Review of Crowdfunding Regulation, Tax and Legal workgroup of the European Crowdfunding Network, The Netherlands, October 2013

A. THE NETHERLANDS

1 Current Market of Crowdfunding platforms in The Netherlands

In the Netherlands, there are various types of Crowdfunding which are recognised as such by the Dutch regulators, being the Dutch Central Bank (De Nederlandse Bank N.V.; “DNB”) and the Financial Markets Authority (Stichting Autoriteit Financiële Markten; “AFM”). Financial regulatory laws for the Netherlands are mostly dealt with in the Financial Supervision Act (Wet op het financieel toezicht; “FSA”).

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, in the first half of 2013 such amount was almost matched with EUR 13 million.[1] This significant growth has also raised the interest of DNB and the AFM and they have jointly issued statements with respect to their views on Crowdfunding.[2] 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). 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.

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

In this model the person gives money in return for shares or other financial instruments bearing equity like characteristics.

A person could also give money in return for debt obligations rather than shares and as such one could speak of an Equity/Debt Crowdfunding Model.

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 this model, a person gives money as a loan to a project, and their reward is to recover the economic value. Apart from recovering the money that has been lent, this type of Crowdfunding can also include an element of receiving interest. As such the person investing in the Crowdfunding entity at times can get back more than it had borrowed to the Crowdfunding entity. It also includes paying money to a Crowdfunding entity that is yet to produce its product and which, as a result does not yet yield any returns, the so-called pre-sale modelling.

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

The Donation or Rewards model does not involve any form of financial investment or return. Crowdfunding originated from Donations or Rewards-based platforms relates to situations where the interest of the participant is solely to help a worthy or interesting cause for the sake of being associated with it, rather than making any financial profit of it. If indeed there is no financial rewards for the Donation or Reward this type of Crowdfunding Model falls outside of the scope of the FSA.

2 Current Regulation of Crowdfunding platforms in The Netherlands

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 Crowfunding 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).

2.1 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).

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 also regulated under the FSA when such repayable funds are received from non-professional market parties. The intermediation in respect of the attracting of repayable funds from non-professional market parties is also a regulated activity. Normally speaking the Crowdfunding platform would require either a license or a dispensation from the AFM in order to allow it to operate as intermediary with respect to the attracting of repayable funds.

As for the issuer of the debt instruments, the Exemption Regulation to the FSA provides for an exemption 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 exemption thereunder) is not subject to the FSA prohibition on the attracting of repayable funds. When making use of aforesaid exemptions one should be careful as most of the exemptions 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 exemption is not available.

Lending Model

The making of non-consumer loans it 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 taking up of 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 non-professional market parties. As an example, should the funds taken from (non-professional) 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 or exemption is available, the attracting of repayable funds from non-professional market parties is prohibited under the FSA.

Additionally and as explained under the Equity / Debt model, the intermediation in respect of the attracting of repayable funds from non-professional market parties is also a regulated activity. Should the Crowdfunding platform be engaged in such intermediary activities it would require either a license or a dispensation 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.

2.2 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 parties other than professional market parties (within the meaning of the FSA).

2.3 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 anywhere near such amount. As a result, a Crowdfunding platform operating the Equity Model or Debt Model is unlikely to be subjected to prospectus requirements. However, as explained above, the use of exemptions is subject to strict formal requirements. If such requirements are not properly met, the exemption is not available in the first place.

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

Under the Act of 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. 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)

2.4 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).

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

3 Possible regulation of Crowdfunding platforms under the AIFMD regime in The Netherlands

The Alternative Investment Fund Management Directive (“AIFMD”) which has taken effect as of 22 July 2013, indeed 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 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 Equity (/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.

4 Conclusion

Currently the Netherlands has no regulatory regime that is specifically adapted to Crowdfunding. The AFM and the DNB have recognised that parties are in doubt as to whether certain Crowdfunding initiatives trigger the application of the FSA and consumer credit rules in general. To this end the AFM and the DNB have issued guidance papers.

