Review of Crowdfunding Regulation, regulation concerning crowdfunding in Europe, North America and Israel, European Crowdfunding Network, the Netherlands (Ella van Kranenburg), December 2014

A. The Netherlands

1 Recent developments in the market of Crowdfunding in The Netherlands

During the last 12 months there were the following significant developments in The Netherlands regarding Crowdfunding.

The interest in Crowdfunding platforms and Crowdfunding initiatives is growing significantly in The Netherlands. Whereas in 2012 the total amount of monies sourced by way of Crowdfunding was approximately EUR 14 million, the 2013 souring amount was EUR 32 million.[1][2] In the first half of 2014 the amount sourced in the Netherlands was EUR 23 million.[3] Crowdfunding initiatives are more often being combined with bank financing. There is a challenge for banks to find ways of using or combing Crowdfunding as funding mechanism. Local governments may also find Crowdfunding interesting now that government budgets are decreasing. Crowdfunding for renewable energies has become fairly common in the Netherlands.

The aforesaid significant growth has also raised the interest of Dutch regulators, being the Dutch Central Bank (De Nederlandse Bank N.V.; “DNB”) and the Financial Markets Authority (Stichting Autoriteit Financiële Markten; “AFM”). DNB and the AFM have jointly issued statements with respect to their views on Crowdfunding.[4] The AFM and DNB have identified, from the perspective of the lender, four models; investments (Equity Model or Debt Model), lending (Lending Model), donations and sponsoring (the latter two jointly the Donation or Rewards Model).

Financial regulatory laws for the Netherlands are mostly dealt with in the Financial Supervision Act (Wet op het financieel toezicht; “FSA”). From the perspective of the Crowdfunding platform no specific legislation has been drawn up in The Netherlands. However, it is clear to the AFM that the activities of the Crowdfunding platform in their nature have a strong alignment with intermediary type of activities. Depending on the Crowdfunding model of choice, such intermediary activities could in themselves be regulated as well. However the Ministry of Finance stresses that Crowdfunding platforms are more than just intermediaries as they supply two sides of the market, whereas a traditional intermediary only has one customer, the investor or the lender.[5]

1.1 The Equity Model (individuals make investments in return for a share in the profits or revenue generated by the company/project) or Debt Model

In respect of the Equity Model, Symbid is the most well known Crowdfunding platform in the Netherlands. It is however not a straightforward equity model as each investor becomes a member in a cooperative. The cooperative is ultimately the shareholder in the business. As with all equity investments, the members run an entrepreneurial risk remain meaning that if a business cannot fulfil its obligations or goes bankrupt, the investors run the risk of losing their investment.

1.2 The Lending Model (individuals lend money to a company or project in return for repayment of the loan and interest on their investment)

In respect of the Lending Model, this seems to be the most successful form of Crowdfunding in the Netherlands. Such statement is solely based on the amount of Crowdfunding platforms that are active in the Netherlands and can operate on the base of an exemption from the AFM.[6] The exemption allows Crowdfunding platforms to intermediate in the attracting or making available of repayable funds (opvorderbare gelden) from the public. This activity is regulated under the FSA and either the intermediary requires a license or exception as financial services provider, or it requires the aforesaid individual exemption from the AFM.

1.3 The Donations or Rewards Model (individuals provide money to a company or project for benevolent reasons or for a non-monetary reward)

In the Netherlands the Donations or Rewards models are used predominantly to finance social or creative projects or companies. Notably as the Dutch government has made significant cuts in subsidising the art sector, several Crowdfunding platforms have developed in this area, such as Crowdfunding for theatre / art or Crowdfunding in respect of cinematic projects. As the Donation or Reward Models would normally not provide financial rewards, these Crowdfunding Models fall outside of the scope of the FSA.

1.4 Credit Union Model

Although not directly a ‘traditional’ Crowdfunding structure, the cooperative model whereby funding for SME is accommodated in the form of so-called credit unions, has become a new phenomenon in the Netherlands. Currently two cooperative credit unions (named as such)[7] have been registered with the AFM. Each of them has received from the AFM an exemption to intermediate in the attracting or making available of so-called repayable funds.

