The Finalisation of the Investment-based Crowdfunding regulations by CySEC

In November 2019, the governmental regulator of the financial markets and securities in Cyprus: CySEC, issued a consultation document, which described future rules and regulations concerning the investment-based crowdfunding activities (equity/bond).

Obtained were comments and questions from the investment society. It was stated that the regulator continues to work on the legislative framework and recently published its key points that will be the base of future legislation. Thus, pursuing the increase of the investor protection, the following additional requirements will be introduced to the entities which are rendering the crowdfunding service – Cyprus Investment Firms (CIFs):

  • Mitigation of the Conflict of Interest risks. Firstly, CIF should be just “an intermediary” between its clients, arranging the transactions through the formation of the platforms for them. Direct or indirect participation or execution on behalf of the client will be forbidden for investment funds. The second restraint is the prohibition of the direct or indirect (through affiliated persons) ownership or participation in crowdfunding projects. Thirdly, “CIFs will not be allowed to receive order routing benefits in respect of crowdfunding projects in general, i.e. both on its own or other platforms”.
  • Appropriate level of due diligence. It means that CIF will be obliged to inspect thoroughly the crowdfunding project and the owner of it on various financial matters including the credit risks, KYC and AML regulations. The final investors also the subject for the last two types of revision.
  • Key Investment Information Sheet (KIIS”)The owners of the project should issue updated correct, clear and complete a Key Investment Information Sheet (“KIIS”). The presence of errors and uncertainties is not admissible. Also, standardized, pre-contractual documents should be prepared and included into the KIIS. All of which should be ensured, before the project is accessed to the public listing.
  • Marketing – Marketing strategies should not contradict the KIIS or be unclear, ambitious, nor mislead in any way.
  • Funds – All funds that are raised by the CIF becomes available for the project owners only in case of obtaining the initial funding goal of the project.
  • Securities – there are two main aspects, the first: transferable securities should be divided into custodial and non-custodial. The second one is that the project owner can be provided with the access to the raised funds only after either securities are delivered physically to the investor, or there are undoubted proofs about the change of the ownership.
  • Exit opportunities – The Crowdfunding platform is obliged to ensure the ability of the investors to “advertise” their transferable securities by the means of bulletin board where the interests and selling will match and the investors will be capable of communicating with each other. Importantly, it should not resemble the trending platform and contain binding prices. The exception is the CIFs that are properly authorized to for the operations of the Trading Venue. It is worth to note that the provisions of the “Crowdfunding directive” will be addressed to the projects that are conducted in investment-base types of the crowdfunding activities, in a way of issuing the transferable securities (equity/bond). All other types such as loan-based, reward-based and donation-based Crowdfunding will not be within its scope.

As a final note to sum up – by the introduction of the bullet points stated above, CySEC intends to identify the main direction in which the legislation regarding crowdfunding activity will move on. The main focus is to ensure and mitigate the risks that investors bear, by participating in Crowdfunding type of investment activity. This can be considered as a strong advantage of Cyprus in that sense since crowdfunding projects based in that jurisdiction will be more credible and secured for the investors that will allow the project to attract more funds for future development. Also, it is worth to note that these new legislations will straightforwardly concern the blockchain and crypto projects as well, especially platforms that are dealing with Security tokens since, according to that key points, they will be within the scope of the possible future directives.

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Published on: 18/02/20