Crowdfunding
Crowdfunding is a way to fund projects and businesses through the public. Crowdfunding platforms are online platforms that host interested fundraisers offering exposure to the projects they seek to fund.
Typically, the public places their financial pledge for such projects and companies, and depending on the crowdfunding target, these are either accepted or returned. In this context, crowdfunding intermediaries provide the platform that enables the fundraising, usually charging a fee for their service. Crowdfunding platforms are categorized into broad categories depending on the way they operate, and the type of fundraising involved: they may be equity/investment-based, donation/reward-based, and debt-based crowdfunding. Crowdfunding rises in popularity not least due to the efficient, fast, and direct way of raising funds, and the unmatched funding opportunities it offers, opening projects to extremely large pools of potential investors.
Companies with new business ideas and projects use crowdfunding marketplaces to benefit for reasons that extend the mere fundraising aspect: crowdfunding marketplaces operate as hosting, advertising, and testing spaces for their projects and ideas. Startups, small and medium-sized enterprises, innovative projects typically pursue crowdfunding to access alternative funds and grow their business.
The number of crowdfunding platforms is bound to spike up considering the increasing development of online platforms and the continuing evolution of technology. Despite the increasing interest in, and implementation of, crowdfunding, the legal and regulatory component has yet to develop in a consistent and fully-fledged way.
For this reason, tackling the legal and regulatory issues involved in crowdfunding platforms requires an assessment of the specific type of crowdfunding type, the relationships emerging in a crowdfunding platform, and the general operation of crowdfunding. In Cyprus, equity/investment-based crowdfunding platform providers are now regulated by the Cyprus Security and Exchange Commission (CySEC), the competent securities commission.
The legal framework pertaining to investment-based (equity) crowdfunding in Cyprus is constituted by the Investment Law 2007, the law transposing the Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), as well as the Crowdfunding Directive (February 2020), which consists of bespoke rules issued by CySEC, substantiating and complimenting aspects of the referred Investment Law.
The new bespoke rules provide that Cyprus Investment Firms (subject to the Investment Law) may operate as crowdfunding service providers, meaning, essentially, as crowdfunding platforms, which match the funding interest of investors and project owners and where project owners will be able to offer securities to investors. These crowdfunding service providers must abide by the rules that normally apply to Cyprus Investment Firms as well as the new, bespoke crowdfunding rules. Depending on the type of service they provide, the crowdfunding platforms must seek CySEC approval to provide specified investment services in accordance with the applicable legal framework.
The new framework provides that other regimes, such as Anti-Money Laundering and Prospectus Law, remain applicable. Investment-based (equity) crowdfunding in Cyprus is now more closely and specifically regulated, following the issuance of the Crowdfunding Directive. This should encourage the emergence of crowdfunding platforms and enhance funding opportunities for various projects.
Our team has closely monitored the adoption of the CySEC Crowdfunding Directive and is up to date with all developments in the crowdfunding space. We serve all crowdfunding platforms, offering consultation and services tailored to the needs of each specific platform.
Entrepreneurs, innovators, project owners seeking alternative sources of funding, rely on our expertise to guide them to the materialization of their project and business ideas through obtaining such funding. We also advise crowdfunding platforms obtaining any necessary CySEC approvals or authorisations, ensuring the handling of all relevant legal issues and compliance matters.