approach previously followed by the UK financial authority under the laws generally applicable to IB-crowdfunding.78 In principle, IB-crowdfunding is regarded as a regulated activity, the type of which depends on the business model adopted and may not even coincide with one of MiFID’s activities, being subject to a lighter regime (eg financial promotion and ‘arranging deals in investments’ when intermediaries only bring together an issuer (p. 224) with potential sources of funding).79 Moreover, the tied agent exemption is applicable under Article 29 MiFID to platforms acting as agents of an investment firm and therefore under the latter’s responsibility.80

10.42  Italy and France dedicate a non-MiFID regime to IB-crowdfunding, exploiting one of the exemptions foreseen by Article 3 of the Directive. The Italian law on equity crowdfunding implicitly considers it to be reception and transmission of orders, while French law defines crowdfunding services as investment advice. In Spain, the law on crowdfunding assumes that the same does not fall under either banking or investment services regulation, rather reserving a legal monopoly to crowdfunding platforms.81 Portuguese law similarly considers crowdfunding services relative to financial instruments as non-MiFID activities, however (unlike Spanish law) it allows banks and investment firms to offer crowdfunding services.

10.43  The national laws on crowdfunding also differ in other aspects. Firstly, their scope varies, since some dedicate a full ad hoc regime to IB-crowdfunding (France, Italy, and Portugal), while others have only introduced limited exemptions to the prospectus or MiFID frameworks or a few ad hoc provisions (Germany, Austria, and the Netherlands). In addition, some laws cover a broad range of crowdfunding products (France, Spain, UK, and Austria), while others only cover certain products (Italy, Germany, and Portugal).82

10.44  Secondly, national crowdfunding regimes vary in strictness, often irrespective of the legal nature of the service. For instance, the Spanish regime of crowdfunding is similar, except for more flexibility, to MiFID’s provisions concerning business conduct (including a due diligence obligation in selecting projects); disclosure and liability (limited however to information completeness); and conflicts of interest (similarly to what happens in France, Portugal and, to some extent, Italy). The French and Italian regimes, although both grounded on Article 3 MiFID exemption, are definitely stricter than the German law on exempted brokers. Differences based on Article 3 MiFID might diminish after the entry into force of MiFID II, asking Member States to adopt requirements at least analogous to those of MiFID concerning the conditions and procedures for authorization and on-going supervision, conduct of business, and organizational requirements.

(p. 225) 10.45  Nonetheless, common trends are identifiable. Most national laws do not apply the Prospectus Directive (now Regulation) and MiFID to crowdfunding, but rather design tailored obligations. Some of them also foresee new dedicated providers (as in Italy, France, and Spain), while others do not (UK, Austria, and Germany). The new dedicated providers are however restricted in terms of permissible products (eg ordinary shares, fixed-interest bonds and ‘bons de caisse’ in France)83 and activities, as they are not allowed to offer other investment services (Italy, France, Portugal, and Spain) and to hold clients’ money or securities (Italy, France, UK, and Portugal) unless they have been authorized as payment institutions (Spain).84 The authorization process is rather simple, generally consisting of checks on managers and shareholders and a minimum initial capital, possibly as an alternative to professional insurance (Spain and Portugal).85 In addition, platforms are subject to the supervision of a financial markets authority. Most regimes also allow traditional financial institutions to conduct crowdfunding operations (except for Spain), however extending to them special crowdfunding requirements, in addition to the general ones.

10.46  Ad hoc regimes for IB-crowdfunding are mostly focused on disclosure obligations about the platform, its risks and costs, and past performance (Portugal and France), special warnings (Italy, France, and Spain), and other business conduct rules (fair conduct and efficient orders management), but generally do not foresee prudential requirements (except for the UK, where general capital adequacy requirements tend to apply). Many countries have also introduced limits to the sums investible by retail investors (UK, Spain, Portugal, Austria, Germany, and the Netherlands),86 while professional investors, High Net Worth Individuals (HNWIs), or legal persons (UK, Spain, and Portugal), and sometimes people receiving regulated advice (Spain, UK) find no limitations (except in Germany where only companies are not subject to investment limits). Such limits are generally referred to investments per project and per year (Spain, Portugal),87 per issuer and per platform (the Netherlands),88 or only investment per issuer (Germany) or all investments per year (Austria), with some limits variable depending on income.89 Limits are often set also with regard to the amount that each issuer can obtain through the platform (Spain, Germany, (p. 226) and Portugal),90 on a certain platform (Germany), or in general through crowdfunding platforms (Spain and Portugal).91 Investor tests or appropriateness assessments are required only in Italy, the UK (for retail investors in the absence of regulated advice), and the Netherlands, while in France platforms, being investment advisors, need to perform a suitability assessment.

10.47  Additional crowd-investor protection measures have been implemented in some countries, such as withdrawal rights (Italy, UK, Austria, Germany, and the Netherlands) or redress and Alternative Dispute Resolution (ADRs) mechanisms (Portugal, France, UK, and the Netherlands). Italy also requires tag-along rights in case of change of control. Some countries expressly apply to platforms AML/CT regulations (UK, Austria, Portugal, and Germany).

V.  Policy Proposals and Conclusions

1.  General criteria

10.48  In this section, we suggest some policy guidelines for the promotion and regulation of marketplace investing in the CMU. Our recommendations are based on the economic analysis included in sections II and III and on the comparative law analysis developed in section IV. In formulating our proposals, we follow a functional approach to marketplace investing and try to identify the needs for investor protection generated by it.92 In addition, we consider the trade-offs between investor protection and financial innovation, which may to some extent suggest lighter regulation of FinTech relative to more mature financial sectors. This would allow the growth of new entrants and the development of innovative technology, which would in the end also benefit traditional intermediaries.

10.49  On the whole, our proposal is coherent with the UK model of crowdfunding regulation, which is likewise driven by a functional approach and has been undoubtedly successful in promoting alternative finance to levels of development that are unique in Europe. Similarly to the UK model, we suggest that IB-crowdfunding should basically remain subject to investment services regulation, as also argued by ESMA in its 2014 opinion (however envisaging some proportionality-based adaptations),93 while LB-crowdfunding should fall under a new harmonized regime tailored to its specificities, taking however into account the similarities with IB-crowdfunding already highlighted throughout this chapter. Indeed, several provisions would be common to both types of crowdfunding and would actually lead to the configuration of a consistent regulatory framework, possibly catching all types of marketplace investing. This framework would touch upon the core elements of marketplace investing, such as its definition, licensing requirements, governance and organization, clients’ money protection, business conduct rules, and disclosure duties. Rather than (p. 227) rigidly sticking to either banking or securities regulation, we look for a menu of solutions, many of which simply reflect existing financial regulation, while others are tailored to the specificities of alternative finance as promoted by FinTechs.

