Investment based crowdfunding and crypto assets – Challenges ahead

Crowdfunding Regulation

With the aim to overcome existing divergences in national frameworks on crowdfunding, in October 2020 the EU has adopted and published the long awaited final text of the Regulation on crowdfunding service providers (Regulation (EU) 2020/1503), the European Crowdfunding Service Provider Regulation “ECSPR”). The ECSPR provides a level-playing field for crowdfunding platforms in the EU, by introducing a harmonized set of rules that will be enable European crowdfunding service providers (CSPs) to explore the full potential of the EU single market.

The ECSPR covers two main types of practices used by crowdfunding platforms:

  1. Facilitation of granting loans (lending based crowdfunding)
  2. Placement of transferable securities within the meaning of Art. 4 para. 1 Nr. 44 MiFID II and/or instruments admitted for crowdfunding purposes that basically refer to shares in private limited companies that are not subject to restrictions that would effectively prevent them from being transferred (investment based crowdfunding)

Offers of financial instruments, either transferable securities or above-described instruments admitted for crowdfunding purposes under national law, of a single project owner whose total consideration is not exceeding 5.000.000 EUR will be eligible to be treated as crowdfunding offers and thereby will be exempted from more onerous requirements stipulated by EU and national rules on securities prospectus and securities issuing requirements.

The ECSPR will start to apply as of 10 November 2021. Crowdfunding service providers operating already under national regimes are provided with a 12-month transitional period within which they will have to ensure compliance with new rules.

Given that the ECSPR is primarily aimed to regulate crowdfunding service providers, the exact scope of application of the investment based crowdfunding in respective EU Member State can only be assessed based on relevant provisions of national law that implement MiFID II definition of transferable securities and define instruments that may fall under the definition of instruments admitted for crowdfunding purposes.

Investment based crowdfunding with crypto-assets – the new frontier?

In the wake of the ever increasing use of crypto-assets for fund raising, the legitimate question that can be raised is whether the crypto-assets can also be used for the purposes of fund raising in accordance with the new regime on investment based crowdfunding under the ECSPR.

Currently, most EU Member States do not stipulate de jure the possibility of issuing transferable securities via DLT or similar technology. However, majority of supervisory authorities across the EU tend to assess the legal status of each crypto-asset on a case by case basis by assessing its features based on various criteria like the level of standardization, tradability on financial markets etc.

  • Debt securities

In relation to crypto-assets with features of debt financial instruments (bonds, derivatives etc.) most supervisory authorities in the EU have taken pragmatic approach by assessing their legal status on a case by case basis and by treating them in accordance with applicable rules on issuance of financial instruments within the meaning of MiFID II. Nevertheless, there are also certain potential impediments to the issuance of debt transferable securities in tokenized form. These are particularly related to requirements under CSDR (e.g. requirement for transferable securities to be registered with CSD in book-entry form) as well as potential obstacles in national legislation like requirement for transferable securities to be represented in the form of a global certificate in physical form.

  • Equity securities

In addition to above mentioned challenges to tokenization of debt securities, the issuing of equity securities in tokenized form (in their literal meaning) has been prevented in most EU Member States due to open legal questions arising from company law that is barely harmonized at the EU level. Therefore, the possibility of using the new crowdfunding regulatory framework for the issuance and placement of equity based transferable securities depends largely on provisions of company law and securities law at national level. The recently published German Act on Electronic Securities (eWpG), which has for the first time allowed the issuing of securities in Germany in electronic or even crypto-form, is also one good example of how the issuing of tokenized shares can hardly be enabled by amendments of securities legislation. Due to related company law issues, German legislator has decided to make new provisions of eWpG solely applicable to debt instruments and units in investment funds, by leaving companies shares out of the scope of its application for the time being.

  • Reform of the MiFID II definition of financial instruments

With the intention to overcome the regulatory uncertainty around the application of MiFID II framework to crypto assets with features of financial instruments the European Commission has proposed in September 2020 a Directive that shall, among other, amend the MiFID II definition of financial instruments.