2 Recent developments regarding Crowdfunding regulation in The Netherlands

No specific changes have been made to Crowdfunding regulation in the Netherlands. According to (non public) information, the AFM is currently preparing a recommendation which in all likelihood will be publishing on its website at the end of 2014. In tandem with such recommendations, the AFM has indicated that it will inform the Dutch Parliament on the 19th of December 2014 of the outcome of a survey in respect of Crowdfunding and the regulatory framework in the Netherlands. The survey will be accompanied by a reaction of the Dutch Ministry of Finance and the Dutch Ministry of Economic Affairs.

The AFM has issued various licenses or granted individual exemptions for entities that required a license for intermediary activities. As indicated in paragraph 1.2, most exemptions were granted in respect of the intermediation in respect of the attracting or making available of repayable funds from the public.

3 Current Regulation of Crowdfunding in The Netherlands

As no regulation has been introduced specifically for Crowdfunding since 2013, this section is very much aligned with the 2013 version. A new section has been added in respect of consumer protection.

As a general note and as explained above, the Crowdfunding platform in its nature is likely to be regarded by the AFM as an intermediary type of platform. Hence rules on intermediation are more likely to apply to Crowdfunding platforms rather than rules on offerings of securities / shares / debt / etc. Such rules are more likely to apply to parties which are seeking funding through the use of the Crowdfunding platform (the Crowdfunding entity).

3.1 Licence under the Dutch Financial Supervision Act

Equity (and Debt) Model

Shares and bonds are regarded as financial instruments. In such case the Crowdfunding platform is likely to be regarded as an investment firm within the meaning of the Markets in Financial Instruments Directive (Directive 2004/39/EC). As a result the Crowdfunding platform requires a license as an investment firm with respect to the acceptance and transmission of orders of lenders with respect to financial instruments (order remitter).[8]

Since a debt instrument will normally have a repayment term, the issue of debt instruments also qualifies as the attracting of repayable funds. Repayable funds is to be explained under the FSA as funds which are to be repaid at some point of time. The taking up of repayable funds (opvorderbare gelden) is to be taken into account as this activity is regulated under the FSA when such repayable funds are received from the public. The intermediation in respect of the attracting of repayable funds from the public is also a regulated activity. Normally speaking the Crowdfunding platform would require either a license or an exemption from the AFM in order to allow it to operate as an intermediary with respect to the attracting of repayable funds. Since 2013 the AFM has been issuing various individual exemptions to Crowdfunding platforms[9] in order to allow such platforms to intermediate in respect of the attracting of repayable funds.

As for the issuer of the debt instruments, the Exemption Regulation to the FSA provides for an exception on this prohibition if the debt instruments are issued in accordance with Part V of the FSA. This in effect is a reference to the Prospectus Directive. In practice this means that an issuer that offers debt instruments in accordance with the Prospectus Directive (or an exception thereunder) is not subject to the FSA prohibition on the attracting of repayable funds. When making use of aforesaid exceptions one should be careful as most of the exceptions are subject to strict conditions, relating to selling restriction requirements and visual tags relating to the offering (vrijstellingsvermelding). If such requirements are not properly executed, the exception is not available.

Lending Model

The making of non-consumer loans is not treated as a regulated activity under the FSA. However, the AFM and DNB suggest that borrowers that use Crowdfunding as an alternative to normal bank loans could very well qualify as consumers. As such the Crowdfunding platform may require a license as a financial services provider (financieeldienstverlener) due to the fact that it intermediates in relation to consumer credit.

As explained the attracting of or having available repayable funds (opvorderbare gelden) is also to be taken into account since this activity is also regulated under the FSA when such repayable funds are received from the public. As an example, should the funds taken from (the public) investors be held in escrow by the Crowdfunding platform, or an entity specifically designated for the escrow or even the designated Crowdfunding entity itself, until closing of the transaction, the escrow activity may be taken as an activity which qualifies as ‘attracting of repayable funds’ under the FSA. Unless a banking license, an exception or an individual exemption is available, the attracting of repayable funds from the public is, in principle, prohibited under the FSA.

Additionally and as explained under the Equity / Debt model, the intermediation in respect of the attracting of repayable funds from the public is also a regulated activity. Should the Crowdfunding platform be engaged in such intermediary activities it would require either a license or an exemption from the AFM.

Donations or Rewards Model

As explained, if indeed there is no financial reward for the Donation or Reward this type Crowdfunding Model falls outside of the scope of the FSA.