10.50  A general definition of marketplace investing should be offered, so as to identify the scope of application of the new regime. This definition should be wide enough to cover all kinds of FR-crowdfunding and other types of financing/investing, such as the purchase of accounts receivable and the private placement of equity securities to investors. The use of a digital platform should be a distinctive feature of the regulated activity. However, the platform should not be required to offer its services to the crowd. No doubt, both LB- and IB-crowdfunding would be included in the definition, which should however also cover cases in which services are offered to professional investors, such as angel investors or venture capital funds. Nonetheless, the presence of retail clients on the platform would determine the application of special provisions that would not necessarily apply to professional clients. Moreover, the regulatory scope should not depend on whether the services offered concern financial instruments or other products, such as loans, investment contracts, and accounts receivables, which would also be covered. Firms should be free to tailor their services according to their preferred business model, which could include either brokerage activities or more complex services, such as advice, rating, scoring, and portfolio management, which however entail distinct risks and therefore require different regulatory responses. The same firm could offer all kinds of services relating to marketplace investing, including IB- and LB-crowdfunding.

2.  The proposed regime of IB-crowdfunding

10.51  As we argued in another paper, IB-crowdfunding implies some form of intermediation between issuers and investors.94 However, whether this also gives rise to an investment service under MiFID I and II and what kind of service are questions, as anticipated above (section IV.2.A), not easily answered, that we consider below (section V.2.A). Moreover, whether the MiFID regime is sufficient to protect investors in IB-crowdfunding activities is a policy question deserving careful consideration, as we show below (in section V.2.B, summarizing the discussion in our previous papers).

A.  Scope of MiFID

10.52  In order to fall under MiFID, the investment service should refer to a financial instrument. The financial instruments most frequently issued through crowdfunding are ‘transferable securities’ such as shares or bonds (dubbed as ‘mini-bonds’ when issued by SMEs). However, in some Member States IB-crowdfunding relates to forms of equity participation that are not considered as financial instruments under national interpretations of MiFID (see section IV.2.A above). The absence of a financial instrument in principle bars such type of crowdfunding from qualifying as an investment service under MiFID I and II. Nonetheless, it is quite clear that the instruments issued are functionally similar to shares, even though they cannot be defined as transferable securities. From the perspective of investor protection, substance should prevail over form and the absence of a transferable security should not be relevant. Indeed, equity participations are sold to investors similarly (p. 228) to shares in what appears to be essentially a primary market for investment products. We suggest therefore that MiFID should be amended so as to clarify that the concept of financial instruments also includes instruments other than transferable securities, when they are offered to retail investors on a marketplace investing platform. This would extend the scope of MiFID also to platforms where silent-partnership participations and accounts receivable are sold to investors.

10.53  Moreover, in order for an investment service to be performed, the digital platform should not restrain its activity to the mere listing or generic promotion of investment opportunities, but offer a facility for the execution of transactions between issuers and investors. If this happens, the type of investment service performed needs to be identified.95 As argued by ESMA, the reception of orders from investors and the transmission of the same to issuers is the service or activity most likely carried out by IB-crowdfunding platforms, in the absence of regulatory constraints.96 Moreover, the platforms generally arrange crowdfunding deals through the provision of standard contracts and information material. However, the subscription of financial instruments through the platform might even count as execution of orders when the platform acts on behalf of clients to simplify procedures and investor relations management.97 ESMA further argued that the service/activity of investment advice is generally not part of the crowdfunding model. However, depending on how platforms present their clients’ projects, they might in fact make recommendations constituting investment advice,98 which is defined by Article 4(1)(4) MiFID as ‘the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments’. Furthermore, ESMA acknowledged that reliance on the platform’s due diligence concerning the proposed investments could lead investors to consider that they are receiving advice even in the absence of personal communications.99

10.54  In theory, also the service/activity of placing could define crowdfunding from MiFID’s perspective. Indeed, the question was examined by ESMA ‘whether platforms that undertake market offers for project owners are thereby carrying out the MiFID service/activity of placing without a firm commitment basis in regard to project owners’.100 MiFID does not define this service, while traditional public and private placements are in many respects (p. 229) different in practice from crowdfunding through digital platforms. However, one cannot exclude a priori the case of a platform offering the service/activity of placing without a firm commitment basis to its clients.101 Some national financial authorities (including the French and Italian ones) require that a promotion agreement be entered into between the underwriter and the issuer for this service to occur.102 In general, the agreements executed between the platform and its clients and/or other circumstances will show whether the relevant activity should be defined as either receiving orders from investors or placing securities on behalf of issuers. The impact of the relevant choice depends on the applicable law and the circumstances of the case.103

10.55  From a policy perspective, the above comments suggest that MiFID is flexible enough to host IB-crowdfunding in any of the specifications considered. The definition of the relevant service as either brokerage, execution of orders, investment advice, or placement will mainly depend on the type of agreement entered into by the parties, which is sometimes determined ex ante or at least influenced by the applicable national law. The applicable MiFID regime will depend on the type of service rendered through crowdfunding and be proportionate to the same. In principle, therefore, MiFID II does not need to be amended to reflect more clearly crowdfunding activities. However, level 2 provisions might offer useful criteria for identifying the type of investment service which is offered in practice in a more harmonized way across Member States and to introduce partial facilitations based on the proportionality principle (see section V.2.4) in the presence of special warnings and limits to the investible sums and to the sums obtainable by crowd-investees. The same criteria could help to exclude a given service from MiFID’s scope, for example in the case of promotion of potential equity investments to the crowd without brokerage or execution services being offered by the platform.

B.  Is MiFID enough?

10.56  As argued in our previous paper, MiFID’s rules of conduct for investment intermediaries should be specified with regard to crowdfunding activities and with particular reference to the appropriateness test.104 From such a perspective, the Commission and ESMA should carefully consider the national regimes examined in section IV.2.B above and others which may emerge, in order to identify specific approaches to investor protection in (p. 230) crowdfunding. They should analyse, in particular, the case for quantitative thresholds to crowdfunding investments, firstly with reference to the UK approach limiting investment-based crowdfunding to retail investors who get regulated advice or invest no more than 10 per cent of their portfolios; secondly, with regard to the provisions that are in force in most countries limiting the total amount of equity that a company can issue through crowdfunding on a given platform and/or in a year. The first type of threshold is aimed at protecting retail investors from excessive exposure to risky investments in illiquid instruments; the second is intended to restrain the moral hazard of issuers and to allow crowd-investors to sufficiently diversify over a greater number of issuers.

3.  The proposed regime of LB-crowdfunding

10.57  Building upon a proposal advanced in a previous paper,105 we recommend that LB-crowdfunding be subject to an ad hoc regime, which could be adopted at EU level through a new directive or by way of amendment of existing directives.

A.  Nature of the service

10.58  As already discussed, LB-crowdfunding shows clear differences to traditional banking, to the extent that the platform operator does not undertake the credit and other risks (such as interest rate and liquidity risks) of the lending activities performed on the platform, and does not collect deposits. The platform operator is a ‘transparent’ intermediary, rather than an ‘opaque’ one like a bank. Its activity is essentially, in the basic model, that of a broker intermediating loans between individuals (or professional investors) who lend money on the platform and individuals (or firms) who borrow money from them. Also the risks run by the platform are mainly of an operating character, while the platform’s clients bear the credit and other risks of the lending transactions. Therefore, from a functional perspective, the firms active in LB-crowdfunding should be regulated similarly to investment brokers and so similarly to firms running IB-crowdfunding platforms. However, when the platform is given discretion as to the investment of clients’ money in loan transactions, the relevant service is rather similar to that of a portfolio manager.106 In fact, the lenders do not choose their borrowers directly, but instruct the platform to choose the same and lend them money according to criteria specified ex ante (such as the rating of clients, the number of transactions, their maturity, etc.). To the extent that discretion is exercised by the platform, the same should be regulated similarly to portfolio managers.107 Moreover, when the platform collects money from clients without resorting to a third-party payment services provider, some of the requirements provided for payment institutions (such as those on client money segregation for payment accounts) should be applicable to ensure the diversity from the bank business.