The new definition will be covering all types of financial instruments under MiFID II (including transferable securities) issued via DLT or similar technology as well. Due to the fact that MiFID II is a Directive, the revised definition will still need to be implemented into national law and currently significant divergences exist in national definitions of financial instruments across the EU. Last but not least, previously mentioned company law issues that prevent issuance of tokenized shares in many EU Member States and new laws on issuance of crypto-securities that fall short of covering all types of financial instruments in certain Member States (like in Germany) will represent challenges that will still need to be addressed. Until the new regime based on the expanded MIFID II definition becomes operational prospective the issuers of security tokens will still need to rely on national laws and the wide interpretative discretion of national supervisory authorities.

  • Instruments admitted for crowdfunding purposes

Looking into the issuing of instruments admitted for crowdfunding purposes (shares in private limited companies) in tokenized form, the picture doesn’t seems to be brighter either. The ECSPR stipulates explicitly that its definition and scope of application in relation to admitted instruments for crowdfunding purposes applies without prejudice to requirements under national laws that govern their transferability, such as the requirement for the transfer to be authenticated by a notary. To that end, EU Member States have a final say when it comes to deciding whether shares in private companies will be eligible to be used for crowdfunding purposes under the new regime. There is a fairly big chance that certain Member States will exclude shares in private limited companies from the scope of application of the new regime at national level by stipulating gold-platting provisions in national law. For instance, heavily criticized national transposition law in Germany, which was published in March this year, stipulates such an exclusion that will prevent shares in private limited companies of being used for crowdfunding offers under the new regime. Despite the fact that such measure would most probably just result in incorporation of fund raising SPVs in other EU jurisdiction (whose shares can still be offered on crowdfunding platforms anywhere in the EU) it cannot be excluded that some other EU Member State will follow similar approach.

Conclusion

Against the backdrop of everything mentioned above, it is fair to conclude that prospective fund raisers intending to leverage the new regime on crowdfunding as a less onerous regulatory framework comparing to regime under Prospectus Regulation will still largely need to ensure compliance with national laws in respective Member States from where they are intending to operate / set up an SPV for fund raising. The proposed EU Regulation on markets in crypto-assets (MiCAR) doesn’t seem to provide any further clarity to this topic either, because its scope of application will be limited solely to crypto assets that do not qualify as financial instruments under the MiFID II framework.

Therefore, despite the fact that the ECSPR has achieved significant progress in harmonization of rules on crowdfunding in the EU, there are still many challenges ahead that will need to be addressed before the crowdfunding as an alternative finance model starts to leverage DLT and crypto-assets in full capacity.


Das Gesetz zur Einführung von elektronischen Wertpapieren (eWpG) – Rechtsgrundlage für die Modernisierung des deutschen Finanzmarktes

Einführung

Im Bewusstsein über die schnelle Digitalisierung des Finanzsektors hat die Bundesregierung in ihrer Blockchain-Strategie bereits 2019 angekündigt, dass das deutsche Recht für elektronische Wertpapiere geöffnet werden muss. Bis vor kurzem musste jedes Wertpapier noch in einer physischen Wertpapierurkunde verbrieft werden. Dazu wurden bisher in der Regel die Wertpapieremissionen in einer physischen Wertpapierurkunde (d.h. einer Globalurkunde) verbrieft, die dann bei einem Zentralverwahren hinterlegt wurde. Angesichts der Tatsache, dass heutzutage der Wertpapierhandel vollständig elektronisch stattfindet, hatte diese physische Urkunde wohl wenig Bedeutung für Anleger, die mit Wertpapieren handeln. Dieses Relikt der Vergangenheit stellte zudem ein wesentliches Hindernis für die Digitalisierung des deutschen Finanzmarktes durch die Anwendung von innovativen Technologien wie Blockchain bzw. DLT dar.  Vor diesem Hintergrund hat der Deutsche Bundestag am 6. Mai 2021 das Gesetz zur Einführung von elektronischen Wertpapieren (eWpG) beschlossen, das die Tür für die Begebung von Wertpapieren in elektronischer Form öffnen soll.

