1.1 The Equity Model (individuals make investments in return for a share in the profits or revenue generated by the company/project)
Recent amendments of April 2014 to the prospectus legislation (discussed below) also include a new exemption that entails that issuers issuing certain investment instruments under the public offering “Crowdfunding Exemption” (further detailed below) will not be considered as intermediaries requiring licensing as investment firms. This new exemption, which has received much less attention than the new thresholds for public offerings, may open the door to real equity Crowdfunding in Belgium.
However, to date there are virtually no Crowdfunding platforms offering “pure” equity Crowdfunding. The new Belgian Crowdfunding legislation may need a bit more time to sort its full effects.
As a consequence, the few Crowdfunding platforms that cater to businesses in Belgium do not offer direct equity participation. They all use the Lending Model.
Most opted for that model as the company being funded borrows money from the crowd through a loan note (see below for further details).
Some try to some extent to come close to the Equity Model by issuing exit-sharing notes (“Participative Notes”) through a holding company or other profit sharing debt instruments. The Participative Notes, which are debt instruments, are only reimbursed once either 100% of the shares held by the holding company (a professional company, co-investing along with the crowd) are sold (in the case of success)
or once the funded company has been liquidated (in the case of failure). Indirectly, therefore, the crowd is exposed to losses.
The timing of repayment of the notes is rather unclear and is controlled by the professional coinvestor(s). The crowd has no say in the funded company. This type of platform operates within the prospectus regime as it raises more than EUR 300,000 within 12 months, mostly from professional investors (acting in the course of business). The crowd co-invests, albeit indirectly through the Notes, along with the professional investors.
A potential game changer is the fact that a group related to a Belgian bank recently announced that it is also opening a Crowdfunding platform. However, as this platform is not effectively active yet, it is too early to say if real equity Crowdfunding will be offered. The platform advertises the “Crowdfinance” model and states it will issue financial instruments in exchange of investments/lending by the crowd.
The only Crowdfunding platform to have offered direct equity participation in the funded company has had to suspend operations last year because, in order to avoid potential application of the regulatory framework applicable to investment firms, it waived it entire fees for its services. A Crowdfunding platform providing direct equity investment could, at the time, only avoid its services qualifying as financial services if it was not paid for those services. Obviously, this was not a financially viable proposition.
There are no licensed platforms offering equity Crowdfunding to the general public in Belgium. It seems that the new platform recently announced by a bank group may make use of its license but this has not yet been confirmed in practice and may, under the new exemptions, not be required.
In sum, pure, unlicensed equity Crowdfunding is not currently available in Belgium. The crowd never obtains a direct equity participation (and voting rights) in the funded company.
1.2 The Lending Model (individuals lend money to a company or project in return for repayment of the loan and interest on their investment)
Loans or debt instruments, such as the aforementioned Notes, are not deemed “financial instruments” falling under the regulation of investment service firms. As a result, in Belgium, crowd-financing of businesses has mostly developed through the Lending Model.
Even though there are only a few successful Crowdfunding platforms at present in Belgium, their numbers slowly increase. According to our information, the most active platforms catering to the business community are MyMicroInvest and Look & Fin. A not yet active newcomer is BoleroCrowdfunding supported by the KBC group. Some smaller platforms specialise in financing real estate projects (e.g., ConseilB+). Others platforms such as Crofun and Angel.me are either mostly active under the Rewards Model or do not advertise investment projects on their website.
That said, the Lending Model has its own limitations. For instance, there are no consumer-to-consumer lending platforms operating in Belgium. This is due to regulatory constraints stemming inter alia from the consumer credit legislation.
1.3 The Donations or Rewards Model (individuals provide money to a company or project for benevolent reasons or for a non-monetary reward)
The Donations or Rewards Model was the first to develop in Belgium. It developed primarily in the music industry and with some international success, as the platform was one of the first of its kind in Europe.
