Crowdfunding will now be subject to legal regulation and supervision by the Czech National Bank (CNB). The current operators of crowdfunding platforms may continue to operate without the CNB’s permission, but no later than 10 November this year. Comprehensive regulation of this increasingly popular type of financing entered Czech legislation only thanks to the implementation of EU regulations. The relevant law was now approved by Parliament in April and signed by the president. According to Filip Murár, an expert in fintech and startup law, from the international law firm Noerr, the CNB’s supervision will increase the attractiveness of crowdfunding among investors. He expects even a multiplier increase in investment through crowdfunding platforms.
“Technological developments were once again one step ahead of the law. Although crowdfunding legislation has long existed in some European countries or in the USA, a similar comprehensive regulation was lacking in the Czech Republic. Only the mandatory implementation of EU regulations changed everything. At the same time, a few weeks ago, there was a real threat that the necessary Czech implementing legislation would not be approved at all and the CNB would not be able to grant licenses. Fortunately, this was solved really quickly, and the possible big problem turned into a great opportunity,” says Luděk Chvosta, a partner at the international law firm Noerr.
“Czech crowdfunding platforms now have less than seven months to obtain permission from the CNB, which may seem like enough time, but we know from experience that licensing proceedings are a long way and can take several months on their own. In addition to being able to easily expand their services to all other European Union countries without the need to obtain additional licenses, regulation will increase the attractiveness of this type of investment. The increase in investments through crowdfunding platforms could reach several tens of percent during the first year, and in the following years the growth could be multiplied,” says Murár. The most important new obligation of the operator of both credit and investment crowdfunding is precisely the obligation to obtain a CNB permit. Its advantage is the principle of the so-called single European passport, ie the possibility to provide crowdfunding services on the basis of a single permit in all Member States of the European Union.
Crowdfunding operators are subject to similar regulatory requirements as, for example, securities dealers, investment intermediaries or payment service providers. “Every operator must act honestly, fairly, professionally and in accordance with the best interests of its clients – both investors and funded companies. It must implement, maintain and apply a management and control system, which will undoubtedly be the biggest challenge in licensing at the CNB,” adds Murár.
The new regulation also comprehensively addresses investor protection. The basic principle is that any information communicated to investors – including marketing communications – must be true, comprehensible and not misleading. To this end, each operator must publish information on its website about its costs, costs, financial risks and charges, the criteria for selecting the projects to be financed, the nature of its services and the risks associated with them. In addition to each project, the operator must have a key investor information document.
“Investor protection will really be strengthened. For example, in the case of credit crowdfunding, the provider must publish the failure rate of funded projects every year for the last three years, which should be a guide for users on how well the platform chooses who it helps with financing, ”says Murár “However, the protection of so-called unqualified investors – in principle, regular users of crowdfunding portals – goes even further. The operator must take a suitability test to determine their knowledge, experience, objectives, understanding of risks and ability to bear the loss, and assess whether crowdfunding on the relevant platform is appropriate for them. And if he finds that he is not, he must inform the investor and warn him of the risks, including the risk of losing all the funds invested.”
Source: Noer and CTK
