Crowdfunding Cross Borders: Assess Liability Risks
CrowdfundingHub teamed up with FG Laywers to launch a pan-European research to identify liability risk in respect to various forms of crowdfunding with the assistance of partners in 11 different European countries.
“Crowdfunding is here to stay. Its exponential growth (in Europe doubling every year) shows that the market is seriously looking into new financing alternatives. Crowdfunding platforms pop up like daisies and are expanding rapidly. Inherently, the platforms, as well as the investors and the project owners, become confronted with other jurisdictions. Other national laws and regulations, another regulator, but most importantly another (claims) culture.”
Crowdfunding Crossing Borders
Due to the absence of a pan-European legal framework or a uniform European legal approach by all Member States applicable to crowdfunding, each of the relevant actors (investors, platforms and project owners) will be confronted with local, unknown, laws when considering crowdfunding crossing borders.
An investor who contemplates to invest in a cross border project listed on a foreign platform and/or related to a foreign project owner, should take into account that generally the underlying legal and/or contractual relationship with the platform and/or project owner will be governed by other laws than the laws of his own Member State because a choice of law clause will generally be included in the underlying contractual terms. Typically, also a choice of forum clause shall be included in the applicable terms referring to another court than the local courts of the Member State of the investor. Subject to not being deprived of mandatory provisions applicable pursuant to the laws of his own Member State, an investor is warned that from a European international private law perspective, a choice of law clause and a choice of forum clause are generally held to be valid. As a consequence, the investor should make himself aware of the relevant laws that apply to his investment.
A platform that contemplates to expand its business into other Member States, at all times, needs to obtain legal advice in the Member State where it wishes to provide its services. Other than mandatory local civil law provisions that the platform should take into account, the platform, in particular crowdinvesting and crowdlending platforms, will need to take into account the local regulatory framework.
If a project owner wishes to raise funds through a foreign platform and/or from foreign investors, it needs to take notice of the relevant applicable foreign rules and regulations of the host Member States in addition to the legislative framework in his own Member State. In particular, in case of fundraising by means of the offering of securities via a crowdinvesting platform, the project owner not only needs to take into account the laws in relation to a public offering of securities in his own Member State, but also the local laws of the Member States where offerings to the public are contemplated. Pursuant to any of these laws, the project owner may be confronted with the obligation to publish a prospectus. Irrespective of such prospectus obligation, in each Member State, the project owner is held to be the main responsible party for providing any material information to enable an investor to make an informed investment decision. The project owner needs to provide such information on the website of the platform or on its own website in an accurate, complete, comprehensible and not misleading (nor misleading by omission) manner.
As mentioned in the introduction of this article, crowdfunding platforms need scalability in order to become profitable. The main means to become scalable is to expand and grow the business on a cross border basis. It is currently still relatively burdensome, inefficient and costly to expand a platform’s business in other Member States. The expanding platform will generally be confronted with a considerable part of new and/or additional local rules to be applicable to it in each host Member State.
If the exponential growth of crowdfunding as an alternative means of financing is continuing in its current pace, this fragmented regulatory approach in the respective Member States will presumably result in multi-jurisdictional takeovers of local platforms by foreign platforms or in the entering into of other sorts of cross border cooperation or corporate structures like joint ventures in which platforms will team up and cooperate with each other on a cross border basis. After all, why would a foreign platform reinvent the wheel in each Member State where it prefers to become operational while local platforms already have in place all what is needed and have knowledge of the relevant local laws in their Member States?