knowledge 12 January 2016 |

Crowdfunding – No Common International Supervisory Approach for Now

There will be no common international approach to the supervision of crowdfunding, at lest for the moment, according to a recent statement published by IOSCO, the worldwide association of national securities regulatory commissions.

This statement accompanied the publication of IOSCO’s Survey Report on its fact-finding survey on crowdfunding, in which IOSCO sought; 1) to enhance its understanding of developments in current or proposed investment-based crowdfunding regulatory programmes, and 2) to highlight emerging trends and issues in this area. IOSCO defines crowdfunding as "an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organizations, in order to raise funds for a project, business/personal loan or other financing needs through online web based platforms."

According to IOSCO, the Survey Report highlights that most regulatory regimes for crowdfunding have only recently been implemented, meaning that the establishment of a common international approach may be premature. However, IOSCO is seeking to raise awareness regarding some of the major risks associated with crowdfunding including the risk of default and the high failure of start up businesses, platform failure, fraud and money laundering, lack of liquidity and information asymmetry. According to IOSCO, so far measures introduced to mitigate these risks include:

• customising entry, registration or licensing requirements for funding portals;
• setting disclosure requirements for issuers and funding portals;
• limiting the services that may be provided by crowdfunding platforms;
• requiring investor education and/or statements signed by investors acknowledging their understanding of risks;
• limiting the size of the investments made by an individual in each offering and in a given timeframe; and
• requiring the appointment of a third party custodian to hold investor assets.

While the establishment, in the short-term, of a common international approach to crowdfunding looks unlikely, the position is somewhat different at EU level. In particular, over the course of the last twelve months or so, both the European Banking Authority and the European Securities and Markets Authority (“ESMA”) have suggested that there is a need for some degree of supervisory convergence around the regulation of crowdfunding platforms. For its part, ESMA has already established a supervisory forum to bring together the staff of national regulatory authorities responsible for regulating crowdfunding platforms. Moreover, at a speech delivered at the European Crowdfunding Network’s 4th Crowdfunding Convention at the end of October 2015, ESMA’s chair, Steven Maijoor, voiced concern that a “fragmented regulatory landscape could prevent crowdfunding from reaching its full potential”.

At national level, the Central Bank of Ireland has not taken any concrete measures to regulate crowdfunding. However, on 17 June 2014 it issued a Consumer Notice alerting consumers to the fact that crowdfunding is not currently a regulated activity in Ireland and that, for example, the protections provided to consumers under Central Bank codes of conduct do not apply to crowdfunding platforms. The Central Bank also outlined a number of specific risks potential investors should consider before participating in crowdfunding.

You may access the IOSCO 2015 Survey Report here.