Crowdfunding Service Providers in Cyprus
The Cyprus Securities and Exchange Commission (CySEC) recently released Policy Statement PS-01-2023, which covers the implementation of Regulation (EU) 2020/1503 on European Crowdfunding Service Providers for businesses and Directive DI73-2009-02 for Crowdfunding Service Providers.
The new regulatory framework aims to establish consistent rules to improve market access, strengthen investor protection, and grant CSPs an EU passport, allowing them to offer their services across the EU with a single authorisation. This framework covers various aspects, such as information disclosures, transparency and marketing communications, governance and risk management, and supervisory powers for national authorities overseeing crowdfunding platforms.
The Policy Statement is relevant to legal entities that plan to offer crowdfunding services from Cyprus and those already providing such services from Cyprus, having been previously authorised under national law, such as Cyprus Investment Firms (CIFs).
Key European Regulations
Regulation (EU) 2020/1503 on European Crowdfunding Service Providers for business (ECSP Regulation) is a significant step towards harmonising the regulatory environment for crowdfunding services across the European Union. Introduced in October 2020, the regulation aims to create a single market for crowdfunding services and establish a clear legal framework for service providers, ultimately enhancing investor protection and market accessibility.
Key aspects of Regulation (EU) 2020/1503 include:
- Uniform Rules: The ECSP Regulation establishes a set of uniform rules for crowdfunding platforms operating within the EU. By providing a consistent legal framework, the regulation helps to minimise regulatory arbitrage and ensure a level playing field for all market participants.
- EU Passport: One of the primary objectives of the regulation is to create an EU passport for crowdfunding service providers (CSPs). This passport enables CSPs to offer their services across the EU with a single authorisation, simplifying the process for businesses seeking to expand their operations in multiple member states.
- Investor Protection: The regulation strengthens the investor protection framework by setting clear rules on information disclosures for project owners and crowdfunding platforms. It also mandates rules on transparency and marketing communications concerning the provision of crowdfunding services within the EU.
- Governance and Risk Management: The ECSP Regulation emphasises the importance of robust governance and risk management practices for crowdfunding platforms. It requires CSPs to establish appropriate procedures to identify, manage, and mitigate potential risks to their operations and clients.
- Supervisory Powers: The regulation grants national competent authorities, such as the Cyprus Securities and Exchange Commission (CySEC), strong and harmonised supervisory powers to oversee the functioning of crowdfunding platforms. This ensures that the platforms operate in compliance with the regulation, ultimately protecting investors and maintaining market integrity.
- Scope: The ECSP Regulation applies to crowdfunding service providers offering services within the EU, including those providing lending-based crowdfunding and investment-based crowdfunding services. However, the regulation does not apply to reward-based or donation-based crowdfunding platforms.
The introduction of Regulation (EU) 2020/1503 is a significant milestone in the development of the crowdfunding industry in Europe. By establishing a consistent legal framework, it fosters market growth, innovation, and cross-border expansion while maintaining a high level of investor protection.
The Cyprus Crowdfunding Service Provider Framework
Directive DI73-2009-02 for Crowdfunding Service Providers is a national directive issued by the Cyprus Securities and Exchange Commission (CySEC) that provides guidance on the implementation of Regulation (EU) 2020/1503 on European Crowdfunding Service Providers for business in Cyprus. The directive aims to facilitate the authorisation process for crowdfunding service providers (CSPs) and provide clarity on the regulatory requirements and compliance obligations for CSPs operating in Cyprus.
Key aspects of Directive DI73-2009-02 include:
- Authorisation Application: CSPs intending to offer crowdfunding services in Cyprus must submit an authorisation application to CySEC. The directive outlines the application process, including the required documentation, such as the standard application form, relevant questionnaires, and any additional information or evidence required by CySEC. Entities authorised under national law can continue offering crowdfunding services within the scope of the ESCP Regulation until November 10, 2023, or until they receive authorisation under the ESCP Regulation, whichever comes first. Entities operating under national law during this transitional period will not benefit from an EU passport.