There is a general perception in the Belgian Crowdfunding market that specialist Crowdfunding platforms have a competitive advantage. As a result, we see a variety of specialist Crowdfunding platform developing or about to start under the Rewards Model. These tend to be in the creative sector (music, movies, fashion, etc.). There are now also a few well established Crowdfunding websites specialising in fashion, movies and applications development.
Non-for-profit organizations involved in financial, social or artistic projects have also been amongst the first to use the Rewards Model.
The rewards-based platforms all operate as unlicensed platforms and outside the prospectus regime.
2 Recent developments regarding Crowdfunding regulation in Belgium
2.1 New legal framework for Crowdfunding: amended prospectus requirements
Before May 2014, there was no specific legislation addressing Crowdfunding issues.
In March 2014, the Belgian Finance Minister announced a Crowdfunding initiative addressing mainly, but not only, the public offering thresholds. The initiative was said to address “both the legal burdens for promoters and investor protection”.
On 7 May 2014, the Belgian Act of 25 April 2014 (which is not limited to Crowdfunding but addressed various topics) included various provisions amending the Prospectus Act (Act of 16 June 2006 on public offer of investments instruments, amended by the Act of 17 July 2013 which came into force on 16 August 2013) was published in the Belgian Official Journal.
The provisions that came into force on 17 May 2014 introduce among others a prospectus exemption making the existing provisions more flexible, and incorporate better investor protection.
The amended article 18 of the Prospectus Act increased the ceiling to benefit from the exemption to issue a prospectus from EUR 100.000 to EUR 300.000. To protect investors, the exemption limits each investment to a maximum of EUR 1.000 per project, in the absence of prospectus. These two conditions are cumulative. Additionally, all documents concerning the offer must mention the total value offered as well as the maximum subscription amount per investor (the “Crowdfunding exemption”).
In addition, the Act of 25 July 2014 exempts the persons or institutions carrying out intermediation for public offerings falling within the scope of the Crowdfunding exemption, from the obligation pursuant to Article 56 of the Prospectus Act, to be licensed as a credit institution or investment firm. This provision is crucial.
Article 13 of the Prospectus Act defines intermediation as any action towards investors, including temporary or incidental, in every capacity, in the placement of investment instruments on behalf of the offeror or issuer, against compensation or any benefit in kind, directly or indirectly provided by the offeror or issuer.
2.2 AIFMD implementation
Belgium, at last, implemented the European Alternative Investment Fund Managers Directive (“AIFMD”), by the Act on Alternative Investment Funds Managers of 19 April 2014 (Wet betreffende de Alternatieve Instellingen voor Collectieve belegging en hun beheerders– “the “AIFM Act”) following its approval by the Parliament on 3 April 2014. The AIFM Act came into force on 27 June 2014.
For the most part, the AIFM Act is heavily based on the directive. However, it imposes more stringent rules on the managers of alternative investment funds marketed to the public.
The AIFM Act applies to all Belgian funds which qualify as AIFs, such as real estate closed-ended investment funds (sicafis/vastgoedbevaks), public closed-end private-equity investment companies (openbare privak/pricaf publique, both of which were, pursuant to the previous regulation (Act of 3 August 2012), already subject to a special status and to supervision by the FSMA, as well as to funds which do not raise funds from the public but are registered as institutional or private collective investment undertakings and which were previously unregulated. Finally, the AIFM Act applies to all AIFs which do not raise capital through private placements and which are not yet subject to the Act of 3 August 2012.
Accordingly, the AIFM Act applies to the managers of these funds which solicit capital from investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors.
The AIFM Act excludes certain types of funds from its scope and provides for certain exemptions which may be helpful for managers of smaller or of certain specific funds. As such, holding companies, institutions for occupational retirement provisions, employee participation schemes/employee saving schemes, securitisation SPVs, family office vehicles, joint ventures, supranational institutions, national central banks and governments are excluded from its scope of application.