Modernisierung des Wertpapierrechtes

Das am 10. Juni 2021 in Kraft getretene eWpG gibt die bisher geltende, zwingende urkundliche Verkörperung von Wertpapieren auf und ermöglicht die Begebung von Wertpapieren in folgenden zwei Formen:

  • dem Zentralregisterwertpapier (§ 4 Abs. 2 eWpG), das ein elektronisches Wertpapier ist, das durch die Eintragung in ein zentrales Wertpapierregister entsteht, und
  • dem Kryptowertpapier (§ 4 Abs. 3 eWpG), was ein Wertpapier ist, das durch die Eintragung in ein Kryptowertpapierregister entsteht.

Die bisher erforderliche physische Urkunde wird durch die Eintragung im Wertpapierregister oder Kryptowertpapierregister vollständig ersetzt werden. Zentralregisterwertpapiere und Kryptowertpapiere werden den urkundlich verbrieften Wertpapieren gleichgestellt werden. Die Begebung von Wertpapieren, die in einer physischen Urkunde verbrieft werden, wird aber weiterhin alternativ zur Begebung von Wertpapieren in oben erwähnten elektronischen Formen möglich bleiben.

Nach dem eWpG ist es künftig möglich, folgende Arten von Wertpapieren in einer der oben erwähnten Form zu begeben:

  • Inhaberschuldverschreibungen (klassische Anleihen, Genussscheine, Zertifikate, Pfandbriefe etc.) und
  • Anteile an Sondervermögen im Sinne des § 95 Kapitalanlagegesetzbuch (KAGB).

Somit wird das eWpG zunächst keine Möglichkeit für die Begebung von Aktien in elektronischer oder Krypto-Form ermöglichen. Wegen der vielfältigen gesellschaftsrechtlichen Aspekte, die mit der Gründung einer Aktiengesellschaft und der Ausgabe und Übertragung von Aktien verbunden sind, ist die Erweiterung des neuen Regimes auf Aktien aber für einen späteren Zeitpunkt geplant.

Zentralregister und Kryptowertpapierregister

Die Führung eines zentralen Registers für Zentralregisterwertpapiere wird eine erlaubnispflichtige Tätigkeit sein. Ein Zentralregister kann von einer Wertpapiersammelbank oder einem vom Emittenten ausdrücklich in Textform ernannten Verwahrer, der eine Erlaubnis zum Betrieben des Depotgeschäfts hat, geführt werden. Das Gesetz sieht sowohl die Möglichkeit für eine Sammel- als auch eine Einzeleintragung in Zentralregister elektronischer Wertpapieren vor.

Das eWpG definiert zudem spezifische Voraussetzungen für die Führung eines Kryptowertpapierregisters. Ein Kryptowertpapierregister muss in einem fälschungssicheren Aufzeichnungssystem geführt werden, in dem die Daten in der Zeitfolge protokolliert und gegen unbefugte Löschung sowie nachträgliche Veränderung geschützt gespeichert werden. Das eWpG präzisiert insoweit, dass ein Aufzeichnungssystem in diesem Zusammenhang ein dezentraler Zusammenschluss ist, in dem die Kontrollrechte zwischen den das jeweilige System betreibenden Einheiten nach einem im Vorhinein festgelegten Muster verteilt sind. Aus dieser Beschreibung lässt sich schließen, dass der Gesetzgeber die Anwendung von Blockchain bzw. DLT vor Augen hatte, obwohl das nicht ausdrücklich so in dem Gesetztext erwähnt wurde.

Die Führung eines Kryptowertpapierregisters wird ebenfalls eine erlaubnispflichtige Tätigkeit sein (§ 1 Abs. 1a Satz 2 Nr. 8 Kreditwesengesetz – KWG); künftige Führer von Kryptowertpapierregistern (registerführende Stellen) müssten daher zukünftig eine Erlaubnis nach § 32 KWG beantragen. Für die Führung des Kryptowertpapierregisters wird eine registerführende Stelle verantwortlich, die von dem Emittenten von Kryptowertpapieren zu benennen ist. Sollte der Emittent keine registerführende Stelle benennen, gilt der Emittent als registerführende Stelle. Da für eine Erlaubnis nach § 32 KWG umfangreiche Anforderungen erfüllt werden müssen, werden sich höchstwahrscheinlich nur wenige Emittenten für eine self-custody Lösung entscheiden, sondern sich stattdessen wohl eher auf ein spezialisiertes Unternehmen mit der Erlaubnis für die Führung des Kryptowertpapierregisters verlassen.

