During the nascent stages of crowdfunding as a fund raising strategy, there was a great deal of uncertainty in France as to the legality of such activities. In 2014, initial regulations were enacted applicable to crowdfunding and the participants in such activities.1 The most recent amendments to these regulations came into force on 30 October 2016, pursuant to enactment of the statute covering “Conseillers en Investissements Participatifs” (French investment advisers specialised in crowdfunding activities, CIPs), applicable to intermediaries on crowdfunding platforms.2 In order to become a CIP, an applicant must apply for registration with the French financial markets regulator, Autorité des Marchés Financiers (AMF), which supervises the activities of CIPs. The legislation and regulations provide the current regulatory framework applicable to crowdfunding activities.
Scope of CIP Regulation
The CIP statute applies to legal entities engaged as a regular profession in investment advisory activities related to offers of equity and bond securities and loans through a website. The website must have the following characteristics set forth by the AMF General Regulation:
(i) Access to the details of the offer must be restricted to potential investors who have provided their contact details, are aware of the risks and have expressly accepted such risks;
(ii) Acceptance of subscription to offers is based on the assumption that potential investors have previously provided to the CIP the following information required by the French Monetary and Financial Code: evidence of suitability to ensure that the offering is appropriate in light of the potential investor’s experience and family wealth.
(iii) The website may not be dedicated to a single financing offer;
(iv) Financing offers must be selected on the basis of previously defined criteria and procedures, and must be published on the website.
Required Characteristics to be Registered as a CIP
CIPs acting as intermediaries on crowdfunding platforms provide activities such as crowdlending and securities distribution. These intermediaries must have certain characteristics similar to those required by the statute covering “Conseillers en Investissements Financiers” (French “basic” investment advisers, CIFs), on which the CIP regime rules were initially based. These include that a CIP must:
- Be formed as a company;
- Act only through websites with the characteristics set forth above;
- Comply with certain good conduct rules;
- Have professional liability insurance;
- Meet minimum knowledge requirements;
- Be established in France; and
- Belong to, and adhere to the rules of, a professional association approved by the AMF, which association is responsible for monitoring the compliance of its members with French regulations.
However, no agreement from the AMF or license is required for the exercise of CIP activities, only a registration with the French public register dedicated to financial intermediaries (ORIAS). As a condition to be registered, a CIP must fulfill certain corporate formalities and implement anti-money laundering procedures.
Securities and Loan Offerings through Crowdfunding Activity
When the crowdfunding legal framework was first implemented, offerings through crowdfunding platforms were restricted to ordinary shares and fixed rate bonds issued by French or foreign companies. Since then, the types of securities offered that may be distributed by CIPs has been expanded to include, among others: preference shares; bonds convertible into shares; participating securities (under certain conditions); and a new type of bonds referred to as “minibons”.
Minibons are subject to the following:
- The subscription period is limited to five years.
- The total amount that may be offered by a single issuer cannot exceed EUR 2.5 million over a period of 12 months from the first issue.
- Repayment deadlines are constant and cannot be split by exceeding one trimester for each repayment in the amortization period.
- Minibons may be issued only by French joint-stock companies and limited liability companies (among credit institutions and commercial companies) that have drawn up a balance sheet for their third business year and whose capital is fully paid.
Per-Issuer Ceiling for Public Crowdfunding Offers
The public offering of securities through crowdfunding was initially based on the private placement legal regime. However, it was necessary to adapt this legal regime for the distribution of securities through crowdfunding.
The ceiling for public offers of equity and bond securities per issuer on the CIP crowdfunding platforms has been increased from EUR 1 million to EUR 2.5 million, provided that offers exceeding EUR 1 million do not relate to equity securities representing more than 50% of the issuer’s capital. However, this 50% limitation does not apply if the purpose of the issuer’s offer is to hold and manage participations of another company, which represent less than 50% of the capital of that other company.
Loans may be offered on crowdfunding platforms, which are therefore called “crowdlending” platforms. The loans corresponding to microcredits are governed by specific rules.
Recently, the ceiling of loans granted by lenders on crowdfunding platforms has been increased from EUR 1,000 to EUR 2,000 for loans with interest, and from EUR 4,000 to EUR 5,000 for interest-free loans.
Gradually, crowdfunding and CIP regulations have been strengthened, become more precise, and improved the manner in which such intermediaries operate. These efforts have been conducted with pragmatism, both by the government and the AMF, in order to offer new opportunities for investors as well as companies that are looking to raise capital. There’s no doubt that in the future, crowdfunding will continue to develop, in order to provide both simplicity of micro financing and investor protection.
1) Ordinance of 30 May 2014, which came into force on 1 October 2014.
2) Amendments introduced by Executive Order 2016-520 of 28 April 2016.