On 10 November 2021, the Crowdfunding Service Provider Regulation ((EU) 2020/1503 - European Crowdfunding Service Provider Regulation - "ECSPR") will enter into force.
In a first article we reported on the scope of application of the ECSPR and the permission requirement for crowdfunding service providers; in a second article on the ongoing requirements for crowdfunding service providers and their conduct obligations; in a third article on the treatment of crypto tokens under the ECSPR; in a fourth article, on the current German crowdfunding models under the ECSPR; in a fifth article on the obligations of a crowdfunding service provider under money laundering law. In this sixth contribution, we will address the question of how the key investment information sheet must be structured.
Crowdfunding service providers must provide a so-called key investment information sheet (KIIS) for crowdfunding offers. The KIIS is to be prepared by the project owner.
As the ECSPR has a single European market in mind, it also imposes requirements on the language of the KIIS. The KIIS must be written in the official language of the competent Member State (or another language accepted by its competent authority). In addition, to the extent that the crowdfunding service provider also promotes its offers in other Member States, the KIIS shall be made available to investors in the official language of that Member State (or in a language accepted by the competent authorities of that Member State). Other language versions may be published by the crowdfunding service provider at any time. The European Securities and Markets Authority (ESMA) will publish on its website the languages accepted by the relevant competent authority for a Member State.
As is known, the ECSPR is to be applied as of 10 November 2021. At the same time, there is a transitional period at least until 10 November 2022. During the transitional period, crowdfunding service providers (to the extent they have not yet been granted permission under the ECSPR) may continue to provide crowdfunding services falling within the scope of the ECSPR in accordance with the applicable national legislation.
The impact of the transitional rules on the KIIS is not clearly set out in the ECSPR. However, according to our interpretation, crowdfunding can initially continue as before (i.e. a securities or asset investment prospectus or a securities or asset investment information sheet can only be replaced by a KIIS once the crowdfunding service provider has received its permission under the ECSPR). The question of whether the previous prospectus requirements continue to apply for the time being is of particular importance, especially with regard to the potential liability of the crowdfunding service provider and its management.
The ECSPR regulates in its Annex I the content of the KIIS. This must contain information on various categories:
a. Information about the project owner and the crowdfunding project
The KIIS must provide information on the project owner. This includes the project owner's identity, legal form, ownership, management and contact details. In addition, all natural and legal persons responsible for the information in the KISS must be indicated. These persons must make the following declaration in the KIIS:
“The project owner declares that, to the best of its knowledge, no information has been omitted or is materially misleading or inaccurate. The project owner is responsible for the preparation of this key investment information sheet.”
The KIIS must identify the main activity of the project owner and the products and/or services offered by the project owner. Certain financial figures must be disclosed and, if the project owner publishes annual accounts, a link to the most recent annual accounts must be included in the KIIS.
The KIIS must also describe the crowdfunding project. The purpose and the main characteristics of the project must be stated.
b. Main features of the crowdfunding scheme and, as applicable, conditions for the capital raising or funds borrowing
The KIIS must describe the crowdfunding process. For this purpose, the minimum target capital to be raised or target funds to be borrowed in the crowdfunding offer as well as the number of offers already carried out for the crowdfunding project by the project owner or crowdfunding service provider must be named. The deadline for reaching the target capital or target funds must be stated.
The KIIS must provide information on what happens if the target capital or target funds are not reached by the deadline. If there is a maximum bid amount in addition to the target capital or target funds, information must also be provided about this.
For the assessment of the project by the investors, the own funds committed to the project by the project owner is also relevant. Therefore, the amount of own funds provided by the project owner for the crowdfunding project must be disclosed. Any changes in the composition of the project owner's capital or loans in connection with the crowdfunding offer must also be disclosed.
Non-sophisticated investors (for the criteria for classification, see Annex II of the ECSPR) must be made aware of the existence and conditions of a pre-contractual reflection period.
c. Risk factors
The KIIS shall set out the main risks associated with the funding of the crowdfunding project, the sector, the project, the project owner and the transferable securities, admitted instruments for crowdfunding purposes or loans, including geographical risks, where applicable.
d. Transferable securities and admitted instruments for crowdfunding purposes
The content requirements distinguish between the requirements for KIIS for transferable securities and admitted instruments for crowdfunding purposes (i.e. investment-based crowdfunding) on the one hand and loans (i.e. lending-based crowdfunding) on the other.
For investment-based crowdfunding, the following information must be provided:
i. Information related to the offer of transferable securities and admitted instruments for crowdfunding purposes
The KIIS must set out the total amount and type of transferable securities or admitted instruments for crowdfunding purposes ("investment instruments") to be offered.
The subscription price and the possibility of oversubscription must also be indicated. The KIIS must contain the subscription and payment terms.
The KIIS must contain information on the custody of the investment instruments for the investor and their delivery to the investor.
If the investment is secured by a guarantee or collateral, the project owner must provide the identity, legal form and contact details of the guarantor or collateral provider, as well as information on the nature and terms of the guarantee or collateral.
To the extent that the project owner undertakes to repurchase the investment instruments, the investor must be informed thereof and the period for such repurchase must be specified in the KIIS.