The activities of Crowdfunding platforms have a strong alignment with intermediary (or advisory) type of activities. Depending on the Crowdfunding model of choice, such intermediary and advisory activities could be regulated under the FSA. The Crowdfunding entity itself can also be regulated under the FSA, most likely as an issuer of equity or debt, participations or as a party taking up repayable funds from non-professional market parties. Consumer credit issues are to be taken into account as well.

Summary – Regulation of Crowdfunding in Europe

Country

Regulation

Germany

The Netherlands

General regulation

Ÿ If CrowdFunding platform facilitates offering of securities or investment products (Vermögensanlagen), the operator of the platform provides financial services
→ BaFin authorisation required

Ÿ Exemption for investment broking and contract broking only regarding newly issued investment products (Vermögensanlagen)

Ÿ Depending on the structure in detail: sound arguments that subordinated loans (Nachrangdarlehen) and contributions under Donations/Rewards Model do not constitute investment products (Vermögensanlagen)

Ÿ Distinction should be made between the activities of the Crowdfunding platform and the activities of the Crowdfunding entity. For the latter please see the box below.

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

- consumer credit

- repayable funds

- financial instrumentsother type of financial products (depending on the structuring of the Crowdfunding platform)

Ÿ

Prospectus requirement

Ÿ Prospectus requirement for offering of securities or investment products (Vermögensanlagen)

Ÿ Threshold: EUR 100.000 per issuer within 12 months

Ÿ Depending on the structure in detail: no prospectus requirements for subordinated loans (Nachrangdarlehen) or contributions under Donations/Rewards Model

Ÿ Prospectus requirement for securities within the meaning of the Prospectus Directive

Ÿ Threshold: EUR 2,500,000 per issuer within 12 months (bear in mind strict selling restriction requirements)

Ÿ

AIFMD-regulation

Ÿ Typical start-up company in general does not constitute an AIF

Ÿ "Project Company" might constitute AIF

→ extensive AIFMD regulation for AIF and its manager

→ manager (AIFM) requires BaFin authorisation

Ÿ Depending on the structure in detail: funding by means of subordinated loans (Nachrangdarlehen) or contributions under Donations/Rewards Model should not entail an AIF

Ÿ Sound arguments that CrowdFunding platforms should not constitute AIFM

Ÿ Crowdfunding structure could constitute an AIF, although regulators have not yet made any comments on this issue to date

Ÿ Notwithstanding the EUR 100 million threshold an AIF that offers participations to retail investors is caught by the AIFMD regime in full

Ÿ An additional disclosure regime applies to retail offerings of AIFs and the rules are aimed to ensure transparency and that retail investors receive proper information on their potential participation/investment

Ÿ

Payment service regulation

Ÿ Transfer of funds through operator may constitute money remittance service

→ BaFin authorisation required

Ÿ "Commercial Agents" exemption probably not applicable to operators of CrowdFunding platforms

Transfer of funds through operator may constitute a payment service which requires a license as payment institution. In such case Dutch Central Bank authorisation would be required

Ÿ

Consumer credit regulation

If consumer borrowers are permitted on a platform (Lending Model) there are implications for the form and content of the lending agreements

If consumer borrowers are permitted on a platform (Lending Model) there are implications for the form and content of the lending agreements. The Crowdfunding platform would normally require a license as an intermediary in relation to consumer credit (financieeldienstverlener)

Further possible requirements

Ÿ German Trade, Commerce and Industry Regulation Act (Gewerbeordnung)

Ÿ German Act on Money Laundering (Geldwäschegesetz)

Ÿ German Securities Trading Act (Wertpapierhandelsgesetz)

· 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, as implemented in several Dutch acts, including the Dutch Civil Code (Burgerlijk Wetboek);

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

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

[1] Source: www.douwenkoren.nl

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