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The European Banking Authority (EBA) has published its final draft of regulatory technical standards (RTS) specifying the information that crowdfunding service providers need to provide to consumers.
The new RTS look at the calculation of credit scores and prices of crowdfunding offers, as well as specifying a minimum set of common standards with regard to information to be considered in credit risk assessments and loan valuations.
The RTS also have a focus on the underlying policies and governance arrangements.
Crowdfunding enables businesses, including start-ups, to raise small amounts of money from a large number of people and organisations.
It typically involves three parties: the business that is seeking funding for a project; investors who fund the project; and an intermediating organisation, the crowdfunding service provider, that helps the two parties connect through an online platform.
In spite of the opportunities that crowdfunding presents, the EBA has warned that using crowdfunding platforms may mean that consumers are exposed to the risk of having insufficient information, and/or incomplete understanding of the viability of a crowdfunding project, as well as the due diligence conducted by the crowdfunding service providers.
Therefore, the Paris-based watchdog has said that it is important that adequate information is disclosed to investors on how credit scores are calculated and crowdfunding offers are priced.
Investors need to be sure that crowdfunding service providers are subject to a minimum set of common standards in terms of credit risk assessment, governance and risk management structures.
Against this backdrop, the final draft RTS specify the information that crowdfunding service providers shall disclose with respect to the method used to calculate credit scores assigned to crowdfunding projects and prices of crowdfunding offers, and how to ensure that loan pricing is indeed fair and appropriate.
The final draft RTS also specify the information to be considered when conducting the creditworthiness assessment of project owners and crowdfunding projects.
The new guidance also proposes what policies and procedures crowdfunding service providers are required to have in place to ensure that investors are adequately informed and that credit risk assessment and loan valuation are conducted in a sound and consistent manner.
Advocates believe that these services are a powerful tool for fintechs to bring in much-needed investment and support for their innovations.
Last year, the London-based crypto payments app Ziglu closed a second crowdfunding round after raising £7.19m on Seedrs.
This adds to the company’s 2020 successes with crowdfunding, which brought £6m to the fintech from 1,250 investors.
The EU’s new crowdfunding regulation came into law in November 2021, with the aim of harmonising the trading bloc’s rules regarding the funding method.
Sources have previously told VIXIO that the fragmented national legal framework and substantial legal costs discourage investors from investing cross-border by means of crowdfunding platforms.