(p. 231) 10.59  Also the different nature of the products dealt with on LB-crowdfunding platforms should be taken into account, for loans generate needs for investor protection somehow different from those concerning financial instruments (see section III). It is true that transferable securities could in theory be issued also for LB-crowdfunding, which is actually the practice in the US, where loans granted to individuals (P2P) or firms (P2B) are first securitized and then sold to clients of crowdfunding platforms.108 Such a practice makes the two types of crowdfunding very similar and both subject to SEC jurisdiction. However, the analogy between IB- and LB-crowdfunding is strong even when the latter does not foresee the issuance of transferable securities, but the investors get slices of loans collectively extended by them through the platform. Building on this analogy, UK law treats the two types of crowdfunding similarly, broadly applying the same rules to them (disclosure and conduct of business rules, client money protection, and minimum capital requirements) but restricting, in the case of IB-crowdfunding, the types of investors allowed given the greater riskiness and illiquidity of the instruments offered to them and extending to crowd-borrowers, in the case of LB-crowdfunding, relevant consumer protection measures.109

B.  Core rules

10.60  The regulation of LB-crowdfunding platforms could be modelled on MiFID II regulatory framework for investment firms. The licensing regime should be similar and a mutual recognition system should also be adopted, in view of the formation of a EU market in alternative finance. Furthermore, the prudential requirements should be modelled on the types of services for which a licence is sought, which generate different investor protection needs depending on whether brokerage and/or advice and/or management services are offered to crowd-funders. Capital adequacy requirements should be proportionate to the risks undertaken by the platform. To the extent that the platform operator does not undertake the risks typical of lending, the capital requirements should be mainly tailored to operating risks. Moreover, platforms and their operators should be soundly organized and governed, so as to reduce the risks of their activities to investors. Reference to the criteria presently in force for other intermediaries and also for trading venues (such as those included in MiFID II and CRD IV) should offer a model for tailoring the governance and organization requirements of marketplace investing firms. As anticipated, clients’ money protection should largely depend on whether the platform is allowed to keep the money and/or assets of clients, in which case tools like segregation of assets and the relevant regime should be resorted to. If payment services are offered, the relevant provisions of the Payment Services Directive (PSD) should apply. In addition, guarantee funds could be set up and made mandatory for platforms to the extent that they can incur liabilities towards clients.

10.61  MiFID II approach to conduct of business rules should be followed in the sense that, once more, the applicable duties—such as those of care and loyalty, diligence in borrowers’ selection and checks, and conflicts of interest management—shall depend on the type of service offered and investor contacted (professional or retail). In addition, limits should be (p. 232) introduced as to the amounts of money that retail investors are allowed to lend through the platforms, along the national requirements presently in force in some Member States. Mandatory disclosure should cover both the platform and its operator and the investments offered on the same. Special disclosure criteria should be provided for the loan portfolios offered to investors on platforms managing the same on investors’ behalf.

4.  Proportionality

10.62  Our proposed regulation is subject to proportionality, to the extent that the same also applies to start-ups and new entrants in the FinTech sector. Indeed, a trade-off exists between investor protection and economic growth, which legal systems try to solve either by adopting special requirements and/or restrictions both for IB- and LB-crowdfunding or by exempting the same from existing provisions of securities and banking regulation. Indeed, investor protection is a prerequisite for the development of markets, but regulation has a cost which could chill the recourse to capital markets by small firms. As a result, the choice for economic growth and technological development may, to some extent, require loosening the regulatory requirements which would otherwise apply to issuers and investment firms for the protection of investors.

10.63  MiFID includes exemptions that have been exploited by Member States to lighten the regulatory burden for IB-crowdfunding platforms. In principle, the Directive offers the natural regulatory framework for IB-crowdfunding intermediaries and activities, as particularly shown by ESMA’s opinion on IB–crowdfunding, but might require a more proportionally-based approach in applying the same. As we suggested in the previous paragraph, a similar regime could be envisaged for LB-crowdfunding, save for its specificities and the relevant regulatory needs. Moreover, MiFID II will enhance investor protection and also the protection of crowd-investors by setting several conditions to the Member States’ recourse to exemptions from the Directive in the case of services like reception and transmission of orders and investment advice. This will reduce Member States’ incentives to adopt special regimes for crowdfunding, which will fall in any case under the core MiFID’s provisions, thus reducing the scope for proportionality while increasing investor protection.

10.64  Another way for assuring proportionality is indicated by UK law and practice, which sees crowdfunding activities often performed by tied agents of regulated firms (see above section IV.2.B).110 This has been possible under former Article 23(1) MiFID providing what follows:

Member States may decide to allow an investment firm to appoint tied agents for the purpose of promoting the services of the investment firm, soliciting business or receiving orders from clients or potential clients and transmitting them, placing financial instruments and providing advice in respect of such financial instruments and services offered by that investment firm.

In essence, the recourse to tied agents can be regarded as a means for reducing the costs of crowdfunding and responds to a proportionality rationale similar to that supporting the national laws that regulate crowdfunding outside MiFID’s scope. Given that benefitting from exemptions has become more difficult under MiFID II, one could speculate (p. 233) that the UK approach to crowdfunding, which is based on tied agents, will become more popular in the rest of Europe. This hypothesis is supported by the fact that MiFID II now requires (rather than only permitting) Member States to allow investment firms to appoint tied agents (Article 29(1) MiFID II).111 Member States retain discretion only in deciding whether to allow tied agents to hold clients’ money and instruments. However, the investment firm appointing tied agents is fully and unconditionally responsible for them.112

VI.  Conclusions

10.65  In this chapter, we have analysed the regulation of FinTech and alternative finance, focusing on marketplace investing and FR-crowdfunding in particular. Firstly, we have discussed the economics and technology of alternative finance, analysing the distinctive features of FinTechs that are active in this area and highlighting the role of digital platforms in connecting those in need of financing with investors willing to take the relevant risks. Secondly, we have examined the business models currently used in IB- and LB-crowdfunding, and the benefit and risks of the relevant activities for either investors or recipients of funds. Thirdly, we have analysed the regulation of crowdfunding platforms both at EU and Member State levels, finding that different regulatory frameworks are presently applied to the relevant services and operators. National regimes are diversified across countries and sometimes even within the same country, to the extent that IB- and LB-crowdfunding are treated differently also for aspects which would deserve a similar treatment. Moreover, the EU directives (such as MiFID and the PSD) are not interpreted and/or implemented similarly across countries with respect to FinTech as applied to alternative finance, so that variations persist despite harmonization at EU level. Fourthly, we have formulated some policy suggestions following a functional approach to marketplace investing and trying to enhance legal harmonization in the EU. As a result, our proposals emphasize the relevance of MiFID as a regulatory model both for IB- and LB-crowdfunding, taking into account however the specificities of the latter, which may require a different treatment of some aspects depending on the type of business model involved and on whether the platform is also active in some payment function.(p. 234)


*  Guido Ferrarini of the University of Genoa and the University of Nijmegen; Eugenia Macchiavello of the University of Genoa.