In addition to these exclusions, Belgium has opted to implement less stringent rules for “small“ AIFM’s. As a result, the following AIFMs benefit from a lighter regime:
· AIFMs managing AIFs with total assets under their management of a value of less than EUR 100 million;
· AIFMs managing AIFs with total assets under their management of a value of less than EUR 500 million (if the AIFs portfolios are unlevered and no redemption rights exist during a period of five years following the date of initial investment in each AIF).
All Belgian Crowdfunding platforms, that would be considered an AIFM, will benefit from the above “small” AIF exemption.
Concerning the AIFMD regulation impact on Belgian Crowdfunding platforms, it should probably be minimal, but it is too early to say. In its 2013 annual report the FSMA stressed that it pointed-out to one Crowdfunding platform that it would again review application of the AIFMD provisions after implementation of the AIFMD Act. In the FSMA’s view application would depend on the scope of the holding exemption under the AIFMD.
Although holding companies are excluded from the scope of the AIFM Act, this concept will be interpreted narrowly. Platforms using special purpose vehicles to manage the investment on a discretionary basis could fall under the AIFMD.
Pursuant to the Belgian AIFM legislation, an Operating Company seeking for funding with the purpose of generating profit to its shareholders should not qualify as an AIF, as the characteristics of AIF are not met. Usually such a company does not have a defined investment policy for the benefit of the investors.
With regard to a Project Company seeking funding, the Act does not apply to business in which collective investments are not conducted in the form of an AIF. However, it cannot be ruled out that a project company would constitute an AIF in the event that the project company would have several investors (at least two) and there would be a collective investment policy.
To conclude, the implementation of the AIFM Directive in Belgium seems unlikely to impact Crowdfunding activities, since the criteria will generally not be met by operating companies, project companies seeking funding or Crowdfunding platforms. Most will benefit from exemptions, or in worst case from the “lighter regime”.
3 Current regulation of Crowdfunding in Belgium
There are numerous laws that might potentially apply to the Equity and Lending Models, depending on the finance structure used by the Crowdfunding platform. We list and summarize the main ones below.
The Donation or Rewards Model usually falls well outside the definition of financial services, financial or investment instruments and the Prospectus Act. They therefore fall outside the most restrictive aspects of Belgian financial regulation, provided due attention is paid to the collection of public savings issue.
Given the rise in applications that Belgium’s Financial Services and Markets Authority, has received from potential promoters of Crowdfunding platforms, the FSMA issued a summary of them on 12 July 2012, with an overview of the regulatory framework applicable to Crowdfunding operations and a related FAQ section, as well as an additional note concerning the changed prospectus requirements on 26 June 2014.
3.1 Supervision of investment firms
Pursuant to MIFiD, the Act of 6 April 1995 (as amended) regulating investment firms defines “investment services” inter alia as the reception and transmission of orders in relation to one or more financial instruments, the execution of orders on behalf of clients, investment advice and the placing of financial instruments with or without a firm commitment basis.
“Financial instruments” include securities such as shares, bonds and other debt instruments. The definition of financial instrument used for the regulation of investment firms is narrower than that of “investment instruments” under the Prospectus Act, which includes all types of instruments (including debt instruments) allowing of a financial investment, whatever the nature of the underlying assets.
With respect to the placing of Financial Instruments, the Banking, Finance and Insurance Commission (CBFA, the forerunner to the FSMA) clarified in a 2004 board report that the following factors are indicative that a regulated “placement service” is being offered:
· the existence of an agreement (whether written or oral) between the issuer and the financial intermediary whereby the intermediary acts on behalf of the issuer
· a consideration paid by the intermediary to the issuer.
The CBFA has further indicated that these indicators are usually accompanied by the financial intermediary providing marketing and advertising services, and “door-to-door” selling to, or cold calling of, potential investors.
These indicators do not sufficiently clarify whether a Crowdfunding platform will be automatically deemed to provide “placement services” when it merely passively facilitates the placement of financial instruments. In particular, it has been pointed out that most Crowdfunding platforms do not actively promote the offered securities (no road shows, no specific marketing devices, etc.). Usually, the issuer seeking the funds does the promotion direct (through the communication modules offered by the platform and other social networks), while the platform (management) often does not actively participate in that promotion exercise.