3.2 Prospectus requirements

The prospectus requirement does not apply to the offering of securities or investment products with a value of EUR 2,5 million or less within a time period of 12 months. Until now no Crowdfunding initiatives in The Netherlands have resulted in offerings of equity or debt near such amount. As a result, Crowdfunding platforms (or in fact the issuing entities / entrepreneurs) that operate under the Equity Model or Debt Model whilst using the aforesaid exception, are currently not subject to a prospectus requirement. However, as explained above, the use of exemptions is subject to strict formal requirements. If such requirements are not properly met, the exception is not available in the first place. Furthermore, some entities using Crowdfunding as a funding mechanism may at some point be so successful that the prospectus requirement could become an issue when exceeding the EUR 2,5 million threshold (assuming that this exception from prospectus requirements is indeed used).

No prospectus requirement is likely to apply in respect of the Lending Model or the Donations or Rewards Model.

Under the Act on Unfair Trade Practices (Wet oneerlijke handelspraktijken) the platform itself or the entity / person that provides (investment) information in relation to a Crowdfunding transaction can be held liable if it conducts an unfair trade practice towards a consumer. This could be the case if the information that is presented to investors (consumers) is misleading or incorrect, whether in the form of a prospectus or other information documents. Misleading is also to be understood as leaving out information that is deemed important to a consumer in its investment decision (a so-called misleading omission).

In 2014 there has been a significant increase of cases where the AFM has used the Act on Unfair Trade Practices to force parties to either inform the market with proper / updated information or to issue fines in respect of breaches of the Act on Unfair Trade Practices. The AFM is typically focussing on market participants that seek funding and technically are unregulated under the FSA, whilst at the same time the information shared by such market participants with potential investors is inadequate, vague or elusive.

3.3 Regulation of Crowdfunding under the AIFMD regime

The Alternative Investment Fund Management Directive (“AIFMD”) which has taken effect as of 22 July 2013, has been implemented into the FSA and lower legislation promulgated thereto.

It is to be noted that the AIFMD (or fund structures in general) has not been mentioned directly in the context of Crowdfunding in the Netherlands. A Crowdfunding structure could constitute an AIF under the FSA. Regulators however have not yet made any comments on this issue to date. The AIFMD allows for a more lenient regime if the assets under management do not exceed a certain threshold. The exact rules are too detailed for the purposes of this briefing. The lowest thresholds amount is a EUR 100 million. Notwithstanding the aforesaid threshold, an AIF that does not exceed the threshold but which offers participations to retail investors in principle is caught by the AIFMD regime in full. An additional disclosure regime applies to retail offerings of AIFs. The disclosure rules must ensure transparency and should allow retail investors to receive proper information on their potential participation/investment.

The recognised Crowdfunding platforms seem to take form mostly in the form of the Lending (/Debt) Model. This could explain the absence of discussions of the AIFMD in the context of Crowdfunding in the Netherlands. It is understood however, that some jurisdictions indeed have found certain Crowdfunding platforms were operating within the scope of the AIFMD.

3.4 Licence under the Payment Services Directive (2007/64/EC)

The transfer of funds through the operator of a Crowdfunding platform could constitute money remittance services and be subject to payment services regulation.

Where external regulated financial institutions are used for processing payments the Crowdfunding platform could avoid being regulated as a payment services provider.

Note that only banks or investment firms can hold sums of money or financial instruments belonging to third parties. Similar to what is reflected in paragraph 2.1, it should be noted that it is prohibited to attract repayable funds (i.e. funds that are to be repaid) from the public.

3.5 Consumer regulations

Although there is no strict underlying legal basis for the following, the AFM and DNB recommend that the maximum amount of investment for consumers on a Crowdfunding platform in respect of:

(i) the Lending Model, is EUR 40,000, with one time investments of EUR 5,000 to be spread over 3 or more projects and no more than 100 investments per platform; and

(ii) the Debt / Equity Model, is EUR 20,000 with one time investments of EUR 2,500 to be spread over 3 or more projects and no more than 100 investments per platform.

At the same time the Ministry of Finance has indicated that it has a preference to introduce a threshold (%), which threshold depends on how much a consumer can spend.

Platforms are to inform consumers actively and continuously to spread their investments and that they should only invest a responsible amount of their income on Crowdfunding. Furthermore, the platforms must inform consumers actively and continuously of the risks of investing. Full disclosure is required with respect to the project, including all the relevant financial information. Information on the website of the Crowdfunding platform must be clear and not misleading (see previous paragraph on Act on Unfair Trade Practices in paragraph 3.3). Crowdfunding platforms also must have proper risk management in place to address matters such as credit risks, risks on overextension of consumer credit or interest rates in relation to the risk of projects.

