On 7 April 2016 the Finnish Crowdfunding Act was submitted by the Finnish Ministry of Finance to the national Parliament. The Act is scheduled to come into force on 1 July 2016. It follows a public consultation in 2015 and creates a national framework for crowdfunding as EU regulation of crowdfunding should not be expected in the near future.
Other countries that have already created national frameworks are Italy, France, the UK, Germany, Spain, Austria and Portugal. In addition, Belgium, the Netherlands and Lithuania intend to bring legislation on the issue into force shortly. The need for regulation is currently being explored in a number of other EU states, including Sweden, Estonia and Latvia. While ECN welcomes the clarification on national level, we must also criticise that the sector has been highly fragmented though national legislation, while the European Commission will issue a report shortly concluding that it is still too early to regulate the sector.
In Finnland, the Crowdfunding Act is part of the key Government projects. According to the Ministry of Finance, the crowdfunding act will give Businesses more options to finance their growth when the acquisition of debt- and securities-based crowdfunding is made easier. The new Act will particularly ease the regulation of securities-based crowdfunding and correspondingly clarify the ground rules for debt-based crowdfunding.
Why is the Crowdfunding Act needed?
The objective of the Crowdfunding Act is to clarify the responsibilities of various authorities in the supervision of crowdfunding, to improve investor protection and to diversify the financial markets.
The goal is to support the creation of new sources of financing, particularly for innovative growth companies that experience difficulties in obtaining financing through traditional funding channels. Crowdfunding will improve access to financing, particularly for SMEs and start-ups. Through this, it will be possible for them to boost their growth opportunities, investment options, commercialisation of innovations and thereby, hopefully, employment.
Minister of Finance Alexander Stubb
It is believed that the Crowdfunding Act will particularly ease the regulation of securities-based crowdfunding, currently still regulated by the Investment Services Act and the Finnish Financial Supervisory Authority’s interpretation of the content of the Act. The following is expected:
- For crowdfunding intermediaries, the administratively onerous and time-consuming operating licence process will be replaced by a registration process that is less expensive, simpler and faster.
- Crowdfunding intermediaries will no longer need to join the Investors’ Compensation Fund.
- A crowdfunding intermediary’s minimum capital requirement will be reduced from the present EUR 125,000 to EUR 50,000.
- An alternative to the capital requirement will be proposed, such as professional liability insurance, a bank guarantee or other corresponding guarantee that the Financial Supervisory Authority deems to be sufficient.
The easing of regulation will apply to mediation and acquisition of crowdfunding in Finland. With respect to operating in other EU countries, it is recommended that an intermediary still apply for an investment service company operating licence, which will facilitate simple access to European markets.
Debt-based crowdfunding, on the other hand, will receive clear legislative-level ground rules. Currently, debt-based crowdfunding is considered to be financial mediation that is not in all cases regulated in law. This applies particularly to loan intermediation to businesses.
In the future, debt-based crowdfunding will be regulated just like securities-based crowdfunding. The proposed Act:
- specifies a disclosure obligation for both the crowdfunding intermediary and the business entity seeking funding
- regulates the crowdfunding intermediary’s procedures and its obligations towards the investor
- includes provisions on the supervision of crowdfunding intermediaries as well as appropriate sanctions.
For investors, crowdfunding may be a way to invest in a project that has higher return expectations and higher risk than traditional investments. When the sector receives clear legislative-level ground rules, investor protection will also be improved.
Under the new Act, crowdfunding may be mediated only by business entities that are entered in a special register of crowdfunding intermediaries. The register will be open to business entities that have reliable management and adequate knowledge of the financial markets.
The Finnish Financial Supervisory Authority will be responsible for the register and the supervision of the intermediaries. For example, credit institutions may also mediate crowdfunding via their own existing operating licence.
In addition, investor protection will be specified in a separate decree of the Ministry of Finance relating to the disclosure obligation of an entity acquiring financing through crowdfunding. The decree will include provisions on risk warning, among other things.
The Crowdfunding Act will improve new financing options, particularly in bottleneck situations affecting the growth of SMEs. I hope that this will give Finnish companies new courage to innovate and grow,”
Minister of Finance Alexander Stubb
How big is the crowdfunding market in Finland?
The size of the crowdfunding market in 2015 was approximately EUR 84.4 million. This was 48% higher than the previous year, according to market estimates:
- investment-based crowdfunding: EUR 15.5 million (equity capital collected from people for companies)
- loan-based crowdfunding: approximately EUR 68.9 million (peer-to-peer loans mediated to consumers EUR 46.3 million and loans mediated to companies EUR 22.6 million).
