New Regulation on Debt-based Crowdfunding
Debt-based crowdfunding consists of loans that are repaid with interest, distinguished from equity-based crowdfunding where investors receive shares of the company. There are also other forms of crowdfunding like reward-based crowdfunding where funders is rewarded with a product, or donation-based crowdfunding where backers donate funds because they believe in the cause.
The actors associated with debt-based crowdfunding is mainly (i) the crowdfunding platform provider that brings the parties together, (ii) the borrower (the company or the private individual), and (iii) the lender (the crowd). The new regulation targets only (iii) the lender (the crowd).
Lending qualifies as financing activity that requires authorisation in accordance with section 2-1 of the Financial Entities Act. However, there is an exemption for isolated instances of financing. There has been substantial uncertainty amongst the financial market participants whether this exemption applies to lenders on crowdfunding platforms.
In order to mitigate this uncertainty, the Ministry of Finance has now adopted an exemption in section 2-18 of the Financial Entities Regulation of 9 December 2016 no. 1502 targeted at lending through crowdfunding platforms provided by registered loan intermediaries or an authorised bank or financing company. The exemption states that lending up to NOK 1 million per year per lender will not qualify as financing activity.
It should be noted that the Ministry of Finance’s original proposal limited the exemption to lending to companies only. However, the responses to the public consultation by the Norwegian Crowdfunding Association and different financial market participants recommended that the exemption should be expanded to encompass lending to private individuals. Obviously, the Ministry of Finance has listened to this recommendation and adjusted the new regulation accordingly.
This adjustment contrasts the opinion of the Norwegian Financial Supervisory Authority, who clearly dislike debt-based crowdfunding towards private individuals.
However, the Ministry of Finance agrees with the Financial Supervisory Authority on the point that specific authorisation requirements should apply to debt-based crowdfunding platform providers. Hence, the Ministry of Finance has initiated a public consultation on such requirements with a response deadline of 1 September 2019.
Today, the crowdfunding platform provider usually qualifies as a loan intermediary, which do not require authorisation, but have to register with the Norwegian Financial Supervisory Authority in accordance with section 2-18 of the Financial Entities Act of 10 April 2015 no. 17. If the provider also performs financing activities, it will require authorisation as a bank or a financing company in accordance with section 2-7 or 2-9 of the Act.
When assessing a new regulation in Norway on crowdfunding platforms the Ministry of Finance will certainly observe the discussions on EU level on regulation of crowdfunding platforms. On 27 march 2019, the European Parliament adopted a proposal for such regulation imposing specific authorisation requirements on crowdfunding platforms, following up the European Commission’s proposal from March 2018. In short, the Parliament’s proposed regulation encompasses both debt-based and equity-based crowdfunding platforms, providing financing to companies only, within a limit of EUR 8 million per year to a single company. It is anticipated that the European Parliament’s proposal will be subject to trilog negotiations between the Parliament, The European Council and the European Commission after the EU-election in May 2019. However, the signals from the European Council is that the member states disagrees substantially on this at the moment.
The Norwegian financial market welcomes the clarification and exemption from the Ministry of Finance. However, we anticipate that it will be difficult for the different crowdfunding platform providers to be able to control the lenders total lending per year.
Financial and credit institutions like insurance companies, banks, regulated markets, investment firms and management companies are facing increasingly complex and extensive regulations, with the added complexity of the need to harmonize, incorporate and implement EU rules and regulations with Norwegian law. SVW’s Financial Regulatory group has extensive experience in guiding clients on all such regulatory matters.
Kasper Formo Asplin is a specialist on financial regulation law, and primarily assist Norwegian and foreign investment firms, management companies and credit institutions on applications for authorization and operating conditions, in addition to participants who operates in the financial market and do not require such authorization. Asplin’s core expertise encompasses EU/EEA law regarding passporting and cross-border activities both into and out of Norway.
See also our previous article on crowdfunding here