3.6 Possible additional Regulations

Other common regulations to which the operator of a Crowdfunding platform may be subject include, but is not limited to:

· Anti-money laundering regulations

· Act on protection of personal data (Wet bescherming persoonsgegevens)

· Act on unfair trade practices (Wet oneerlijke handelspraktijken, as implemented in several Dutch acts, including the Dutch Civil Code)

· Act on the consumer credit (Wet op het consumentenkrediet)

· Rules on distant marketing of consumer financial services

· Dutch civil code (not only in relation to corporate / contract law, but also implementing provisions on consumer credit and unfair trade practices)

4 Lessons learned from The Netherlands's regulation for a possible harmonized European Crowdfunding regulation

4.1 Role model ("dos")

Be assured that all parties involved in respect of a Crowdfunding platform are, where appropriate, authorised, financially solid and trustworthy. Check background and track record of key parties / individuals involved. Have good contracts in place and be assured that where appropriate, contracts within the chain of parties involved, are aligned with each other so as to avoid unintended mismatches, for example in the execution.

Even where a Crowdfunding platform is legally operating outside the scope of the Dutch regulatory framework (FSA), a platform could take note of the positive aspects of certain rules, for example rules in respect of consumer protection, or rules dealing with investor information (such as relating to the Prospectus Directive). The same applies where a Crowdfunding platform is made subject to certain rules of the FSA. It may be prudent to follow some aspect of the regulatory framework, from the perspective that Crowdfunding platforms literally aim to attract the crowd, which may have little to no knowledge of financial products and risks inherent to financial products.

4.2 Aspects that should be avoided ("don'ts")

The FSA regulates certain financial products and financial services which are not based on European rules. Where foreign Crowdfunding platforms wish to engage in activities in the Netherlands, they may run into financial services rules which are not based on European rules and regulations. This is a risk that needs to be taken into account. The same applies to the general principle that the FSA contains a prohibition to attract repayable funds from the public in / from the Netherlands. This typically will affect the debt/lending type of Crowdfunding instruments, though equity type instruments with conversion characteristics (into debt) should be careful of this prohibition as well.

In short, Crowdfunding platforms should not enter the Dutch market without having conducted a check on the regulatory framework which applies in The Netherlands.

5 Conclusion

The interim conclusion has been taken by the European Commission[10] earlier this year that it does not intend to come up with legislative measures. Several actions have however been proposed, which actions are aimed at promoting, raising awareness and building confidence in Crowdfunding. In the meanwhile the Dutch legislator is not likely to come up with new legislation specifically for Crowdfunding, notwithstanding that Crowdfunding has come under the scrutiny of the Dutch Ministry of Finance, the AFM and DNB.

The AFM will provide further guidance on Crowdfunding before the end of 2014. Guidance is likely to be expected in respect of consumer protection and transparency requirements in line with the aforesaid suggested actions of the European Commission.

The AFM has informed Crowdfunding platforms (known to them) of the fact that they will present the outcome of a survey to the Dutch Parliament on the 19th of December 2014 on Crowdfunding and the regulatory framework. The survey will be accompanied by a reaction of the Dutch Ministry of Finance and the Dutch Ministry of Economic Affairs.

Summary – Crowdfunding Review 2.0

Country

Summary

The Netherlands

Recent developments in Crowdfunding regulation

Ÿ Crowdfunding has come under the scrutiny of the Dutch Ministry of Finance, but so far this has not resulted in changes to laws.

Ÿ AFM will publish recommendations on its website probably at the end of 2014. AFM recommendations are likely to be aligned with the recommendations of the European Commission.

Ÿ AFM will inform Dutch Parliament on 19th of December 2014 of its findings in respect of a survey of Crowdfunding and the regulatory framework.

Current / planned Crowdfunding regulation

General regulation

Ÿ Distinction should be made between the activities of the Crowdfunding platform and the activities of the Crowdfunding entity.

Ÿ Crowdfunding platform could be taking up a regulated activity under the FSA as it intermediates (or advises) in relation to:

- consumer credit

- repayable funds

- financial instruments

- other types of financial products regulated under the FSA

Ÿ Crowdfunding entity could be taking up a regulated activity under the FSA as it:

- attracts repayable funds

- issues and offers financial instruments

- issues and offers other types of financial products regulated under the FSA

Prospectus requirement

Ÿ Currently no specific regulation is envisaged.