- Compliance Obligations: The directive establishes various compliance obligations for CSPs operating in Cyprus. These obligations include:
- Submit an annual confidential report of all projects funded through their platform to CySEC.
- Annually disclose crowdfunding project default rates on their lending-based platform for at least the past three years.
- Prepare and make public an outcome statement within four months of each financial year’s end.
- Provide prospective investors with a comprehensive key investment information sheet (‘KIIS’) including a warning statement regarding potential financial losses.
- Governance and Risk Management: In line with Regulation (EU) 2020/1503, Directive DI73-2009-02 emphasises the importance of robust governance and risk management practices for CSPs. It requires CSPs to implement appropriate procedures to identify, manage, and mitigate potential risks to their operations and clients.
- Language Requirements: The directive sets out language requirements for the documentation, such as the KIIS, which must be drafted in Greek or English. Additionally, a KIIS in Greek should be made available if the document is originally drafted in English.
- Ex-ante Notification: In relation to the ex-ante notification of the KIIS, CySEC requires a notification period of at least seven working days before making it available to prospective investors.
- Fees: Directive DI73-2009-02 outlines the fees payable to CySEC for the examination of the authorisation application, the notification of any changes or the intention to provide or terminate the provision of any services or activities, and the annual fees applicable to CSPs operating in Cyprus.
Directive DI73-2009-02 plays a crucial role in ensuring the proper implementation of Regulation (EU) 2020/1503 within Cyprus, offering CSPs guidance on the authorisation process and compliance requirements. This directive ultimately helps to establish a stable and secure environment for crowdfunding services in Cyprus, supporting the growth of the industry while maintaining investor protection.
Crowdfunding Service Provider Fees
Fees are payable to CySEC for the examination of the authorisation application, as well as for notifying any changes or the intention to provide or terminate the provision of any services or activities. Annual fees are also applicable, consisting of a fixed fee and a cumulative increment based on the CSP’s turnover.
A €2,000 fee is payable to CySEC for the examination of the authorisation application. Fees also apply for notifying any changes or the intention to provide or terminate the provision of any services or activities, as outlined in Article 7 of Directive DI73-2009-02.
Annual fees payable to CySEC consist of:
a. A fixed fee of €5,000, and b. A cumulative increment based on the product of the CSP’s turnover, provided that the turnover is equal to or greater than €250,000, according to the scale defined below:
- €400 for turnover between €250,000 and €499,000.
- €300 for each additional €250,000 tranche in turnover.
The calculation in point (b) above is performed based on the previous year’s annual audited financial statements of the CSPs.
How Chambers & Co Can Assist Crowdfunding Service Providers
Chambers & Co is a leading law firm in Cyprus, offering comprehensive legal services to businesses, including those in the crowdfunding industry. Our team of experienced legal professionals can assist CSPs operating in Cyprus in various ways:
- Navigating the complexities of the new regulatory framework and ensuring compliance.
- Guiding CSPs through the authorisation application process and assisting with the completion and submission of necessary forms and documents.
- Ensuring compliance with specific requirements, including drafting necessary documentation and advising on the ex-ante notification process for the KIIS.
- Assisting with fee calculation and management to maintain good standing with the regulatory authority.
- Providing ongoing legal support as regulations evolve and the crowdfunding industry continues to grow.
The new regulatory framework for Crowdfunding Service Providers in Cyprus presents both opportunities and challenges for businesses operating in the sector. By understanding the key aspects of the framework and ensuring compliance with all relevant regulations, CSPs can thrive in this rapidly evolving industry.
Chambers & Co is committed to providing comprehensive legal services to Crowdfunding Service Providers in Cyprus. With our extensive knowledge of the regulatory landscape and dedication to client success, we can help your crowdfunding platform navigate the complexities of the new framework and ensure ongoing compliance. Contact us today to learn more about our services and how we can support your business in the ever-changing crowdfunding industry.