1  Although this chapter is the result of joint work, the following sections should be attributed to Eugenia Macchiavello: III, IV, V.1, and V.3.

2  European Commission, ‘Building a European Capital Markets Union’ (Green Paper) COM (2015) 63 final (18 February 2015).

3  Guido Ferrarini and Andrea Ottolia, ‘Corporate Disclosure as a Transaction Cost: The Case of SMEs’ (2013) 9 European Review of Contract Law 363.

4  SMEs are in general more dependent on bank credit than other firms: see, for an overview, Alberto Giovannini et al, ‘Restarting European Long-Term Investment Finance, A Green Paper Discussion Document’ CEPR and Assonime (2015) 13ff. See also European Central Bank, ‘Corporate Finance and Economic Activity in the Euro Area—Structural Issues Report 2013’ Occasional Paper Series No 151 (August 2013); European Central Bank, ‘SME Access to Finance in the Euro Area. Barriers and Potential Policy Benefits’ (July 2014). About the reduction in bank financing to SMEs after the crisis, see European Commission, ‘2013 SMEs’ Action to Finance Survey. Analytical Report’ (14 November 2013) 7–10 and 34 <http://ec.europa.eu/DocsRoom/documents/7864/attachments/1/translations> accessed June 2017.

5  See European Commission, ‘Capital Markets Union—Accelerating Reform’ (Communication) COM (2016) 601 final (14 September 2016) 5–6, stating inter alia: ‘The Commission will continue to promote the development of the FinTech sector and work to ensure the regulatory environment strikes an appropriate balance between building confidence in companies and investors, protecting consumers and providing the FinTech industry the space to develop’.

6  PwC, ‘Global FinTech Survey—Blurred lines: How FinTech is Shaping Financial Services’ (2016) 3 <http://www.pwccn.com/home/eng/fs_fintech_mar2016.html> accessed June 2017.

7  ibid 6.

8  See Helmut Kraemer-Eis et al, ‘Institutional non-bank lending and the role of Debt Funds’ (2014) European Investment Fund, EIF Research & Market Analysis Working Paper 2014/25 <http://www.eif.org/news_centre/publications/eif_wp_25.pdf> accessed June 2017.

9  Rüdiger Veil and Carmine Di Noia, ‘SME Growth Markets’ in Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets: MiFID II and MiFIR (OUP 2017) 345–62.

10  See, in general, Lodewijk Van Setten and Danny Busch (eds), Alternative Investment Funds in Europe. Law and Practice (OUP 2014).

11  On the distinction between opaque and transparent intermediaries, see Steven A Ross, ‘Institutional Markets, Financial Marketing and Financial Innovation’ (1989) 44 Journal of Finance 541–56.

12  See Caroline Binham and Claire Jones, ‘Fintechs warned to expect tougher regulation’ Financial Times (25 January 2017), reporting however that Mr. Carney, Governor of the Bank of England and Chairman of the FSB, said that the burgeoning peer-to-peer lending sector, which in the UK now represents about 14 per cent of new lending to small businesses, ‘does not, for now, appear to pose material systemic risks’. Opposite comments were made last year by Adair Turner, the former chairman of the now-defunct Financial Services Authority, who said that P2P loans could be the source of losses that would ‘make the worst bankers look like absolute lending geniuses’. During the publication process of this chapter, interesting documents have been published, discussing the risks posed by FinTech and the use of technology by traditional financial intermediaries: European Commission, ‘FinTech: A more competitive and innovative European financial sector’ (Consultation document) (2017), <https://ec.europa.eu/info/sites/info/files/2017-fintech-consultation-document_en_0.pdf>; IOSCO, ‘Research Report on Financial Technologies (Fintech)’ (February 2017) <https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf>; European Parliament, ‘Report on FinTech: The influence of technology on the future of the financial sector’ 2016/2243(INI) (28 April 2017); EBA, ‘Discussion Paper on the EBA’s approach to financial technology (FinTech)’ EBA/DP/2017/02 (4 August 2017); BCBS, ‘Sound Practices: Implications of Fintech developments for banks and bank supervisors’ (Consultative Document,BIS 2017); FSB, ‘Financial Stability Implications from FinTech. Supervisory and Regulatory Issues that Merit Authorities’ Attention’ (27 June 2017) <http://www.fsb.org/wp-content/uploads/R270617.pdf>; Committee on the Global Financial System and FSB, FinTechCredit.MarketStructure, Business ModelsandFinancial Stability Implications (BIS 2017) (all electronic resources last accessed August 2017).

13  The case for more bank equity is emphasized by Anat Admati and Martin Hellwig, The Bankers’ New Clothes. What’s Wrong with Banking and What to Do about It (Princeton University Press 2013) 81ff.

14  For instance, the British FinTech industry is mainly focused on banking and payment services, with 20 per cent of it represented by credit and lending sectors. See EY, ‘UK FinTech On the Cutting Edge—An Evaluation of the International FinTech Sector’ (2016) 24 <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/502995/UK_FinTech_-_On_the_cutting_edge_-_Full_Report.pdf> accessed June 2017.

15  See Eleanor Kirby and Shane Worner, ‘Crowd-funding: An Infant Industry Growing Fast’ (2014) IOSCO Research Department Staff Working Paper 8–9 <http://www.iosco.org/research/pdf/swp/Crowd-funding-An-Infant-Industry-Growing-Fast.pdf>. In 2015, the sector presented the following figures: in Europe, P2C EUR 365.8 million (growth rate (GR) in 2013–15: 54 per cent), P2B EUR 212.08 million (GR 131 per cent), EB-crowdfunding EUR 159.32 million (GR 83 per cent), debt securities crowdfunding EUR 10.73 million (GR 155 per cent); in the UK, respectively (£ converted in EUR based on a conversion rate of 1.3 at 31 December 2015), EUR 1,182 million (GR 78 per cent), €1,145 million (GR 194 per cent), EUR 318 million (GR 295 per cent) and EUR 8 million (GR 52 per cent): see data in Bryan Z Zhang et al, ‘Sustaining Momentum—The 2nd Annual European Alternative Finance Industry Survey’ (2016) 31, 33 <https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/09/sustaining-momentum.pdf> accessed June 2017; Bryan Z Zhang et al, ‘Pushing Boundaries—The 2015 UK Alternative Finance Industry Report’ (2016) 15 <https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2015-uk-alternative-finance-industry-report.pdf> accessed June 2017.