To the extent that the investment vehicle is not equity based, the nominal interest rate, the date from which interest is payable, the due dates for interest payments, the maturity and the applicable yield must be designated in the KIIS.
ii. Information on special purpose vehicles
The project owner must indicate in the KIIS whether an SPV is interposed between the project owner and the investor. If this is the case, the contact details of the special purpose vehicle must be provided.
iii. Investor rights
The KIIS must also present the rights of investors. This includes, on the one hand, the rights associated with the investment instruments, but also possible restrictions to which the investment instruments are subject, for example on the basis of agreements in partnership agreements or other agreements that prevent transferability (restrictions on transferability).
The restrictions on the transfer options of the investment instruments must be described. In addition, the other ways in which an investor can exit the investment must also be presented in the KIIS. Insofar as the investment instrument is an equity instrument, the distribution of capital and voting rights before and after the capital increase resulting from the offer (assuming that all investment instruments are subscribed) must be stated.
e. Disclosures related to loans
For lending-basedcrowdfunding the following information must be provided.
If the crowdfunding offer provides for credit intermediation, the above information does not fit. Therefore, a KIIS for loans need not include this information.
Instead, the KIIS must include the following information:
The project owner must provide information in the KIIS on the type, maturity and terms of the loan. The applicable interest rates or other investor remuneration, if any, must be presented. Risk mitigation measures, including available guarantors or other types of collateral, must also be disclosed.
The KIIS must include the repayment schedule for the loan amount and payment of interest. In addition, any default by the project owner on loan agreements in the last five years must be disclosed. The KIIS must also include the servicing of the loan and set out the provisions that will apply if the promoter defaults on its obligations.
f. Fees, information and legal redress
Further disclosure obligations arise in relation to the fees charged to the investor in connection with the investment and the costs incurred by the investor in connection with the investment, including administrative costs as a result of the disposal of admitted instruments for crowdfunding purposes.
The KIIS must provide information on where and how additional information on the crowdfunding project, the project owner and the special purpose vehicle can be requested free of charge.
With regard to the project owner, the KIIS must also include any default by the project owner on loan agreements in the previous five years.
In addition, the KIIS must indicate to whom the investor may address a complaint about the investment or the conduct of the project owner or the crowdfunding service provider and the manner in which this may be done.
g. Information on individual portfolio management of loans to be provided by crowdfunding service providers
The crowdfunding service provider is subject to certain disclosure obligations if it manages loan portfolios for investors. The KIIS must then contain information on the identity, legal form, ownership, management and contact details.
The KIIS must disclose the minimum and maximum interest rate for loans, if any, available to an investor's individual portfolio. Similarly, the minimum and maximum maturity of loans, if any, available to an investor's individual portfolio must be disclosed.
Depending on the design of the administration, the range and distribution of risk categories into which the loans fall, default rates and a weighted average interest rate per risk category with a further breakdown by years in which the loans were granted through the crowdfunding service provider shall be disclosed.
The crowdfunding service provider must also disclose the key elements of the internal methodology used to assess the credit risk of each crowdfunding project and to determine the risk categories.
Where a target rate of return on investment is offered in respect of investments, an annual target rate and its confidence interval of this annualized target rate over the investment period, taking into account fees and default rates, must be provided.
The crowdfunding service provider must indicate procedures, internal methods and criteria for the selection of crowdfunding projects for the investor's individual loan portfolio. Coverage and terms of applicable capital guarantees must be presented. The servicing of portfolio loans must be disclosed, including for cases where the project owner fails to meet its obligations.
The crowdfunding service provider must outline its risk diversification strategies in the KIIS and indicate the fees payable by the project owner or investor, including any deductions for interest payable by the project owner.
The KIIS shall be fair, clear and not misleading. It shall not contain footnotes, with the exception of references to, and where appropriate quotations from, applicable law. It shall be provided in a stand-alone, durable medium, clearly distinguishable from marketing communications, and shall not exceed six sides of A4-sized paper format if printed.
The ECSPR requires the inclusion of the following text as a disclaimer directly under the title of the KIIS:
“This crowdfunding offer has been neither verified nor approved by competent authorities or the European Securities and Markets Authority (ESMA).
The appropriateness of your experience and knowledge have not necessarily been assessed before you were granted access to this investment. By making this investment, you assume full risk of taking this investment, including the risk of partial or entire loss of the money invested.”
In addition, the KIIS must contain the following risk warning:
“Investment in this crowdfunding project entails risks, including the risk of partial or entire loss of the money invested. Your investment is not covered by the deposit guarantee schemes established in accordance with Directive 2014/49/EU of the European Parliament and of the Council (*1). Nor is your investment covered by the investor compensation schemes established in accordance with Directive 97/9/EC of the European Parliament and of the Council (*2).
You may not receive any return on your investment.
This is not a savings product and we advise you not to invest more than 10 % of your net worth in crowdfunding projects.
You may not be able to sell the investment instruments when you wish. If you are able to sell them, you may nonetheless incur losses.
(*1) Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (OJ L 173, 12.6.2014, p. 149)."
(*2) Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes (OJ L 84, 26.3.1997, p. 22).’“
German crowdfunding service providers are already familiar with similar requirements from the German Investment Act (VermAnlG), although the wording of the ECSPR differs from the German Investment Act (VermAnlG).
Our financial regulatory experts combine pragmatism and an interest in innovative solutions with technical know-how. In our daily dealings with German and European regulators, we navigate our clients safely through all registration and licensing procedures and are always up-to-date on new procedures and regulatory practices. We are happy to advise you on this.