Die Verwahrung von Kryptowertpapieren sollte allerdings nicht verwechselt werden mit dem Kryptoverwahrgeschäft im Sinne von § 1 Abs. 1a S. 2 Nr. 6 KWG. Letzteres umfasst lediglich die Verwaltung, Verwahrung und Sicherung von Kryptowerten im Sinne des § 1 Abs. 11 Nr. 10 KWG. Nach dem eWpG wird es für die zuvor erwähnten Kryptoverwahrer hingegen auch erlaubt sein, die privaten kryptografischen Schlüssel zu sichern, die dazu dienen, Krypto-Wertpapiere für andere zu halten, zu speichern oder darüber zu verfügen. Die Verwahrung von Kryptowertpapieren wird daher, wie die Verwahrung herkömmlicher Wertpapiere auch, Depotgeschäft darstellen, dessen Erbringung von der Erlaubnis zur Erbringung des Kryptoverwahrgeschäfts gerade nicht umgefasst ist.

Ausblick

Die Änderungen, die durch eWpG nun eingeführt wurden, sorgen für eine Erfrischung des deutschen Wertpapierrechtes, das bis vor kurzem nicht für die digitale Realität des Finanzsektors geeignet war. Angesichts seines relativ engen Anwendungsbereiches scheint das dennoch nur ein erster Schritt in die richtige Richtung gewesen zu sein. Im Rahmen ihres Digital Finance Package hat die EU-Kommission schon den Entwurf einer Richtlinie veröffentlicht, die die Definition von Finanzinstrumenten nach MiFID II entsprechend erweitern wird, um die Begebung von allen Arten von Finanzinstrumenten mittels DLT oder einer ähnlichen Technologie zu ermöglichen. Dabei unterscheidet der EU-Gesetzgeber im Unterschied zum deutschen nicht zwischen Equity- und Debt- Finanzinstrumenten. Vor diesem Hintergrund wird der deutsche Gesetzgeber wohl relativ bald eine weitere Gesetzesänderung vorbereiten müssen, die dieses Mal den Schritten des europäischen Gesetzgebers ein wenig genauer folgen sollte.

The EU regulatory framework on outsourcing – where are we now?

In recent years, in pursuit of cost reduction and efficiency improvement financial institutions around the globe have been increasingly interested in outsourcing their business activities to other institutions and specialised service providers. From asset management, where delegation of certain functions was a standard practice since decades, to small payment companies relying on specialised regulatory compliance service providers, there is almost no area of the financial services sector nowadays that has remained immune to the ever-increasing use of outsourcing arrangements. Moreover, rapid digitisation of the financial service sector, featured by more frequent use of cloud technology and specialised providers of IT-related services to financial institutions has just added more complexity into the game which immediately triggered the attention of financial regulators in the European Union.

ESA’s Guidance Framework

In attempt to bridge these gaps (to the certain extent) the European Supervisory Authorities (ESAs), European Banking Authority (EBA), European Securities and Markets Authority (ESMA and European Insurance and Occupational Pension Authority (EIOPA) have issued guidelines on outsourcing arrangements that stipulate standards and requirements that financial institutions under their respective supervisory remit need to fulfil when entering into outsourcing arrangements.

These include:

  • EBA Guidelines on outsourcing arrangements (EBA/GL/2019/02), see our explanation thereof here
  • ESMA Guidelines on outsourcing to cloud service providers (ESMA50-164-4285), see our blog post thereof here.
  • EIOPA Guidelines on outsourcing to cloud service providers (EIOPA-BoS-20-002)

What applies to whom?