The above discussion may soon be outdated as the new Crowdfunding legislation, which modified the Prospectus Act, specifies that the persons or institutions carrying out intermediation for public offers falling within the scope of the “Crowdfunding exemption” (see above), are exempted from the obligation to be licensed as a credit institution or investment firm. This exemption is likely to open the door for equity Crowdfunding in Belgium.
Up to now no licensed financial services firms or intermediaries offered Crowdfunding services in Belgium. This may change with the entrance of KBC Securities in the market.
The FSMA has further pointed out that Crowdfunding platforms organizing a market for the financial instruments offered through the platform could be considered a multilateral trading facility, which also requires a licence.
3.2 Bank monopoly for the collection of public savings
In principle, only credit institutions (and the like) are authorized to collect deposits and other repayable funds from the public in Belgium (section 68bis Prospectus Act, previously regulated under the Banking Act).
This is a fundamental problem as Crowdfunding platforms often collect funds, which they pay back to the crowd if the minimum target financing is not achieved. Luckily, from the very inception of rewards based Crowdfunding, the FSMA has accepted that, subject to certain guarantees and given the limited funds that each investor usually invests in a Crowdfunding project (usually a few hundred euros), the funds stockpiled by Crowdfunding platforms are not considered as falling within the scope of the banking monopoly.
In this respect, Crowdfunding platforms need to build in adequate contractual and other guarantees to make sure that the collected funds cannot be used for any other purpose than either reimbursing the investor (if the fundraising venture fails) or investing in the project (in case of success).
In its earliest stage, because of that, Crowdfunding platforms set up non-profit organizations to collect the funds. The articles of association of these non-profit organizations offered additional guarantees regarding the limited use that could be made of the collected funds. Lately, it has been found to be sufficient for the general terms and conditions of the platform and the conditions of the specific account to provide such guarantees, e.g. by using special escrow bank accounts.
Lending based Crowdfunding platforms, whose core business is to obtain repayable funds from the public through the issue of debt instruments, fall within the scope of the banking monopoly. They circumvent that monopoly either by collecting non-repayable funds (i.e. by collecting the funds at the end, once the funding operation’s success is already secure and it is certain that no funds will need to be repaid) or by issuing a prospectus, as the Prospectus Act provides for an exemption.
3.3 The Act on Collective Investment Schemes (2012)
Crowdfunding platforms that use a holding structure to pool collective investments in various funded companies and thereby manage the risk of such investments for the investors collectively could qualify as regulated public collective investment scheme, provided their offerings are public as defined inter alia in the Prospectus Act. This requires a licence as a collective investment scheme.
Since 22 July 2013, the AIFMD has added a new layer of regulation on top of the collective investment scheme regime. The AIFMD applies where the investment proposition involves an AIF (see above for further details).
In this regard, the scope of application of the Act on Collective Investment Schemes has been reviewed and limited to UCITS and collective investment undertakings investing in receivables, and all the provisions of the law of 3 August 2012 applying to funds qualifying as alternative investment funds under the Directive and to their managers, have been inserted in the AIFM Law.
In order to ensure the highest level of investor protection, the previous regulation remains unaffected insofar as it is complementary to the AIFM Act. As a result, public collective undertakings and their managers will thus become subject to two layers of regulation: the provisions of the directive as transposed, as well as the existing provisions of the Act on Collective Investment Schemes.
3.4 Prospectus requirements
As seen above, under the Prospectus Act the following operations do not qualify as a public offer of “investment instruments”; they are offers:
· for a total consideration of less than EUR 300.000;
· with a maximum investment of EUR 1.000 per person and per project.
All documents concerning the offer must indicate the total value offered as well as the maximum subscription amount per investor.
In order to benefit from this exemption, the Prospectus Act provides that the offeror is required to demonstrate to the FSMA that the public offer complies with the conditions of exemption and this PRIOR to the offer. For continuous offers, the offeror must demonstrate this each 12 months. The FSMA has put a notification procedure in place.
