In an environment where digitalization and innovation make the difference, companies, especially startups and SMEs, seek alternative ways to finance their growth.
Crowdfunding, has become an attractive and accessible solution, connecting entrepreneurs with investors through online platforms.
However, behind this collaborative and digital model, there is a demanding regulatory framework that guarantees transparency and protection for both companies and investors.
What exactly is crowdfunding?
Crowdfunding allows companies to raise capital from multiple investors through digital platforms.
Depending on the model, these investors may receive interest in exchange for loans (crowdlending) or shares in the company offering the project (crowdequity). This model has gained popularity for its agility, reach, and for making capital accessible to companies through a different methodology.
To operate legally, it is essential to have a key figure, the European Crowdfunding Service Providers for Business (ECSP). This entity acts as an intermediary between promoters (the companies seeking financing for their projects) and investors, managing the platform under a clearly defined legal framework.
A regulated environment at the European level
Since November 2021, all crowdfunding platforms operating in the European Union must comply with Regulation (EU) 2020/1503, which establishes common rules for the entire community territory.
The goal is clear: to protect the investor and foster confidence in this alternative financing system.
This regulation applies to services that facilitate loans or investments in companies through digital platforms, with financing limits per project set at 5 million euros over a period of 12 months. In Spain, we also have national regulations such as Law 5/2015, of April 27, to promote business financing.
What requirements must ECSPs meet?
ECSPs must comply with a series of technical, organizational, and legal obligations that are essential to operate with transparency and legality.
Among them are:
- Formal authorization: Every platform must be authorized by the competent authority (in Spain, the National Securities Market Commission), which assesses the suitability of the management team and the viability of the business model.
- Robust internal governance: A clear organizational structure is required, with well-defined compliance, audit, and risk management functions.
- Conflict of interest management: Persons directly related to the ECSP are not allowed to be project promoters. And if any of these persons act as an investor in any project, it must be communicated to all investors in a section or bulletin board on the digital platform. The aim is to prevent the ECSP from benefiting its own projects.
- Investor knowledge evaluation: A test must be applied to help non-professional investors understand the risks of their decisions.
- 4-day reflection period: Any retail investor has the right to withdraw their investment without penalty within that period.
- Information transparency: Platforms must publish clear and updated information about projects, investment conditions, commissions, and risks.
- Complaints and claims protocol: An effective system must be established to handle any customer issue.
- Business continuity plan: Platforms must be prepared to continue operating or to close in an orderly fashion in the event of a crisis or cessation of activity.
As we can see, there is a series of particularly strict requirements in such a sensitive sector as finance, where trust is one of the most valuable assets.
Why is it important to have specialized legal advice?
Complying with all these requirements may seem overwhelming, but with adequate support, it is possible to structure a ECSP platform that not only complies with the law, but also inspires trust and grows solidly.
It is essential to have legal advice throughout the process of obtaining authorization to become a ECSP. Specialized counsel not only helps to draft and formalize all documentation required by the competent authority, but also advises the parties involved on the risks and benefits, ensuring that both parties fully understand their rights and responsibilities.
Crowdfunding is a financing alternative with enormous potential, especially in sectors such as fintech, technology, or social impact. But this potential is only realized if built on a solid legal foundation.
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