16  See Guido Ferrarini and Paolo Saguato, ‘Regulating Financial Market Infrastructures’ in Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), Oxford Handbook of Financial Regulation (OUP 2015) 568–95; Guido Ferrarini and Paolo Saguato, ‘Governance and Organization of Trading Venues. The Role of Financial Market Infrastructure Groups’ in Ferrarini and Busch (eds), Regulation of the EU Financial Markets (n 9) 288.

17  In this sense, see ESMA, ‘Opinion—Investment-based Crowdfunding’ ESMA/2014/1378 (18 December 2014) 18.

18  In 2015, invoice trading totalled in Europe (UK excluded) EUR 80.59 million in 2015, with a 877 per cent GR between 2013–15, while in the UK EUR 422.5 million, with a 99 per cent GR in the same three-year period: see data in Zhang et al, ‘Sustaining Momentum’ (n 15) 31–33, 36; Zhang et al, ‘Pushing Boundaries’ (n 15) 15.

19  The present and the following sections to some extent draw on Eugenia Macchiavello, ‘Financial-return Crowdfunding and Regulatory Approaches in The Shadow Banking, FinTech and Collaborative Finance Era’ forthcoming in European Company and Financial Law Review 2017; Eugenia Macchiavello, ‘Peer-to-Peer Lending and the “Democratization” of Credit Markets: Another Financial Innovation Puzzling Regulators’ (2015) 21(3) Columbia Journal of European Law 521; Guido Ferrarini and Eugenia Macchiavello, ‘Investment-based Crowdfunding: Is MiFID II enough?’ in Busch and Ferrarini, Regulation of the EU Financial Markets (n 9) 659–92.

20  For a first reference to this concept, which is however difficult to apply to ordinary cases of crowdfunding, see James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (Doubleday 2004), arguing that decisions taken in groups are often better than could have been made by any single member of the group.

21  See FCA, ‘Call for Input to the Post-implementation Review of the FCA’s Crowdfunding Rules’ (July 2016) 13 <https://www.fca.org.uk/publication/call-for-input/call-input-crowdfunding-rules.pdf> accessed June 2017.

22  See Zhang et al, ‘Sustaining Momentum’ (n 15) 11, 20, 40–41; Zhang et al, ‘Pushing Boundaries’ (n 15) 29, 43.

23  See Zhang et al, ‘Sustaining Momentum’ (n 15) 20, 38–39, 41; Zhang et al, ‘Pushing Boundaries’ (n 15) 43.

24  See Lars Hornuf and Armin Schwienbacher, ‘Crowdinvesting—Angel Investing for the Masses?’ (8 October 2014) in Handbook of Research on Venture Capital: Volume 3. Business Angels (forthcoming) 8 <http://ssrn.com/abstract=2401515> accessed June 2017.

25  See European Commission Financial Services User Group, ‘Crowdfunding from an Investor Perspective’ (EU 2015) 4, 55–56 <http://ec.europa.eu/finance/finservices-retail/docs/fsug/papers/160503-study-crowdfunding-investor-perspective_en.pdf>.

26  European Commission, ‘Unleashing the Potential of Crowdfunding in the European Union’ (Communication) COM (2014) 172 final 2 (27 March 2014) 5.

27  EB platforms have only few projects at a time: European Commission Financial Services User Group, ‘Crowdfunding’ (n 26) 64.

28  See also FCA, ‘The FCA’s Regulatory Approach to Crowdfunding and Similar Activities’ CP13/13 (October 2013); John Armour and Luca Enriques, ‘Financing Disruption’ Preliminary Draft (June 2015) <http://www.iast.fr/sites/default/files/Conferences/stakeholders/enriques.pdf> accessed December 2016.

29  See Kathryn Judge, ‘The Future of Direct Finance: The Diverging Paths of Peer-to-Peer Lending and Kickstarter’ (2015) 50 Wake Forest Law Review 102–39 and Columbia Law and Economics Working Paper No 520 <http://ssrn.com/abstract=2662697> accessed June 2017; Zhang et al, ‘Sustaining Momentum’ (n 15) 20.

30  See eg Jian Zhang and P Liu, ‘Rational Herding in Microloan Market’ (2012) 58(5) Management Science 892.

31  See for references Macchiavello, ‘Peer-to-Peer’ (n 19) 529–30.

32  See Judge, ‘The Future’ (n 29) 120ff; Steve Lohr, ‘Creditworthy? Let’s Consider Capitalization’ N.Y. Times (19 January 2015) A1.

33  See Ajay Agrawal et al, ‘Are Syndicates the Killer App of Equity Crowdfunding?’ (25 February 2015) MIT Sloan Research Paper No 5126-15 and Rotman School of Management Working Paper No 2569988 <http://ssrn.com/abstract=2569988> accessed June 2017.

34  Ajay K Agrawal et al, ‘The Geography of Crowdfunding’ (2011) NBER Working Paper No. w16820 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1770375> accessed June 2017; Lars Hornuf and Armin Schwienbacher, ‘Funding Dynamics in Crowdinvesting’ (September 2015) <http://ssrn.com/abstract=2612998> accessed June 2017; Gerrit KC Ahlers et al, ‘Signaling in Equity Crowdfunding’ (2015) 39(4) Entrepreneurship: Theory and Practice 955; Silvio Vismara, ‘Information Cascades Among Investors in Equity Crowdfunding’ (2015) <http://ssrn.com/abstract=2589619> accessed June 2017; Keongtae Kim and Siva Viswanathan, ‘The Experts in the Crowd: The Role of Reputable Investors in a Crowdfunding Market’ (2016) TPRC 41: The 41st Research Conference on Communication, In>formation and Internet Policy <http://ssrn.com/abstract=2258243> accessed June 2017.

35  In 2014, 29 per cent of European platforms had a secondary market for their products while only 9.5 per cent in the EB segment: see Giuliana Borello et al, The Funding Gap and The Role of Financial Return Crowdfunding: Some Evidence From European Platforms’ (2015) 20(1) Journal of Internet Banking and Commerce 1, 13, 16.

36  Commission Staff Working Document, ‘Crowdfunding in the EU Capital Markets Union’ (2016) SWD (2016) 154 final 33.

37  See <http://www.repubblica.it/tecnologia/2012/04/03/news/dopo_lo_stop_di_bankitalia_a_zopa_il_social_lending_ci_riprova_con_smartika-32487286/> accessed December 2016, giving account of the transformation of Zopa Italia (which was authorized as a financial intermediary under Italian banking law) into Smartika (a payment institution which provides P2P services).

38  See Trib. Amm. Reg.—T.A.R. (Regional Administrative Tribunal) Roma, Lazio, 12 December 2009, No 12848, sez. III, in Giur. comm. (2011) 2, II, 422.

39  See Veerle Colaert, ‘On the Absence of Peer-to-Peer Lending in Belgium’ (2016) 5(4) Journal of European Consumer and Market Law 182. Also the Bank of Italy has recently recognized that crowd-borrowers may violate the banking monopoly when negotiations between crowd-lenders and borrowers have not a private character, so that the parties cannot negotiate between themselves on individual clauses: see Banca d’Italia, ‘Provvedimento recante Disposizioni per la raccolta del risparmio dei soggetti diversi dalle banche’ (November 2016) <https://www.bancaditalia.it/compiti/vigilanza/normativa/archivio-norme/disposizioni/raccolta-risparmio-soggetti-diversi/disposizioni.pdf> accessed December 2016; see also Macchiavello, ‘Peer-to-Peer’ (n 19) 548, footnote 157 (anticipating the problem and the relevant discussion).

