Crowdfunding faces regulation to protect investors

It is vital that investors understand the risk involved in crowdfunding, the Central Bank said as it launched a regime to bring the sector within its regulatory grasp, in line with new European Union rules.

The development has been welcomed by the largest players operating in this space in the Republic, who say it will help develop the market.

Crowdfunding, the practice of funding a project or a venture by raising small amounts of equity or debt financing from a large number of people, has ballooned globally over the past decade, forcing policymakers and regulators to scrutinise the area.

Until now, crowdfunding had been unregulated in the Republic.

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The global crowdfunding market was valued at $12.3 billion (€10.7 billion) last year and is forecast to double by 2027, according to Statista, the German market and consumer data firm.

The new framework will require in-scope crowdfunding service providers – the intermediary between investors and project owners – to be authorised and be subject to operational and prudential requirements as well as investor protection measures.

Alternative finance

There are two main types of crowdfunding that are covered by the regime: investment-based crowdfunding and peer-to-peer loan-based crowdfunding.

“Crowdfunding provides a form of alternative finance for start-ups and SMEs, typically relying on small investments. Trust, confidence and fair dealing are essential for any financial market or product,” said Gerry Cross, director of financial regulation in the areas of policy and risk at the Central Bank.

“It is therefore vital that investors are made aware of the risks of any such investment.

“The Central Bank is now applying its advertising rules to crowdfunding service providers. This will ensure that Irish consumers receive the same protections in relation to advertising by crowdfunding service providers that we require of other financial service providers.”

The new regime is a result of EU crowdfunding regulation that came into effect in November.

A number of provisions of the Consumer Protection Code 2012 will now apply to advertising by crowdfunding service providers in the Republic, the Central Bank said. These include that any advertisement must be fair and clear and must not mislead or seek to influence consumers unduly in their investment decisions.

Crowdfunding service providers must display a prominent warning message on all advertisements that investment in crowdfunding projects entails risks, including the risk of partial or entire loss of the money invested, it said.

Service providers must also highlight to investors that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme, it added.

Regulatory framework

Linked Finance, the largest and longest-established peer-to-peer (P2P) lending platform in the State, said it had been calling for an Irish regulatory framework for years.

“Linked Finance has always managed its business to meet international best practices introduced in markets where the P2P sector is more mature,” said the company, which has channelled €179 million to more than 3,000 Irish businesses since its inception in 2013. Its new lending rose 90 per cent last year to €36 million.

Graham Byrne, chief executive of P2P lender Flender, which has issued €32 million since it was set up in 2018, said the regime “will give greater protection to retail investors” and would help develop the market.

Chris Burge, co-founder and chief executive of Spark Crowdfunding, the only equity crowdfunding platform based in the Republic, said: “Anything that increases protection for investors and improves the integrity of the market is to be welcomed. This is also a very positive development for the hundreds of Irish start-ups that are looking for alternative sources of seed funding.”

In 2021, crowdfunding raised €7 million for Irish start-up companies, he said.