Whereas EBA Guidelines apply to all types of outsourcing arrangements that financial institutions under its supervisory remit enter into, ESMA and EIOPA Guidelines are focused solely on one specific type of outsourcing arrangements that has attracted much of regulatory scrutiny lately, outsourcing to cloud service providers.

Outlook

It is unquestionable that ESA’s Guidance framework on outsourcing has provided a valuable set of standards and requirements that financial institutions can follow when ensuring compliance with applicable requirements on outsourcing they may be a subject to under applicable sector specific pieces of EU and national legislation. However, there are small divergences between ESA’s Guidelines and such lack of full alignment brings financial institutions that find themselves under the supervisory remit of more than one European Supervisory Authority in front of significant challenges. Furthermore, given that ESMA and EIOPA Guidelines apply solely to outsourcing to cloud service providers, there is a great number of standard outsourcing arrangements that will still need to be structured in accordance with high-level regulatory requirements on outsourcing stipulated by applicable EU legislation that frequently falls short of providing clear guidance for financial institutions.

Nevertheless, the process of harmonization of rules on outsourcing and operational resilience of financial institutions in general seems to be far from over. As part of its Digital Finance Package published on 24 September 2020, the EU Commission has published a proposal for Regulation on digital operational resilience for the financial sector (commonly known as Digital Operational Resilience Act “DORA”) that aims to harmonize EU regulatory requirements on digital operational resilience in financial services. In the same vein, beside requirements on management of ICT risks, DORA aims to bring certain requirements on outsourcing arrangements, onto a legislative footing. Despite the fact that DORA may harmonize a number of questions related to outsourcing arrangements until it becomes operational (which from today’s point of view is hard to expect before 2023) financial institutions will have to ensure compliance with requirements on outsourcing in accordance with ESA’s Guidelines and applicable sector specific pieces of EU and national legislation.

Sustainable Finance Package

Finalisation of the regulatory framework on sustainable finance in sight

The EU has taken major steps over the past number of years to build a sustainable financial system. On this blog, we have repeatedly given updates on the EU Taxonomy Regulation, the Sustainable Finance Disclosure Regulation and the Benchmark Regulation that form the foundation of the EU’s work to increase transparency and provide tools for investors to identify sustainable investment opportunities. We are now steering toward a final regulatory framework on sustainable finance.

Sustainable Finance Package in a nutshell

On 21 April 2021, the European Commission has adopted a comprehensive package of measures (the Sustainable Finance Package) as part of its wider policy initiative on sustainable finance, which aims to re-orient capital flows towards more sustainable investments and enable the EU to reduce its carbon-footprint by at least 55% by 2030 and reach carbon neutrality by 2050.

The Sustainable Finance Package is comprised of:

  • Corporate Sustainability Reporting Directive (CSRD), which amends the existing reporting requirements under Directive 2014/95/E (Non-Financial Reporting Directive, NFRD) by expanding the scope of sustainability-related reporting requirements to more corporate entities;
  • Taxonomy Climate Delegated Act, which provides technical screening criteria under which an economic activity qualifies as environmentally sustainable, by contributing substantially to climate change mitigation or climate change adaptation while making no significant harm to any of the other environmental objectives;
  • Six Delegated Acts that amend requirements under UCITS, AIFMD, and MiFID II framework by incorporating new rules on consideration of sustainability risks, factors and preferences by investment managers and investment firms.

Corporate Sustainability Reporting Directive (CSRD)

With the aim to capture a wider group of companies and to bring sustainability reporting over time on a par to financial reporting, CSRD expands the scope of the existing NRFD, which currently applies only to companies with over 500 employees (even though national law in certain EU Member States stipulates lower thresholds).

The CSRD expands the scope of application of sustainability-related reporting requirements to all large undertakings (whether listed or not) that meet two of the following three criteria:

  • balance sheet total of EUR 20,000,000,
  • net turnover of EUR 40,000,000,
  • an average of 250 employees during the financial year.

In addition to large undertakings, the CSRD reporting requirements will apply to all companies listed on the EU regulated market as well, with the exception of listed micro companies.