40  Crowdfunding platforms are required to seek individual exemptions from the Autoriteit Financiële Markten (AFM, the Dutch Financial Markets Authority) as regards the prohibition to intermediate in attracting or making available repayable funds from the public without a financial service provider licence under the Financial Supervision Act (Wet op het financieel toezicht): see Anne Hakvoort, ‘New Crowdfunding Rules as per 1 April 2016’ (2016) <http://www.fglawyersamsterdam.com/wp-content/uploads/2016/03/20160316-New-Crowdfunding-rules-as-per-1-April-20162.pdf>.

41  For an extended discussion and for references, see Macchiavello, ‘Peer-to-Peer’ (n 19) 535, 552–53.

42  See Art 18 of Directive (EU) 2015/2036 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market (PSD 2) OJ L337/35 stating: ‘(2) Where payment institutions engage in the provision of one or more payment services, they may hold only payment accounts which are used exclusively for payment transactions. (3) Any funds received by payment institutions from payment service users with a view to the provision of payment services shall not constitute a deposit or other repayable funds within the meaning of Article 9 of Directive 2013/36/EU’.

43  See Macchiavello, ‘Peer-to-Peer’ (n 19) 550–51, 563–64.

44  See In re Prosper Marketplace, Inc., Securities Act Release No. 8984, SEC LEXIS 279124 (November 2008) <http://www.sec.gov/litigation/admin/2008/33-8984.pdf> accessed December 2016 (applying SEC v W. J. Howey Co., 328 US 293 (1946) and Reves v Ernst & Young, 494 US 56 (1990)). This decision has also influenced the US P2P market where platforms follow a securitization model under which they receive funds from crowd-investors in exchange of notes incorporating loans executed by a bank to the benefit of borrowers on the platform: see above section IV.1, below section V.3.A, and Macchiavello, ‘Peer-to-Peer’ (n 19) 558.

45  See in Italy Consob, Communication No 10101143 (10 December 2010) <http://www.consob.it/documents/46180/46181/c10101143.pdf/3303db5a-7f82-4508-9a7f-389e49397a97>.

46  About the notion of ‘financial instrument’ in Europe (and the centrality of the ‘transferability’ character), see European Commission, ‘Questions on Single Market Legislation—ID 150—Definitions (Internal reference 2.) “transferable securities”, Article 4(1)(18) of Directive 2004/39/EC’ <http://ec.europa.eu/yqol/index.cfm?fuseaction=question.show&questionId=150> accessed June 2017; Niamh Moloney, How to Protect Investors: Lessons from the EC and the UK (CUP 2010) 202; Giuliano Castellano, ‘Towards a General Framework for a Common Definition of “Securities”: Financial Markets Regulation in Multilingual Contexts’ (2012) 17(3) Uniform Law Review 449. In the Netherlands, it is recognized that when a loan can be considered a negotiable security, the platform needs a MiFID licence to receive and transmit orders: see Hakvoort (n 40).

47  Recently the FCA, while considering a revision of its crowdfunding rules, recognized the risk of operating collective investment schemes in case of platforms using provision funds funded by crowd-lenders and which cover all defaults. In fact, crowd-lenders are de facto exposed to the risk of default of any platforms’ loan since any default reduces the availability of the provision fund to other lenders: FCA, ‘Call for Input’ (n 21) 13.

48  In some countries (eg Sweden, Austria, and Germany) platforms have been offering products that are not considered as financial instruments despite being negotiable and attributing a participation to profits.

49  For example, Italy has opted for the EUR 5 million exemption (rather than the mandatory EUR 100,000 exemption). However, after the entry into force of the Prospectus Regulation No 2017/1129/EU, the new mandatory exemption threshold is EUR 8 million and the new optional one EUR 1 million, which might affect also current national thresholds. One of the objectives of such threshold increase was to facilitate crowdfunding (see European Commission, ‘Capital Markets Union: Commission Welcomes Agreement to Give Companies Easier Access to Capital Markets’ Press release (8 December 2016), <http://europa.eu/rapid/press-release_IP-16-4324_en.htm>) but no further reference in this sense can be found in the subsequent texts and final version of the Regulation.

50  In Germany, the general threshold is EUR 100,000, but the Small Investor Protection Act (Kleinanlegerschutzgesetz) of 23 April 2015 has allowed a EUR 2.5 million exemption for certain crowdfunding products under some conditions. In Austria, the general EUR 100,000 threshold was increased to EUR 250,000 in 2013 and a simplified prospectus requirement introduced for offerings of shares and bonds between EUR 1.5 million and EUR 5 million: see Armin Schwienbacher, ‘Crowdfunding and the “Alternativfinanzierungsgesetz” in Austria’ in 14(2) CESifo DICE Report 2016, 33 <http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_DICE_Report/zs-dice-2016/zs-dice-2016-2/dice-report-2016-2-schwienbacher-june.pdf>. However, offerings of certain alternative financial products (including shares, bonds, and subordinated debt) issued by SMEs and below EUR 1.5 million have been exempted by the Alternative Financing law of 14 August 2015 No 114 (AlternativfinanzierungsgesetzAltFG) and only require a special information sheet when above EUR 100,000. Offerings of the same alternative products above EUR 1.5 million, but below EUR 5 million are instead subject to a simplified prospectus obligation.

51  The Netherlands have recently introduced a system of individual exemptions granted by the Dutch AFM to FR-crowdfunding platforms willing to lawfully attract or make repayable funds available to the public without a financial service provider licence, as otherwise required by the Financial Supervision Act (Wet op het financieel toezicht). Such dispensation will now generally be granted in the presence of trustworthy shareholders and managers and of professional directors: see Hakvoort (n 40).

52  Germany has introduced specific provisions (pertaining to prospectus obligations and investment limits) applying to certain LB products (subordinated debt and profit-participation loans), while Austria has created a special regime for a range of ‘alternative financial products’ (including subordinated debt but also silent partnerships, participation rights, shares, and bonds subject to the same regime). The Netherlands have opted for a more structured regime for business loans platforms based on individual exemptions for LB platforms (see nn 40 and 51).

53  Only the UK requires a £20,000 and, starting 2017, £50,000 minimum capital (or higher depending on loan volumes), together with an adequate business plan (see FCA, CP13/13 (n 28) 19). In Spain (EUR 60,000) and Portugal (EUR 50,000) a minimum capital is alternative to a professional insurance or an adequate combination of the two. However, in Spain a minimum capital of at least EUR 120,000 becomes mandatory when the platform’s offering in a twelve-month period exceeds EUR 2 million and additional capital requirements exist based on volumes. See Art 56 Spanish Ley de fomento de la financiación empresarial No 5 of 28 April 2015 and Art 2 Portuguese Regulamento of the Comissão do Mercado de Valores Mobiliários (CMVM) No 1/2016 (Financiamento Colaborativo de capital ou por empréstimo).

