When talking about crowdfunding in Europe, the UK is without a doubt the most important and active market. According to Forbes, the UK crowdfunding industry had a net worth of €3.56 billion by the end of 2014, leading the continent. Quantified in money raised, the European crowdfunding scene raised €2.96 billion in total and the UK accounted for three-quarters of it.
Focusing on the renewable energy crowdfunding industry, the UK has always had a strong presence with renewable energy focused platforms that raise the largest amounts in the world, according to Solarplaza’s Renewable Energy Crowdfunding Map. These are remarkable numbers which cannot help but raise questions: Why has the UK taken such a big leap when it comes to crowdfunding and why have the rest of the European markets not followed suit in the development of crowdfunding?
There might be a lot of different explanations for that; it could be the high demand for alternative financing for renewable energy projects or the “first-mover” advantage, given that the concept of crowdfunding has been around in the UK for about a decade. However, what seems to be the most important factor to facilitate such a great advance in alternative finance is the timely and supportive regulatory system. A system that is highly distinguishable from the rest of the European markets’ ones and in which we take a better look in the following detailed overview by Eversheds, part of our recent Crowdfunding Legal Framework Overview report.
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UK CROWDFUNDING: UPDATE ON THE LEGAL FRAMEWORK
by Andrew Henderson, Partner, Eversheds UK
Simon Mchugh, Associate, Eversheds UK
Crowdfunding is regulated by the Financial Conduct Authority (“FCA”) in the UK where it involves activity that falls within the scope of the legal framework provided for by the Financial Services and Markets Act 2000 (“FSMA”).
In particular, crowdfunding is regulated where it involves the carrying on of a ‘regulated activity’ for the purposes of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”) or where there is communication of a financial promotion for the purposes of section 21 of FSMA.
It should be noted that the following types of crowdfunding are most likely to fall outside the FCA’s regulatory remit and the legal framework provided for by FSMA:
- Donation-based crowdfunding;
- Pre-payment or rewards based crowdfunding; and
- Exempt schemes (where there is investment or lending using organisations or investments that satisfy requirements in statutory exemptions such as Enterprise Schemes or withdrawable shares issued by Provident Societies).
Investment-based crowdfunding
Investment-based crowdfunding is where investments are made, directly or indirectly, into new or established businesses through buying shares or debt securities or units in a collective investment schemes on crowdfunding platforms. Investment-based crowdfunding is subject to FCA regulation to the extent that it most likely involves the carrying on of one the following regulated activities:
- arranging deals in specified investments;
- agreeing to carry on a regulated activity;
- establishing, operating or winding up of an unregulated collective investment scheme.
As such, firms operating investment-based crowdfunding platforms are required to to be authorised by the FCA unless an exemption is available.
Non-readily realisable securities
On 1 April 2014, the FCA introduced new rules that apply to the distribution of “non-readily realisable securities”, which includes through their distribution through crowdfunding platforms. Non-readily realisable securities are securities that are not: (i) readily realisable securities, (ii) non-mainstream pooled investments (“NMPIs”), or (iii) packaged products. The FCA’s rules require firms promoting non-readily realisable securities to communicate direct offer financial promotions only to the following types of investor:
- professional clients;
- retail clients who are advised;
- retail clients classified as corporate finance contacts or venture capital contacts;
- retail clients certified as sophisticated or high net worth; or
- retail clients who confirm that they will not invest more than 10% of their net investible assets in these products. confirm receive regulated investment advice.
Where no advice has been provided to retail clients firms are required to apply an appropriateness test to check that clients have the knowledge or experience to understand the risks involved.
It should be noted that whilst not falling within the definition of non-readily realisable securities, packaged products and NMPIs can be distributed through crowdfunding platforms. There is an established regime in the UK that applies to packaged products and also regulatory restrictions applicable to the promotion of NMPIs (including unregulated collective investment schemes).
Loan-based crowdfunding
From 1 April 2014 regulation of the consumer credit market transferred to the FCA, including responsibility for regulating loan-based crowdfunding. Loan-based crowdfunding is where platforms are operated to facilitate lending either between two consumers (‘Peer-to-Peer’ or ‘P2P’) or between consumers and businesses (‘Peer-to-Business’ or ‘P2B’). Such agreements are known as article 36H agreements and there are a number of regulated activities relating to them.
In particular, the FCA has introduced the new regulated activity of operating an electronic system in relation to lending. This is where a firm operates an electronic system which enables them to facilitate persons entering into article 36H agreements. As such, firm operating loan-based crowdfunding platforms are required to be authorised by the FCA[1].
Unlike the rules relating to investment based crowdfunding which focus on restricted categories of investor, the rules that the FCA has introduced in relation to loan-based crowdfunding focus on providing investors with access to clear information. This is so that consumers interested in lending to individuals or businesses can assess the risks and understand who they are lending to.
Firms involved in loan-based crowdfunding are subject to the application of the FCA’s core consumer protection provisions, including its conduct of business rules, client money protection and minimum capital requirements. Firms operating loan-based crowdfunding platforms are also required to have resolution plans in place that mean, in the event of the platform collapsing, loan repayments will continue to be collected so those lending money do not lose out.
Future outlook on the evolution of the UK crowdfunding laws
The FCA carried out a review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media in February 2015. The FCA’s review looked at the implementation of the rules introduced in April 2014 and the FCA concluded that, whilst recognising that it was still early, there was no need to change the regulatory approach adopted for crowdfunding, either to strengthen consumer protections or to relax the requirements that apply to firms. The FCA is carrying out a full post-implementation review of the crowdfunding market and regulatory framework in 2016 to identify whether changes are required at that stage.
Recent updates
The FCA recently published a call for input on competition in the mortgage sector. In relation to looking at access to mortgage funding as a barrier to entry and competition in the UK mortgage lending industry, the FCA stated that it had a particular interest in the scope for newer types of funding models such as crowdfunding to overcome the constraints potentially imposed by other (more traditional) funding models. The FCA’s interest can be seen as a sign of support for alternative forms of funding such as crowdfunding.
[1] Or where relevant an interim permission pending application for full authorisation.
