Crowdfunding refers to an open call to the public to raise capital targeted for a specific investment project. This is a fast-developing trend across the globe and has become increasingly popular with businesses which face difficulties to get access to finance. Investment-based crowdfunding (“IBC”) is enabling investors to increase their portfolio in a diversified manner, whilst also providing a low-cost alternative for channelling savings to the real economy.
IBC has quickly become an alternative source of funds for Small to Medium Enterprises (“SMEs”) and start-ups alike, however, still presents various risks for investors.
The parties in a typical IBC scenario would be the following: (i) An issuer (the one who has a project for which funds are needed); (ii) Investors (who are interested in participating in the financing of the project); and (iii) An online platform (acting as a moderating organisation).
In Malta, IBC is regulated by the Investment Services Act (Chap. 370 of the Laws of Malta) (“ISA”) and the Malta Financial Services Authority (“MFSA”) has issued requirements for an entity to apply for a license to be able to carry out IBC under the ISA.
Requirements and Restrictions
For any platform to be able to provide IBC services, it will have to apply for a licence under the ISA. The application must contain a detailed business plan and a detailed description of the activities that the applicant for the licence plans to carry out.
Segregation of Activities
Should a company already hold an investment services licence, and want to apply for an IBC license, it must clearly separate its current activities from the crowdfunding services.
Disclosure and Transparency
The issuer of an instrument through a crowdfunding platform will have to disclose, in the prospectus, the pertinent information about its business activities as well as meaningful, comprehensive and sufficient information for the investors to make an informed investment decision. This concept represents transparency and full disclosure to potential investors.
Investors will also have to be provided additional information regarding the transfer of their funds to the issuer and the total amount of fees to be paid. They will be warned of the risks involved in the investment operation and that they are solely responsible for their own investment decisions.
If the investor is not a professional investor, the platform operator will have to assess the investor’s investment experience, knowledge and objective. Should said assessment reveal that the investor does not have enough knowledge, the platform operator is obliged to give the investor a risk warning and ensure he/she understands this.
Anti-Money Laundering Requirements
Applicants for a financial services licence are bound to comply with Anti-Money Laundering regulations in Malta, and this also applies to IBC applicants. They are required to conduct due-diligence procedures, ensure that the issuer is officially registered and solvent and that the investment instruments are duly and legally issued.
Crowdfunding activities do not enjoy passporting possibilities to other EU Member States.
Type of Instruments
The instruments that can be offered on the platform cannot be complex in nature. Only the following instruments can be offered: - Shares; - Bonds and other debt instruments but not convertible shares; - Units in collective investment undertakings; and - Instruments embedding a derivative.
A particular offer on an investment-based crowdfunding platform cannot exceed €1,000,000 over a period of 12 months. Furthermore, a particular issuer may only be allowed to place a project on one crowdfunding platform. In fact, and in conjunction with this, the issuer will be requested to sign a declaration in which it undertakes not to use other platforms for the same project.
Amount of Investment
Non-professional investors may not invest more than the lowest between €5,000 and 20% of their net annual income over a period of 12 months on a specific platform.
The platform operator is responsible to verify that these regulations and restrictions are respected in adherence with the applicable law and rules issued, from time to time.