54  Articles 43–57 Spanish Ley de fomento; Art 15 of the Portuguese Law on the Regime jurídico do financiamento colaborativo No 102/2015 of 24 August 2015 and 2ff of the Regulamento 1/2016.

55  FCA, ‘Call for Input’ (n 21) 13–14.

56  EUR 1,000: Art D411-2 CMF modified by Décret No. 2016-1453 of 28 October 2016.

57  EUR 1 million in Portugal (Art 19 Portuguese Regulamento 1/2016) and EUR 2 million in Spain (Art 68 Spanish Ley de fomento) but EUR 5 million in both when the offering is restricted to professional investors, legal persons, and individuals with an income above certain levels.

58  EUR 2,000 per project and per issuer in France (Arts L511-6.7, L548-1ff of the French CMF and Arts R547-1ff of the part réglementaire); EUR 3,000 per issuer in Spain (Arts 81–82 of the Spanish Ley de fomento) and Portugal (Art 20 of the Portuguese Law 102/2015 and 12 Regulamento 1/2016).

59  EUR 10,000 saved institutional investors or legal persons or individuals with an income above certain levels (ibid).

60  Articles 71 and 73 Spanish Ley de fomento.

61  Article R548-5(2) CMF.

62  The test aims to verify whether the investor has sufficient knowledge and experience to understand the risks involved in general, in the specific project and in the specific platform, and whether he/she invested only a sound part of his/her freely available assets for investment (for the AMF this should not exceed 10 per cent of his/her freely available assets): Hakvoort (n 40).

63  Articles 60 and 81 Spanish Ley de fomento; Art 8 Portuguese Law 102/2015.

64  FCA, ‘Call for Input’ (n 21) 19.

65  See Art R548-7 French CMF; Arts 76 and 88 Spanish Ley de fomento.

66  A simplified regime used to apply when the lender is not a professional/institutional one but pre-contractual obligations, creditworthiness assessment, withdrawal right, and CONC rules on arrears, defaults, and recovery have been recently introduced by FCA: FCA, ‘Call for Input’ (n 21) 12–13.

67  Articles 86 and 88 Spanish Ley de fomento.

68  In the Netherlands, platforms are required to have a policy for applicant assessment (which takes at least into account his/her payment behaviour and payment morality) and a policy for risk assessment including borrowers’ repayment capability (publishing on the website only borrowers with repayment capabilities): see Hakvoort (n 40).

69  In the UK, fourteen days, while in the Netherlands, twenty-four hours.

70  In Spain, platforms (and their managers and shareholders) are allowed to participate in the loans published on their own website and even receive funding for themselves up to 10 per cent of the total amount of loans on the platform: Art 63 Spanish Ley de fomento.

71  See, as regards Spain, Art 48 Ley de fomento.

72  Ella van Kranenburg, ‘The Netherlands’ in Oliver Gajda et al (eds), ‘Review of Crowdfunding Regulation. Interpretations of Existing Crowdfunding Regulations in Europe, North America and Israel’ (2014) European Crowdfunding Network, 160, <http://eurocrowd.org/wp-content/blogs.dir/sites/85/2014/12/ECN-Review-of-Crowdfunding-Regulation-2014.pdf> accessed June 2017; Decree 18 February 2016 introduced in addition to MiFID requirements, investment limits, investor test obligation (in case of investments above EUR 500) and a twenty-four-hour reflection period: see Hakvoort (n 40).

73  Under the additional conditions of dealing in investment products and financial instruments other than transferable securities and acting as mere intermediaries between clients and issuers or offering placement (§ 2(6) n 8e German Banking Law—Kreditwesengesetz—KWG). Such regime has nonetheless been reinforced by the 2015 Small Business Act reform and now requires: reliability and financial position adequacy; professional insurance and a certificate issued by the Chamber of Commerce after a test; compliance with information, consultation, and documentation duties; and investor protection obligations similar to those foreseen under the securities laws—Wertpapierhandelsgesetz). See Peter Mayer and Robert Michels, ‘Changes for Crowdfinancing resulting from the German Small Investor Protection Act (Kleinanlegerschutzgesetz)’ (September 2015) <http://www.dentons.com/en/insights/articles/2015/september/8/changes-for-crowdfinancing-resulting-from-the-german-small-investor-protection-act> accessed December 2016.

74  ESMA, ‘Opinion’ (n 17) 3–4, 16.

75  See AMF, ‘Position AMF—Placement non garanti et financement participative’ (30 September 2014) <http://www.amf-france.org/Reglementation/Doctrine/Doctrine-list/Doctrine.html?category=III+-+Prestataires&docId=workspace%3A%2F%2FSpacesStore%2Fbd6675bb-a590-48c3-a53e-c120bc4a4fc1> accessed December 2016; Alexis Wochenmarkt, ‘Belgium’ in Gajda et al (n 72) 22, 25.

76  See AMF and ACP, ‘Crowdfunding: A Guide for Funding Platforms and Project Owners’ (14 May 2013) 9 <http://acpr.banque-france.fr/fileadmin/user_upload/acp/Communication/Communiques%20de%20presse/20130514-guide-professionnel-crowdfunding.pdf> accessed December 2016.

77  See Gajda et al (n 72) 25, 155. The MTF qualification is instead rejected by ESMA for the lack of both multiple buyers and multiple sellers for the same financial instrument: ESMA, ‘Opinion’ (n 17) 18.

78  FCA, CP13/13 (n 28) 7.

79  For instance, the offering of securities to retail investors qualifies as the regulated activity of financial promotion (ie the invitation or inducement in the course of business to engage in investment activities) unless directed to shareholders see Tanja Aschenbeck-Florange et al, ‘Regulation of Crowdfunding in Germany, the UK, Spain and Italy and the Impact of the European Single Market’ (June 2013) 18 <http://www.osborneclarke.com/media/filer_public/51/b3/51b3007b-73aa-4b9a-a19d-380fc1d6ff35/regulation_of_crowdfunding_ecn_oc.pdf> accessed December 2016. FCA, ‘The Perimeter Guidance Manual—Chapter 13 Guidance on the scope of MiFID and CRD IV’ (April 2016), in particular 13.3 Q13 and Annex 2, <https://www.handbook.fca.org.uk/handbook/PERG/13/?view=chapter> accessed January 2017.

80  See David Blair and Aisling Pringleton, ‘United Kingdom’ in Gajda et al (n 72) 224–25.

81  In fact, crowdfunding activity is simply defined as putting in contact, through the web or other electronic means, a plurality of individuals or legal entities offering financing in exchange for a financial return (investors), with individuals or legal entities soliciting financing in their own name for a project of ‘financiaciòn participativa’ (promoters), with platforms primarily facilitating financial dealings between promoters and investors but also selecting promoters and developing communication channels among participants. See Arts 46, 51(1), and 66 Ley de fomento.

82  Only shares in unlisted technologically innovative start-ups—and more recently SMEs and OICV—with certain legal forms, in Italy; only subordinated-debt, profit-participating loans and similar financing granting a right to repayment and interest or cash settlement, in Germany; only equity and right to obtain a remuneration from equity participation or dividends or a share of profits, in Portugal.

