Understanding Due Diligence Standards for Crowdfunding Platforms Under ECSPR

Article 5 of the European Crowdfunding Service Providers Regulation (ECSPR) sets out clear due diligence requirements for crowdfunding platforms. These requirements mandate that crowdfunding service providers (CSPs) perform at least a minimum level of due diligence on project owners before allowing them to propose their projects for funding through their platforms.

Due diligence, in its simplest terms, can be described as “doing your homework” before making an important decision. It involves thoroughly investigating and verifying information to reduce risks and make informed choices. While due diligence is widely used in fields like business, finance, and law, it also applies specifically to the operations of crowdfunding platforms regulated under ECSPR.

Key Aspects of Due Diligence

Understanding due diligence in broader terms can help contextualize its application in the crowdfunding space. Here are some essential features of due diligence:

1. Applicable Across Contexts:
   Due diligence is a common practice in various fields, including business transactions, legal matters, and even personal decisions such as purchasing a home or hiring a contractor.
2. Involves Comprehensive Investigation:
   The process typically involves gathering information through multiple channels, such as document reviews, interviews, and asset inspections.
3. Focuses on Risk Assessment:
   Due diligence aims to evaluate the potential risks and benefits associated with a decision, helping stakeholders make informed choices.
4. Tailored to the Context:
   The scope and depth of due diligence depend on the situation and the level of associated risk.

Due Diligence Requirements for Crowdfunding Platforms

Under ECSPR, crowdfunding platforms must meet specific minimum due diligence standards to ensure the integrity of their operations. These include verifying the following:

1. No Criminal Record for Key Offenses
   CSPs must confirm that the project owner has no criminal record related to breaches of laws such as national commercial law, insolvency law, financial services law, anti-money laundering (AML) law, fraud law, or professional liability obligations.Example:
   A small business previously convicted of violating AML laws—e.g., accepting significant cash payments without proper documentation—would not meet the due diligence standards. In such cases, projects proposed by this business should not be accepted by the platform.
2. Not Established in High-Risk Jurisdictions
   CSPs must ensure that project owners are not established in:
   • Non-cooperative jurisdictions as identified by relevant EU policies, orHigh-risk third countries as defined in Article 9(2) of Directive (EU) 2015/849.
   Example: If a project owner is based in a high-risk third country such as Afghanistan, Barbados, or Burkina Faso (identified as high-risk jurisdictions), their projects would not meet ECSPR due diligence requirements.

Conclusion

Due diligence is a cornerstone of the ECSPR framework, ensuring that crowdfunding platforms operate with transparency, integrity, and accountability. By conducting thorough investigations into project owners’ backgrounds, platforms can mitigate risks, protect investors, and uphold the credibility of the crowdfunding ecosystem. These stringent requirements not only enhance investor confidence but also create a robust regulatory environment for the growth of crowdfunding services across the European Union.