New crowdfunding regulations in Romania

Despite a turbulent year for Central and Eastern Europe and the region's proximity to the Ukraine warzone, last year CEE was one of the most efficient creators of value in Europe, according to the November 2022 CEE Report published by Google & Atomico. Fintech and enterprise software ranked second and third in the top five industries by venture capital investments in the first three quarters of 2022, with the region positioning itself as a solid start-up hub for many local and international investors.

Romania is the home of UiPath, Bitdefender and Elrond, all valued at EUR 1bln, as well as some other emerging unicorns such as Fintech OS, Soleadify, eMag, Tokinomo and Flowx AI.

These success stories have boosted the local start-up environment, not just for entrepreneurs looking to grow their business, but also for potential investors who have shifted their interests from traditional brick and mortar investments to the emerging sectors of software technology, process automation and cybersecurity.

Appreciating the country's talent-generating capabilities, alternative investment solutions have emerged and even expanded cross-border. In a bottom-up approach, the emergence of crowdfunding platforms has prompted the national legislator to speed-up the adoption of the implementation measures for Regulation (EU) 2020/1503 of the European Parliament and the Council on European crowdfunding service providers for business (ECSPR).

Crowdfunding has existed in Europe for some years, but a single regulatory framework was introduced only in late 2020. Before the ECSPR, there was no single regulatory framework. In some countries, crowdfunding services were regulated by the domestic legislation, while in others (Romania included) there was no applicable regulation at all. Consequently, crowdfunding platforms would set their own standards in terms of valuations or providing information to investors.

Although the Regulation is of direct applicability in the Member States, certain implementation measures were still required from local legislators, such as the designation of a national regulator, the sanctions regime, the authorisation process and the language applicable for marketing materials and communication of key investment information. The implementation package was enacted pursuant to Law 244/2022, which came into force on 6 August 2022.

Four months after the enactment of Law 244/2022, on 7 November 2022 SeedBlink became the first European co-investment platform licensed under the ECSPR by the National Supervisory Authority (Autoritatea de Supraveghere Financiara).

In terms of local authorisation requirements, Law 244/2022 provides that at least half of the members of the board of directors, supervisory board or a similar governing body must have university degrees in economics, law, accounting, audit, public administration or information technology, and at least three years of professional experience. The law allocates three months to the authorisation process and provides that significant changes of the authorisation underlying conditions are subject to ex-post notification to the regulator.

The ECSPR establishes uniform requirements regarding crowdfunding services at the EU level regarding the authorisation, operation and supervision of crowdfunding service providers, and the organisation of platform, transparency and adequate information of investors. The ECSPR equally addresses the need for convergence across the Union with respect to the operation of platforms, the scope of permitted activities, the authorisation requirement and the transferability of investment instruments.

Given the relative low value of the investment tickets, the ECSPR recognises that the investment instruments may be accessed by non-sophisticated investors, which is the "default" category protected under the ECSPR. As any investor is initially considered non-sophisticated, the Regulation lays down a number of investor protection requirements, such as:

1. Investors' knowledge test (article 21 of the ECSPR). The crowdfunding service providers should periodically test non-sophisticated investors' experience, investment objectives, financial situation and basic understanding of the risks entailed by the investment. The testing requirement may result in a risk warning by the service provider, without limiting the investors' ultimate decision to place their money on the crowdfunding platform.
2. Simulation of the investors' ability to bear loss (article 21 of the ECSPR). Crowdfunding platforms do not guarantee any rate of return on investment, so a risk exists for non-sophisticated investors to lose their entire investment. To avoid over-exposure to a certain platform, crowdfunding service providers should assess the investors' net worth and their ability to bear losses up to 10 % of their net worth. The Regulation provides that every time the investment exceeds EUR 1,000 or 5 % of the net worth of the investor's assets, a risk warning is issued, and the investor should make an informed assessment and expressly consent to the respective investment.
3. Investment risk warnings (article 21 of the ECSPR). The Regulation provides for a mechanism that only those investors who have expressly acknowledged that they understand the risks may invest in a crowdfunding platform.
4. Pre-contractual reflection period (article 22 of the ECSPR). As an additional layer of protection of non-sophisticated investors, the ECSPR allows investors to revoke their offer without giving a reason or having to bear any penalty. Crowdfunding service providers should provide clear information with respect to the pre-contractual reflection period and the manner in which investors may revoke their offers or expressions of interest.
5. Key investment information sheet – KIIS (article 23 of the ECSPR). The Regulation has standardised the key information that a start-up should provide to its investors in a crowdfunding offer. The KISS must include the risks of investment in a standard wording and focus on important information about the project owners, investors' rights, fees and the types of instruments offered.

To ensure that the information is easy to understand, the maximum size of the key investment information sheet is set at no more than six A4-sized pages. A person who seeks funding for their project through a crowdfunding platform will be responsible for preparing investment information. However, to ensure stronger protection of investor interests, crowdfunding service providers should introduce appropriate procedures for verifying whether the information contained in the key investment information sheet is complete, accurate and clear.

In addition to the above requirements, Law 244/2022 introduced the obligation of crowdfunding service providers to prepare the KIIS as well as any marketing communication materials at least in the Romanian language.

To ensure that crowdfunding service providers properly implement the obligations laid down in the ECSPR, Law 244/2022 introduces a severe sanctions package mainly consisting of:

1. fines from RON 10,000 (approx. EUR 2,000) to RON 2,433,700 (approx. EUR 486,740), or up to 5 % of the aggregate annual turnover corresponding to the last two financial exercises, or twice the value of the benefit achieved from the breach (even if exceeding the previous limits); plus additional sanctions of:
2. prohibiting the members of the board or executive directors to exercise management powers for 90 days to five years; and/or
3. withdrawal of the authorisation.

In case of minor breaches, the regulator may opt for a public warning addressed to the breaching service provider.

Conclusions

The ECSPR and Romania's implementation measures set forth in Law 244/2022 aim to contribute to the standardisation of the crowdfunding platforms, the protection afforded to investors and the uniformization of the secondary markets where investors may resell their crowdfunding investments, with benefits for the entire start-up ecosystem.

In light of the recent enactment of these pieces of legislation, empirically organised crowdfunding platforms are expected to align their practice to the rigours of the ECSPR and kick-off the authorisation process with the Financial Supervisory Authority.

Mădălina Neagu