83  Décret 2016-1453 has also included preferential shares assigning a right to vote at least proportional to the capital subscribed and mini-bonds (Arts L223-6ff and L547-1 CMF).

84  In addition, in Spain, platforms cannot provide investment services or personalized recommendations, loan advance, guarantees to promoters about a campaign’s success, or automatic investment systems; in Portugal, they cannot remunerate employees based on volumes: see Art 52 Spanish Ley de fomento and Art 5(2) Portuguese Lei 102/2015.

85  EUR 60,000 in Spain (Art 56 Ley de fomento) and EUR 50,000 in Portugal (Art 2 Regulamento 1/2016). In Italy, France, and based on the general regime for exempted brokers, Germany, only a professional insurance is required.

86  In France, investors can invest without limits but platforms, as advisors, must verify that the investment is adequate to investors’ understanding, experience, and financial situation (‘suitability test’). In Italy, investment amounts below certain thresholds now only relieve banks and investment firms from appropriateness checks (when platforms have not opted for directly performing the same: in such a case investment size is irrelevant since platforms must always verify that investments are appropriate).

87  Respectively, EUR 3,000 and EUR 10,000.

88  Starting April 2016, EUR 40,000.

89  In the UK, retail investors can invest in ‘non-readily realisable securities’ only when advised or having passed an ‘appropriateness test’ and anyway no more than 10 per cent of their ‘net investible portfolio’. In Germany, the limit is EUR 10,000 per issuer, when the investor attests a full availability of EUR 100,000 but otherwise, the limit is the double of monthly net income, in any case not above EUR 10,000; in the absence of a statement, the cap is EUR 1,000. In Austria, the limit is EUR 5,000 per year or, if the monthly income is above EUR 2,500, the double of the same or the 10 per cent of their financial assets.

90  Respectively, EUR 2 million, EUR 2.5 million, and EUR 1 million.

91  In France and Italy, no limits exist with reference to funds obtainable by each investee but offerings, in order to be exempted from prospectus requirements, must be below, respectively, EUR 2.5 million and EUR 5 million.

92  Regarding a functional approach in financial regulation, see John Armour et al, ‘Principles of Financial Regulation’ (OUP 2016); Steven L Schwarcz, ‘Regulating Financial Change: A Functional Approach’ (2016) 100 Minnesota Law Review 1441–94.

93  See ESMA, ‘Opinion’ (n 17).

94  Ferrarini and Macchiavello, ‘Investment-based Crowdfunding’ (n 19) 668. See also Macchiavello, ‘Peer-to-Peer’ (n 19) 581.

95  Some early-stage investment platforms restrain their activity to the listing of investment opportunities concerning start-ups: see eg Gust (<https://gust.com/about>) and AngelList (<https://angel.co>). To the extent that these platforms offer mere information services, US broker-dealer regulation does not seem to apply. Some US crowdfunding platforms do not offer brokerage services directly to investors, but partner with broker-dealers: eg EquityNet (<https://www.equitynet.com>) and CircleUp (<https://circleup.com>) which employs a wholly owned subsidiary registered as broker-dealer (all electronic resources, last accessed December 2016).

96  ESMA, ‘Opinion’ (n 17) 16, mentioning that Art 4(1)5 of MiFID clarifies that the concept of order is relevant both in primary and secondary markets. In ESMA’s opinion, the service/activity of execution of order on behalf of clients is generally excluded from the crowdfunding business model.

97  ESMA, ‘Opinion’ (n 17) 16: ‘In many cases the agreement could be effectively concluded by the platform on behalf of the investor, and in this case the platform would be carrying out execution of orders on behalf of clients. However, there could also potentially be models where the deal was concluded elsewhere without involvement from the platform.’

98  ibid 17.

99  ibid.

100  ibid.

101  ibid.

102  The French AMF and ACPR, in particular, ask platforms not to actively engage in soliciting new subscribers for individual offers, even by posting a detailed description of projects on a publicly accessible page of their website, in order for their service not to qualify as placement: see ACPR, ‘Position de l’ACPR relative au placement non garanti et au financement participative’ 2014-P-08 (30 September 2014) <http://acpr.banque-france.fr/fileadmin/user_upload/acp/publications/registre-officiel/201409-Position-2014-P-08-de-l-ACPR.pdf> accessed December 2016; AMF, ‘Position AMF—Placement non garanti et financement participative’ DOC-2014-10 (30 September 2014) <http://www.amf-france.org/Reglementation/Doctrine/Doctrine-list/Doctrine.html?category=III+-+Prestataires&docId=workspace%3A%2F%2FSpacesStore%2Fbd6675bb-a590-48c3-a53e-c120bc4a4fc1> accessed December 2016. As regards Italy, see Assoreti, ‘Linee guida per la relazione di servizio con il cliente’ (2009) guidelines on investment services approved by Consob, (2009) <http://www.assoreti.it/index.php?option=com_content&view=article&id=47:linee-guida-per-la-relazione-di-servizio-con-il-cliente-testo-completo&catid=18:articoli-allegati> accessed December 2016; Consob Communication No DAL/97006042 (9 July 1997).

103  In principle, the characterization of the service as placement could entail higher capital requirements and the exclusion of the Art 3 exemption, and would create a risk of liability for the platform, to the extent that the latter may appear to perform due diligence with respect to the offered securities and their issuer.

105  Macchiavello, ‘Peer-to-Peer’ (n 19) 580ff.

106  Article 4(1)(8) MiFID II defines portfolio management as ‘managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments’.

107  Platforms tend to deny their discretion in selecting the recipients because of their use of an algorithm (ie an automatic tool). A similar argument might be used by robo-advisor platforms using fully automated models to exclude the qualification of their activity as ‘personal recommendation’. In this second context ESAs have underlined the importance of clients’ perception, identifying a financial advice where the consumer can reasonably perceive the output to be advice: see ESAs, ‘Joint Committee Discussion Paper on automation in financial advice’ (4 December 2015) JC 2015/080 <https://www.eba.europa.eu/documents/10180/1299866/JC+2015+080+Discussion+Paper+on+automation+in+financial+advice.pdf> accessed June 2017.

108  See above section IV.1.C and Kirby and Worner (n 15).

109  Macchiavello, ‘Peer-to-Peer’ (n 19) 561–63; Ferrarini and Macchiavello, ‘Investment-based Crowdfunding’ (n 19) 674. In any case, when MiFID is applicable (because of the type of service and products), the treatment is stricter for IB-crowdfunding.

111  See Art 29(1) MiFID II: ‘Member States shall allow an investment firm to appoint tied agents’ (emphasis added; the rest of the provision is identical to Art 23(1) MiFID quoted above in the text). Under Art 4(1)(29) MiFID II, ‘ “tied agent” means a natural or legal person who, under the full and unconditional responsibility of only one investment firm on whose behalf it acts, promotes investment and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or financial instruments, places financial instruments or provides advice to clients or prospective clients in respect of those financial instruments or services’.

112  See Art 29(2) MiFID II.