In comparison, estimates of crowdfunding markets throughout the world in 2015 show the significant market potential:
- Europe: EUR 6 billion euros (+100% from previous year)
- USA: USD 17 billion (+80 %)
- Asia: USD 11 billion (+220 %)
- Whole world: USD 34.4 billion (+112%)
In Finland, the availability of financing from banks has not deteriorated as much as in many other EU countries. Nevertheless, crowdfunding has also become more popular in Finland as banks have tightened their requirements relating to collateral and special conditions (covenants) and focused to increase the margins on the loans books.
The Act in more detail
The Crowdfunding Act aims to ensure that investors are informed of all relevant information to enable them to make informed investment decisions. Moreover, crowdfunding as a sector is also in a growth phase, and all procedures have not yet been established. In this respect, too, the Act seeks to steer the sector in the right direction and to define the rights and obligations of intermediaries, investors and companies seeking finance in a centralised way.
Under the proposal, crowdfunding can be mediated only by businesses that are entered in a special register of crowdfunding intermediaries. The conditions for registration are specified in detail in the Act. The register will be open to reliable operators that have adequate knowledge of the financial markets. The Finnish Financial Supervisory Authority will be responsible for the register and the supervision of the intermediaries.
The current operating licence process will be replaced by a lighter model in which intermediaries will be registered with the Finnish Financial Supervisory Authority. Crowdfunding intermediaries will no longer need to join the Investors’ Compensation Fund, and the minimum capital requirement for crowdfunding intermediaries will be reduced from the present EUR 125,000 to EUR 50,000. An alternative to the capital requirement will be proposed in due course.
The Act will have no effect on situations where a business entity seeking funding exercises its option within the scope of business freedom to obtain funds from people by independently offering its own securities. Securities may be offered, for example, through the business entity’s own website in the form of a share issue. A crowdfunding intermediary is not used in such an arrangement. In such cases, the business entity seeking funding must independently ensure that it complies with legislation, for example the Limited Liability Companies’ Act and Securities Market Act.
Other key points of the Crowdfunding Act are to:
- enhance financial intermediation and thereby economic growth
- clarify the ground rules for crowdfunding and to reduce the costs of the sector and the authorities
- resolve demarcation problems in relation to other national legislation, such as the Investment Services Act and the Securities Markets Act
- make a clear distinction between transferrable securities referred to in the Securities Markets Act and securities other than those referred to in the Securities Market Act, essentially non-transferrable securities, which is of key significance for crowdfunding intermediaries with respect to the operating opportunities prescribed in the Act
- improve investor protection where, in acquiring and mediating crowdfunding, securities other than those referred to in the Securities Market Act, essentially non-transferrable securities, are utilised
- facilitate the mediation of crowdfunding with lighter administrative requirements than at present without an administratively heavy and expensive operating licence procedure (implementation of Article 3, optional for Member States, of the Market in Financial Instruments Directive, MiFID I, with respect to investment-based crowdfunding)
- support the growth of crowdfunding such that a prospectus needs only be published for a securities offer exceeding EUR 5 million (the current national prospectus limit value is EUR 2.5 million), with the aim of facilitating the utilisation of crowdfunding in business financing more extensively than at present without the obligation to prepare a separate and often rather expensive prospectus
- promote with respect to investors and the rest of the general public as well as companies and other issuers seeking financing through crowdfunding an understanding of their rights and obligations.
How may the Act improve investor protection?
The Act clarifies the terminology and the responsibilities of the authorities in the sector, and makes a complex subject more understandable. It also strengthens the position of investors by specifying clear rules on investor protection and disclosure requirements. At the same time, crowdfunding will become part of the regulated financial markets.
Investor protection will be improved, for example, by extending under the Act the obligation to disclose information also to situations in which securities other than those referred to in the Securities Markets Act are utilised in acquiring or mediating crowdfunding. Currently, securities other than those referred to in the Securities Market Act, essentially non-transferrable securities, are not included within the scope of the Securities Market Act or the Investment Services Act. They are therefore largely outside of regulation and thereby investor protection.
In addition, investor protection will be specified in a separate decree of the Ministry of Finance relating to the disclosure obligation of an entity acquiring financing through crowdfunding. The decree will include provisions on risk warning, among other things. The Act, for its part, has provisions on a crowdfunding intermediary’s procedures and its obligations towards the investor.
Donation-based crowdfunding is regulated by the Money Collection Act, which is the responsibility of the Ministry of the Interior. The comprehensive reform of the Money Collection Act has been suspended until further notice.
Reward-based crowdfunding is regulated by the Consumer Protection Act where a relationship between a consumer and a business is involved. The Sale of Goods Act is applied where a relationship between two consumers or a relationship between two businesses is involved. The Ministry of Justice is responsible for both Acts.
Peer-to-peer consumer lending falls within the scope of the Consumer Protection Act. The Ministry of Justice is currently specifying the regulation of peer-to-peer consumer lending as part of the implementation of the Mortgage Credit Directive. A Government proposal on the matter will be submitted to Parliament in April 2016.