To that end, the CSRD aims to capture nearly 50,000 companies in the EU in comparison to only 11,000 companies that are currently subject to reporting requirements under NFRD. This should provide financial institutions that are subject to Regulation (EU) 2020/2088 (Sustainable Finance Disclosure Regulation, SFDR) with more relevant sustainability-related data about prospective investee companies, based on which they will be able to fulfil disclosure requirements under the SFDR.

As a next step, the Commission will engage in discussions on the CSRD Proposal with the European Parliament and Council.

Taxonomy Climate Delegated Act

The Taxonomy Climate Delegated Act represents the first set of technical screening criteria that are intended to serve as a basis for the determination which economic activities can be deemed as environmentally sustainable under the Taxonomy Regulation. Developed based on the scientific advice of the Technical Expert Group (TEG), the Delegated Act provides technical screening criteria for determination whether an economic activity contributes significantly to either climate change mitigation or climate change adaption while making no significant harm to any other environmental objective under Article 9 of the Taxonomy Regulation.

Final Draft of the Delegated Act still needs to be officially adopted by the Commission, after which the European Parliament and the Council will have 4 months (which can be extended by additional 2 months) to officially adopt it.

Amending Delegated Acts

As part of the Sustainable Finance Package, the Commission has also published six long-awaited final versions of the draft amending delegated acts under MiFID II, UCITS and AIFMD framework with the aim of incorporating additional requirements on consideration of sustainability risks, factors and preferences by investment managers and investment firms.

The proposed changes introduced by delegated acts, which are expected to apply from October 2022, can be summarized as follows:

Product Governance: changes to MiFID II Delegated Directive (EU) 2017/593 put the obligation on manufacturers and distributors of financial instruments to take into consideration relevant sustainability factors and clients’ sustainability objectives in the process of product manufacturing and distribution.

Suitability assessment: changes to MiFID II Delegated Regulation (EU) 2017/565 require investment firms to take into account clients’ sustainability preferences in the course of suitability assessment. Given that requirements on suitability assessment apply only to firms providing investment advisory and portfolio management services, ESMA is separately considering (ESMA Consultation on appropriateness and execution only under MiFID II) whether the consideration of sustainability risks and factors shall be taken into account in the case of provision of other investment services for which requirements on appropriateness assessment apply.

Integration of sustainability risks and factors: amendments to MiFID II Delegated Regulation (EU) 2017/565, UCITS Delegated Directive 2010/43/EU and AIFMD Delegated Regulation (EU) 231/2013 impose new obligations on investment firms and asset managers, by requiring them to take into account sustainability risks and factors when complying with organisational requirements, including requirements on risk management and conflict of interest requirements.

Further, UCITS and AIF management companies that consider principal adverse impacts of their investment decisions on sustainability factors under SFDR (e.g. impact of an investment in a fossil fuel company on climate and environment), will be required to consider this when complying with due diligence requirements stipulated under UCITS and AIFMD framework.

The Sustainable Finance Package also includes similar changes to Delegated Acts under IDD, which affect insurance distributors.

Conclusion

The proposals published as part of the Sustainable Finance Package represent some of the last pieces in the puzzle of the EU regulatory framework on sustainable finance, which aims to support the EU on its way towards creation of a more sustainable economy. These latest efforts by the Commission provide some further clarity to corporate entities and financial institutions that have been facing with new regulatory challenges for quite some time now.  In the meantime, on 7 May 2021 the Commission has also published one additional Delegated Act under the Taxonomy Regulation, which outlines requirements on the content, methodology and presentation of key performance indicators (KPIs) that entities, which are subject to reporting requirements under Article 8 of the Taxonomy Regulation, need to comply with.

Nevertheless, there are some other important legislative proposals that still need to be published, like the final version of regulatory technical standards under the SFDR that is essential for compliance of financial institutions with disclosure requirements stipulated by this Regulation.  Those regulatory initiatives show that aiming at a sustainable financial market in Europe is more than a fancy trend but rather a new effort which needs to be taken seriously and is not to be underestimated. If you have any questions about the EU regulatory framework on sustainable finance and its impact on your business, please get in touch with us.