Overview: Proposal for Regulation of 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), and (iii) the lender (the crowd).
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. The proposal does not include further regulation of the crowdfunding platform provider.
The borrower usually does not perform any activities regulated by the financial market law. The proposal does not include any regulation of the borrower.
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 proposed to add an exemption in the Financial Entities Regulation of 9 December 2016 no. 1502 targeted at lending to companies 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.
Norway’s central bank states in its response to the public consultation that the different crowdfunding platform providers should be able to control the lenders total lending per year, and suggests a reporting obligation to an open central register.
The responses to the public consultation by the Norwegian Crowdfunding Association and different financial market participants can be summarised by the following: (i) exemptions should be expanded to encompass lending to private individuals, and (ii) the amount limitation should be removed, eventually raised to NOK 5 million per year.
The Norwegian Financial Supervisory Authority recommends in its response to the public consultation that the amount limitation is reduced to NOK 500,000 and that the limitation is put on the lenders total lending continuously, thus not only limited yearly.
However, the Financial Supervisory Authority has also published its own proposal for new regulation of debt-based crowdfunding platform providers. The proposal imposes an authorisation requirement on loan intermediaries providing crowdfunding platforms and that lending to private individuals shall be prohibited through such platforms. The provider shall have liability insurance and be affiliated with a non-judicial dispute resolution arrangement.
The financial market participants and the Financial Supervisory Authority disagrees substantially on the proposal from the Ministry of Finance. It will be interesting to see how the Ministry handles this disagreement, but one should not be surprised if the Ministry does not amend its proposal.
We anticipate that the Ministry of Finance will await EU’s regulation on crowdfunding service providers before assessing the Financial Supervisory Authority’s proposal for new regulation of debt-based crowdfunding platform providers, at least if they get signals that EU will adopt the regulation shortly. The European Commission presented a proposal for such regulation in March 2018, which encompasses passporting rights for crowdfunding service providers.
Nevertheless, financial market participants should anticipate new regulation on crowdfunding in 2019, and should also note the Financial Supervisory Authority’s dislike of unauthorised debt-based crowdfunding, particularly towards private individuals.
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.