The continuous evolvement of the financing market led to the inevitable creation of innovative schemes and financial technology solutions. Crowdfunding has been established as an alternative and innovative financing model, mainly for Small and Medium-sized Enterprises (“SMEs”) and start-ups, opening the gate to promote innovative businesses.
During a crowdfunding campaign, a business owner can raise funds from the crowd through an online platform, operated by a crowdfunding service provider. In our analysis, we focus on the regulatory regime of crowdfunding in Cyprus as an investment scheme through the issuance of transferable securities, during which investors will participate in the crowdfunding campaign and will have a return based on their investment (“investment-based crowdfunding”). Currently, investment-based crowdfunding is the only regulated type of crowdfunding in Cyprus.
The participants of an investment-based crowdfunding are the project owner, the crowdfunding service provider and the investor.
B. CROWDFUNDING IN CYPRUS
Crowdfunding in Cyprus is regulated under the Investment Services and Activities and Regulated Markets Law1 (the “Law”) and the Crowdfunding Directive2 issued by the Cyprus Securities and Exchange Commission (“CySEC”). The Crowdfunding Directive regulates the provision of crowdfunding services by the crowdfunding service providers and constitutes a supplement of the Law, with the aim to enhance the protection of investors during crowdfunding through the issuance of transferable securities. It should be noted that the existing legislation does not regulate other forms of crowdfunding such as loans, rewards and donations.
Crowdfunding service providers
According to the provisions of the Crowdfunding Directive, a crowdfunding service provider means a Cyprus Investment Firm (“CIF”) providing crowdfunding services. In effect, a crowdfunding service provider should obtain an authorization as a CIF in order to initiate the provision of crowdfunding services and should therefore meet its obligations set by the Law. Further, an existing CIF may request the expansion of its authorization so as to cover the provision of the below crowdfunding services.
Crowdfunding services are defined as “the matching of business funding interest of investors and project owners through the use of a crowdfunding platform” and which services consist of the following investment services and all or any of the following ancillary services as the case may be:
I. Investment services as provided under Part I of the First Appendix to the Law
II. Ancillary services as provided under Part II of the First Appendix to the Law
It should be noted that by granting such authorization, the CIF will be able to provide its crowdfunding services in the European Union under the passporting regime set by MIFID II3 and the Law. Further, it is worth mentioning that when a CIF acts as a crowdfunding service provider for the cross-border offering of transferable securities for investment-based crowdfunding, the prospectus thresholds regarding marketing, sale and distribution of securities within the European Union will be applicable.
The rules on investors’ protection
As mentioned above, the Crowdfunding Directive establishes a set of rules for the enhancement of investors’ protection. These rules concern the conflicts of interest, the customers’ due diligence, transparency obligations, the safekeeping of clients’ funds and financial instruments, as well as exit opportunities for the investors.
Two of the main rules are that a crowdfunding service provider is not allowed to acquire participation in the crowdfunding projects participating on the platform operated by itself and that a thorough Key Investment Information Sheet (“KIIS”) must be drafted by the project owner, containing information on the crowdfunding project.
It should be noted that the obligation for preparing a KIIS is applicable without prejudice to the obligation for the preparation of a Key Information Document (“KID”) under the EU Regulation 1286/20144.
C. EUROPEAN UNION FRAMEWORK ON CROWDFUNDING
In October 2020, the European Regulation on crowdfunding service providers5 (the “Crowdfunding Regulation”) was published on the official journal of the European Union along with the EU Directive 1504/20206 amending MIFID II. The Crowdfunding Regulation aims to harmonize investment-based and loan-based crowdfunding across the European Union, by establishing standards and obligations to be met by the crowdfunding service providers.
It is important to note that the EU Directive amending MIFID II, excludes from the scope of application of MIFID II the crowdfunding service providers regulated under the Crowdfunding Regulation, whereas, based on the current regulatory framework, a crowdfunding service provider in Cyprus should be authorized as a CIF in accordance with the Law implementing MIFID II.
Since the Crowdfunding Regulation, which is directly applicable in the national law of the Member States, will enter into force on the 10th of November 2021, it remains to examine how the Cyprus regulator will adjust the existing crowdfunding framework in order to meet the requirements under the Crowdfunding Regulation.
D. HOW WE CAN ASSIST YOU
Crowdfunding Service Providers
Our Financial Services Department may assist a company to obtain an authorization as a CIF or assist an existing CIF to expand its authorization to provide crowdfunding services.
Kinanis LLC may:
SMEs and start-ups
If you are a SME or a start-up, Kinanis LLC may:
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.
Partner – Financial Services & Funds Department
Associate Lawyer – Financial Services & Funds Department
We are a Law Firm with offices in Cyprus and Malta and a representative office in Shanghai China comprising of more than 50 lawyers, accountants and other professionals who advise, international and local clients.
The Firm has been offering legal and consulting services since 1983 evolving from a traditional law firm to an innovative cutting-edge multidisciplinary law firm combining exceptional expertise in law, tax, vat and accounting.
From its establishment the Firm’s focus has been heavily business oriented and always abreast with the latest global developments and innovations. Drawing from our pool of experienced professionals we provide our clients’ businesses full legal and accounting support on an everyday basis as well as customized solutions in today’s global financial and legal challenges.
We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively.
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