Ÿ AFM may be issuing recommendations in respect of, inter alia, information requirements. AFM may require Crowdfunding platforms to provide investors with information that meets certain standards.

Ÿ Be aware that when having the benefit of an exception from the prospectus requirement there are strict conditions, relating to selling restriction requirements and visual tags relating to the offering (vrijstellingsvermelding). If such requirements are not properly executed, the exception is not available.

AIFMD-regulation

Ÿ Currently no specific regulation is envisaged.

Ÿ Typically a start up company would not constitute an AIF. However, if the proposition offered assumes that the crowd collectively puts in money and the risks and benefits are shared by the crowd the qualification of an AIF cannot be excluded.

Payment service regulation

Ÿ Currently no specific regulation is envisaged.

Ÿ Crowdfunding platforms that are part of the money chain / flows, often use electronic money institutions.

Ÿ Crowdfunding platform could be considered intermediating in respect of electronic money when so-called e-wallets are used.

Consumer credit regulation

Ÿ AFM recommends a minimum threshold for the crowd, meaning:

- the Lending Model; EUR 40,000, with one time investments of EUR 5,000 to be spread over 3 or more projects and no more than 100 investments per platform; and

- the Debt / Equity Model; EUR 20,000 with one time investments of EUR 2,500 to be spread over 3 or more projects and no more than 100 investments per platform.

Ÿ Platforms must

- inform consumers to spread their investments and that they should only invest a responsible amount of their income

- inform consumers of risks of investing

- provide full disclosure with respect to the project

- provide clear and not misleading information

- have proper risk management in place

Further possible requirements

· Anti-money laundering regulations (Wet ter voorkoming van witwassen en financieren van terrorisme)

· Act on protection of personal data (Wet bescherming persoonsgegevens);

· Act on unfair trade practices (Wet oneerlijke handelspraktijken);

· Act on the consumer credit (Wet op het consumentenkrediet);

Ÿ Dutch civil code (Burgerlijk Wetboek)

Lessons learned for a possible harmonized European Crowdfunding regulation

Role model ("dos")

Ÿ Check regulatory status of proposition, both in respect of the Crowdfunding platform, the company seeking funding and third parties offering services in respect of the Crowdfunding platform.

Ÿ Have proper documentation and align documentation where relevant in order to avoid unintended mismatches (in execution for example).

Ÿ Incorporate aspects of the regulatory framework that are prudent from the perspective that the Crowdfunding platform attracts the crowd which may have little to no knowledge of financial products.

Aspects that should be avoided ("don'ts")

Ÿ Be aware of specific rules for the Netherlands such as the prohibition to attract repayable funds from the public.

Ÿ When considering entering the Dutch market with a Crowdfunding initiative, do not enter the Dutch market without having conducted a check on the regulatory framework in The Netherlands that applies to such initiative.

[1] Crowdfunding in Nederland 2013, De status van Crowdfunding in Nederland, Douw & Koren, 15 January 2014.

[2] http://www.douwenkoren.nl/crowdfunding-op-weg-naar-mainstream/.

[3] Translated: “DNB and AFM are orientating themselves on “Crowdfunding”” and “DNB and AFM give interpretations on Crowdfunding”.

[4] Source is document on the site of the Dutch Ministry of Finance headed , “List of provisions for consumer protection“. The background of this document and its use is not entirely clear.

[5] As at 24 November 2014, 22 Crowdfunding platforms have an exemption from the AFM which allows them to intermediate in repayable funds. Source: Crowdfunding register of the AFM as at 24 November 2014, http://www.afm.nl/~/media/Files/registers/register-crowdfunders-311014.ashx..

[6] Source: Crowdfunding register of the AFM as at 24 November 2014, http://www.afm.nl/~/media/Files/registers/register-crowdfunders-311014.ashx.

[7] Source: Crowdfunding register of the AFM as at 24 November 2014, http://www.afm.nl/~/media/Files/registers/register-crowdfunders-311014.ashx.

[8] The amount as at 24 November 2014 is: 22. Source: Crowdfunding register of the AFM as at 24 November 2014, http://www.afm.nl/~/media/Files/registers/register-crowdfunders-311014.ashx.

[9] http://europa.eu/rapid/press-release_MEMO-14-240_en.htm.