Recently, the European Union has adopted several new regulations in the capital markets sector. In April 2022, these regulations were comprehensively implemented into Czech legislation by a draft law amending several financial market acts. This national legislative package aims to transpose these regulations into Czech legislation aiming to integrate the capital markets of EU Member States.
The amendment introduces major changes in six areas. The first is the revision of the capital requirements for securities brokers in order to make the requirements more effective. The amendment also harmonises the regulation of covered bonds and cross-border pre-marketing of collective investment funds. Another objective of the amendment is to promote the growth of the SME market by reducing the administrative burden and facilitating access to public capital markets. The amendment also establishes the regulation of sustainable financing and, harmonises and simplifies the cross-border provision of crowdfunding services.
In this newsletter, we focus on the brand-new crowdfunding legislation and what this brings to the Czech legal environment.
The Crowdfunding Regulation
On 10 November 2021, a new regulation on European crowdfunding service providers for business (the “Crowdfunding Regulation“) came into force. Crowdfunding as such has not been regulated conceptually before, either at national or European level. The Crowdfunding Regulation constitutes a special regulation and an exemption from the regulation of the provision of investment services under MiFID 2, and from the regulation of public offerings of securities under the Prospectus Regulation. The Crowdfunding Regulation aims to harmonise the regulatory framework and thereby facilitate the cross-border provision of crowdfunding services. The Crowdfunding Regulation also increases investor protection, which should ultimately make projects more attractive to investors.
The Crowdfunding Regulation introduces a new category of crowdfunding service providers, the conditions for the provision of crowdfunding services, and regulates the rules of the crowdfunding platform provider’s dealings with customers, i.e. investors and project owners. It also distinguishes between two types of crowdfunding financing, namely financing in the form of loans, or through the purchase of mainly transferable securities. The Crowdfunding Regulation’s scope is limited to crowdfunding platforms for financing business projects with proceeds of up to EUR 5 million in a 12-month period (up to EUR 1 million only until November 2023).
Crowdfunding in the Czech Republic
The draft law, which adopts the Crowdfunding Regulation, represents the first domestic regulation on crowdfunding ever. In particular, the draft law regulates the supervision of the provision of crowdfunding services and sanctions in the case of breaches of EU and national legislation. To this end, the draft law contains amendments to the Act on Capital Market Supervision and the Capital Market Undertakings Act (the “Czech CMU Act“).
Provision of services
The purpose of crowdfunding is to connect the interests of investors and project owners through a digital online platform. Specifically, the Crowdfunding Regulation regulates credit crowdfunding (the investor provides a loan to the project owner) and investment crowdfunding (the investor buys transferable securities issued by the project owner, typically shares or bonds) for business purposes. Donor crowdfunding, where the funder receives no consideration at all or in exchange for a small gift item, is not covered by the Crowdfunding Regulation.
The operation of a crowdfunding platform obtains an exemption from the regime for the provision of investment services and from the regulation of public offerings of securities under the Czech CMU Act. If the main investment service provided by the crowdfunding platform operator is the acceptance and transmission of orders concerning investment instruments, or the placement of investment instruments without any obligation to subscribe for them, the operator needs a permit to operate under the Crowdfunding Regulation (issued by the Czech National Bank). Thus, it will not need a licence to operate as a securities broker under the Czech CMU Act, which is significantly more administratively demanding to obtain.
Existing crowdfunding providers must obtain the relevant authorisation by 10 November 2022 at the latest.
Supervision of crowdfunding service providers, i.e. crowdfunding platforms, is now carried out by the Czech National Bank (the “CNB“). In practice, this means that the CNB supervises compliance with both EU and national legislation and can impose measures for possible breaches under the Crowdfunding Regulation. The CNB has the power to:
- suspend or prohibit the offering of crowdfunding,
- suspend the provision of crowdfunding services; or
- disclose relevant information to ensure investor protection.
Offences and sanctions
The amendment extends the Czech CMU Act by providing for new offences for natural and legal persons. These persons may commit an offence by:
- breaching any of the obligations or prohibitions under the Crowdfunding Regulation,
- failing to cooperate with the CNB in the exercise of its supervision; or
- providing crowdfunding services without authorisation.
Fines may be imposed on natural persons:
- up to CZK 13,750,000, or
- up to twice the amount of the unjustified benefit obtained by committing the offence (if the amount of the unjustified benefit can be ascertained and exceeds CZK 13,750,000).
Fines may be imposed on legal persons:
- up to CZK 13,230,000, or
- up to 5% of the total annual turnover, or
- up to twice the amount of the unjustified benefit obtained by committing the offence (if the amount of the unjustified benefit can be ascertained and exceeds CZK 13,230,000).
For further information, please contact:
Lubomír Brecka, Bird & Bird