PSFP – Regulation and Benefits

PSFP – Regulation and Benefits

The Regulation 2020/1503 (EU) of the European Parliament and of the Council, in force since November 10, 2021, constitutes a crucial advancement in the regulation of crowdfunding in the European Union. This legislation not only amends Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 but also establishes a harmonized framework for the organization, transparency, authorization, supervision, and effective regulation of providers of crowdfunding services in the Member States of the EU.

Definition of Participatory Financing Services

The Regulation defines crowdfunding services as “the connection of the interests of investors and project promoters in business financing through the use of crowdfunding platforms, facilitating the granting of loans or the placement of negotiable securities and instruments admitted for crowdfunding issued by project promoters.” This innovative approach enables project promoters to access a broader and more diverse investor base, while providing investors with the opportunity to diversify their portfolios and support projects.

Key Actors in Participatory Financing

Within the regulatory framework of participatory financing, Regulation 2020/1503 (EU) identifies three main actors:

1. Project Promoters: These are individuals or legal entities seeking financing to carry out their business projects. They may range from startups to small and medium-sized enterprises in need of capital to fund their expansion, development, or operations.
2. Investors: Individuals or legal entities providing capital to business projects promoted through participatory financing platforms. In return, they expect to receive a financial return, either in the form of interest on loans granted or shares in the profits generated by such projects.
3. Providers of Participatory Financing Services: These entities play a critical role as intermediaries between project promoters and investors. They must operate as neutral intermediaries, acting honestly, fairly, and professionally, always prioritizing the best interests of platform users. Additionally, they are subject to strict requirements for authorization, regulation, and supervision by the competent authorities of the European Union Member States.

Obligations for Providers of Participatory Financing Services

Providers of participatory financing services (PSFP) are subject to a series of obligations to ensure transparency, investor protection, and fair and efficient operation of participatory financing platforms. These obligations include:

1. Operating with Neutrality: PSFPs must act as impartial intermediaries in connecting project promoters and investors, without favoring any of the involved parties.
2. Transparency: It is essential that participatory financing platforms provide clear, comprehensive, and understandable information about projects available for financing. This includes details about the projects, associated risks, terms and conditions of loans or investments, as well as the rights and obligations of investors.

3. Authorization and Supervision: PSFPs must obtain authorization from the competent authorities of each European Union Member State before operating. Additionally, they are subject to rigorous supervision to ensure compliance with all applicable regulations and requirements.
4. Investor Protection: PSFPs have the responsibility to implement effective measures to protect investors using their platform. This may include assessing the suitability of offered products for each investor, clear disclosure of relevant information, and implementation of risk management mechanisms.

Benefits of Regulatory Development for PSFP

The regulatory development of Providers of Participatory Financing Services (PSFP) entails several significant advantages for the European financial and investment market. The key benefits include:

1. Facilitation of Financing:

 PSFPs provide an alternative source of financing that complements traditional capital markets. This enables businesses, particularly small and medium-sized enterprises, to access the necessary funds to drive their growth and development. By offering a more accessible and flexible financing avenue, PSFPs directly contribute to strengthening the business fabric and bolstering the economy of the country.

2. Promotion of Investment Diversification:

PSFPs offer investors the opportunity to diversify their investment portfolios by providing access to a wide range of projects and business sectors. This helps reduce the risk associated with concentrating investments in a single asset or sector, allowing investors to distribute their capital more equitably and strategically.

3. Cross-Border Access:

One of the standout advantages of PSFP regulatory development is the ability to participate in the participatory financing market in any European Union country. This facilitates greater financial integration within the EU, enabling investors and project promoters to access financing and investment opportunities beyond national borders. Cross-border access promotes capital mobility and fosters greater efficiency in resource allocation across the region.