Before the entry into force of the Estonian regulation governing crowdfunding (collective financing), the authorities were concerned that there could be an avalanche of permit applications which would take a whole year to review. However, now there is concern that many companies providing crowdfunding services could miss out on the deadline to obtain a crowdfunding permit and would have to either stop or suspend their services.
On 7 October 2020, the European Parliament adopted the long-overdue Regulation 2020/1507 (EU) on the regulation of crowdfunding (“Regulation”).
In line with the rationale for the Regulation, crowdfunding is increasingly an alternative means of financing for startups and small and medium-sized enterprises. Crowdfunding is considered a good opportunity to improve the availability of financing, and it has also become one of the opportunities for financing the entrepreneurial activities of individuals and legal entities. Such financing is provided via online platforms, and funded projects usually attract a large number of private and corporate investors. This includes startups that often raise the necessary funding through crowdfunding.
In December 2021, the provisions of the Securities Market Act that apply to crowdfunding service providers within the meaning of the Regulation entered into force. These provisions foresee that crowdfunding service providers will be under the supervision of the Estonian Financial Supervisory Authority (FSA).
On 5 November 2021, FSA held an information day for crowdfunding service providers and explained in detail the issues that are related to applying for permit to provide crowdfunding services and supervision matters. These materials are available as a video recording on the FSA website.
In order to ensure consistent application of the Regulation, including the provision of adequate investor and consumer protection, the Regulation gives the European Securities and Financial Markets Authority (ESMA) and the European Banking Supervision Authority (EBA) the mandate (authorization) to develop regulatory technical standards and submit them to the European Commission.
The problem is that the Regulation contains quite a number of the regulatory technical standards that ESMA and EBA are required to draft and which are important in the context of an application for an operating permit. However, what happened was that ESMA and EBA were unable to develop all the required regulatory technical standards. This situation is now causing problems for both permit applicants and regulators: on the one hand, the situation is specific and clear – crowdfunding service providers must be regulated and supervised and if they fail to do so within the time frame specified in the Regulation, they may be prohibited from providing the service. On the other hand, a number of very important components are still missing that enable the regulators to deal with applications for a permit to operate with complete confidence and, if the required data and information are sufficient, to grant a license to operate.
For obvious reasons, this situation creates uncertainty and may become a direct obstacle to the provision of crowdfunding services both in Estonia and in the European Union as a whole. In the light of the foregoing, FSA has developed an approach that allows companies to apply for a permit under the current legal situation.
According to the Regulation, the transition period is until 10 November 2022. Until then, crowdfunding providers may continue to provide the crowdfunding service without a permit.
The procedure for processing a crowdfunding permit application is similar to that for other areas of the financial sector. An entrepreneur applying for a crowdfunding permit must collect the required information and submit it with the application to FSA. One important difference is the timing of the so-called preliminary assessment of the application.
In other words, FSA must, within 25 working days of receiving a formal application, assess the completeness of the application, including whether sufficient information has been provided. Within the specified period, FSA must assess the compliance of the form and content of the application with the requirements established by law. If the application or the documents attached to it do not comply with the current requirements, contain significant shortcomings in form or content, FSA shall assign an additional period for the applicant to remedy the shortcomings.
Thus, at the initial stage of the consideration of the application, it is possible that 25 working days have elapsed since the receipt of the application, FSA has identified shortcomings, and sets a deadline for their elimination. An additional period of 10–20 working days may be required to remedy the deficiencies, depending on the content of the deficiencies being remedied. It is also possible that such an additional term may be imposed more than once.
In addition, FSA should have time to review the responses. In general, it is possible that 25–50 (and even more) working days may pass before the beginning of the process of consideration of the application, which in fact is almost two calendar months.
If FSA does not return the application and begins the review process, the Regulation sets the time limit for the proceedings at three months, within which FSA must decide whether the potential crowdfunding service provider meets all requirements. The decision should take into account, among other things, the nature, scope and complexity of the potential crowdfunding service, as well as the suitability and law-abidingness of managers and owners.
Thus, during the process of consideration of an application, it is possible that the total duration of the procedure may be on average five to six calendar months or even longer. It may happen that the application for permission will not receive a positive decision for the first time. Given that it is no longer possible to work without permission after 10 November, crowdfunding service providers must begin to act and file a correct and eligible application.
Prior to the entry into force of the crowdfunding regulation, FSA reviewed the potential market for crowdfunding services and identified some 20 potential business entities as candidates for authorization. Considering that today applicants of the permission can be counted on fingers of one hand, it is possible that many of them didn’t have so much time to submit the application. It is also worth noting that activities without permits are governed by penitentiary law and are punishable, so the obligation to apply for a permit must be taken seriously. It would be naïve to hope that the Commission would extend the deadline set out in the Regulation – this is unlikely, especially since a certain time delay does not apply in all cases.
Currently, more than 400 Estonian companies are providing crowdfunding services. The experts of Wisor Group OÜ will assist you in setting up your company in Estonia and can support you in preparing documents for filing an application and obtaining permission for crowdfunding activities in Estonia.