- Current and emerging regulatory frameworks for investment-based crowdfunding seek to address platform misconduct and failure risks through a combination of approaches, including authorization and vetting requirements; requirements for business/service-continuity arrangements; segregation of client funds and imposing rules and policies to mitigate conflicts of interest. Other requirements might include minimum capital and adequacy of financial resources, organizational competence, dispute resolution, and outsourcing standards.
- Setting adequate criteria for platform operator authorization and vetting fortifies investor protection by ensuring operators adhere to rigorous standards of integrity, competence, and financial viability.
- Having authorization requirements in place enables regulators both to take action against unauthorized platform operators and to use enforcement of authorization conditions as a means of ensuring good behavior by authorized entities.
Different jurisdictions have taken different approaches to authorization requirements for crowdfunding platform operators. Some jurisdictions have brought operators within existing licensing regimes (some with adjustments), while others have bespoke licensing frameworks.
Adjustments within existing licensing regimes Bespoke licensing frameworks Jurisdictions where authorization requirements for crowdfunding sit within an existing licensing and regulatory framework, with some crowdfunding-specific adaptations, include Australia, Dubai, Türkiye, Indonesia and Nigeria The European Union and United States have created a specific framework for crowdfunding platform operators. In the European Union, operators have to be licensed as crowdfunding service providers under a new regime introduced by EU regulation.1 In the United States, operators must be licensed as funding portals under the Regulation Crowdfunding2 .
- In order to ensure the ongoing administration of investments in the event of platform failure, platforms could be required to put arrangements in place to allow continuation of post-investment services even in the event of business failure. Such business continuity plans are typically expected to take into account the nature, scale, and complexity of the crowdfunding services being provided and to establish measures and procedures that ensure, in the event of the failure of a platform operator, the continuity of critical services related to existing investments and the sound administration of agreements between the platform operator and its clients.
Country Examples
In Dubai, an operator must maintain a business-cessation plan that sets out appropriate contingency arrangements to ensure the orderly administration of investments in the event that it ceases to carry on its business.
- Implementing safeguards to segregate and protect client funds shields investors from misappropriation or misuse, instilling confidence in the integrity and security of crowdfunding platforms. Regulators have been approaching this issue in two ways in a crowdfunding context. The first is to prohibit crowdfunding platforms from dealing with investors’ funds and to require that operators have arrangements with other regulated institutions that are allowed to provide such services (for example, deposit-taking institutions or payment-services providers). The second approach is to allow crowdfunding platforms to deal with client funds by either requesting them to be authorized as payment-services providers or simply to apply similar funds-protection standards without necessarily requesting specific licenses.
Country Examples
- In order to safeguard the operation of crowdfunding platforms and to protect interests of all parties to crowdfunding regulators have prescribed a range of obligations for platform operators to mitigate against conduct inconsistent with the interests of investors. Typical requirements include a duty to act honestly, fairly, and professionally in accordance with the best interests of investors, requirements to have in place effective policies for the mitigation of conflicts of interest, restrictions on investments hosted on platforms by operators and their staff, requirements for operators to disclose any financial interest in issuers, requirements for disclosures of the manner in which operators are compensated, and bans on solicitations by platforms.
Country Examples
In Italy, platform operators must operate with diligence, correctness, and transparency, preventing any conflicts of interest that may arise in the management of platforms from harming the interests of investors and ensuring equal treatment of recipients of offers who are in identical conditions.1
1. Resolution no. 18592 (as amended), art. 13.
Many regulators take the view that prohibiting operators from investing in offers they host on their platforms is a good way of mitigating a key driver of potential conflicts of interest risk. For example, under new EU regulation, crowdfunding service providers are prevented from having any financial participation in the crowdfunding offers on their platforms.1
1. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 8(1)-(2).
Similarly in Indonesia, requirements to disclose potential sources of conflicts are frequently implemented as a regulatory approach, often in addition to other substantive measures.