The FSMA recommends to issuers benefiting from the prospectus exemptions to point out to the public that the offer takes place without the publication of a prospectus and also to stress the risks associated with the investment instruments offered.
Most (but not all) Belgian Crowdfunding platforms operate within the prospectus exemptions.
3.5 Regulation of Crowdfunding under the AIFMD regime
As mentioned above, Belgium implemented the AIFMD by the AIFM Act of 19 April 2014.
Generally, the AIFM Act imposes a heavy regulatory burden above and beyond the Collective Investments regime on fund operators falling within scope. However, there is a light compliance regime for managers with a leveraged portfolio with total assets under management of less than EUR 100 million, and for managers with an unleveraged portfolio with total assets under management of less than EUR 500 million.
The impact of the Directive is reduced in Belgium in comparison with other European jurisdictions that do not all apply a light touch regime in respect of fund structures that fall within the EUR 100 million exemption. Holding companies are excluded of the scope of application of the AIFM Act.
3.6 Payments Services Act
Any transfer of funds through a Crowdfunding platform or payment operations executed by a Crowdfunding platform will generally constitute money remittance services within the meaning of the Belgian Payments Services Act of 21 December 2009 (sections 4(1°), (2°) and (12°) of that Act).
These activities are normally restricted to banks and payment establishments licensed by the Belgian National Bank that have been granted the status of Payment Institutions (section 6 of the Act).
If the Crowdfunding platform falls within the scope of the Payment Services Act, i.e. if the money transits through the Crowdfunding platform’s bank accounts, it will have to apply for a licence from the Belgian National Bank.
To avoid this burden and expense, platforms usually rely on a third party, an external provider or partner, for processing payments rather than acting as a payment intermediary between the investors and the company seeking funding.
Most Belgian platforms even avoid the cost of a payment services provider by having the funds wired direct by the investor into the funded company’s account.
Platform promoters will probably not be able to rely on the “sales agent” exemption provided for in section 4(1°) of schedule II to the Payment Services Act (“payment transactions from the payer to the payee through a commercial agent authorized to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or the payee”), as the chance is that, in the absence of steady relations with the funded company, they will be deemed to be acting as a broker rather than an agent.
3.7 Possible additional Regulations
Other common regulations to which the operator of a Crowdfunding platform may be subject include:
· The Act on Market Practices and Consumer Protection
· Money Laundering Provisions
· The Privacy Act
· The Consumer Credit Act
4 Lessons learned from Belgium’s regulation for a possible harmonized European Crowdfunding regulation
The development of a Crowdfunding market in Belgium remains slow. The Crowdfunding exemptions adopted in 2014 may speed up things a bit. Nevertheless in comparison to some other EU countries Belgium has adopted a very conservative approach as exemption thresholds remain low both on the amounts that can be collected and on the amounts invested. Further exemptions, regarding AIFMD or the investment service legislation may be required.
Belgium has been on the forefront of rewards based platforms, although by now other EU countries (especially the UK) have developed much bigger rewards based Crowdfunding platforms.
The new Crowdfunding exemptions to public offerings may strengthen the offer of platforms that cater to the business community. These new rules have also drawn more public attention to Crowdfunding. The two most established lending based platforms in Belgium will certainly benefit from that new regime. We may for the first time also see real equity based platforms surviving.
This said, given the limited amounts that Belgian investors may invest and issuers may collect, the reality is that both tend to quickly seek to advertise and invest on platforms in other EU countries.
It remains to be said that only an initiative at EU level (which will take some time) would really open up the Crowdfunding market and level the playing field amongst EU member
* This second edition of our Review of Crowdfunding Regulation published at the end of 2014 marks yet another milestone in the work of the European Crowdfunding Network, its members and its supporters. The paper covers the legal frameworks in 30 countries accross Europe, the USA, Canada and Israel. Details of how crowdfunding of all types is treated under national regulation across Europe and beyond can be found in this publication.