Cyprus Crowdfunding: An established form of alternative finance

Hyper-connectivity of our world defines our era. As a result of this hyper-connectivity, digital markets and services are rapidly growing, thus facilitating people and organizations to conduct business anywhere, anytime. The fact that businesses and entrepreneurs around the globe can gather in the same (virtual) place within an instance would, sooner or later, affect the way they seek finance of their projects and increase the number of investment opportunities for the investors in exchange for potential return.

Recognizing the importance of access to funding for SMEs and fintech startups, and its aim being to ensure the protection of investors, CySEC proceeded in developing a regulated environment through which companies may obtain funding through an online information system or platform. In this way, investors on crowdfunding platforms will benefit from a better protection regime.

To this extent, CySEC introduced Directive DI87- 10 of the Cyprus Securities and Exchange Commission on the provision of Crowdfunding Services in respect of transferable securities (hereinafter referred to as the “Directive”). The purpose of the established Directive is safeguarding investors interests and regulate the services and activities related to crowdfunding, conducted by already authorized Cyprus Investment Firms (CIFs) or entities that applied to obtain a CIF authorization and wish to provide crowdfunding services as well. The Directive makes clear that only CIFs with an operational license covering the said services shall be entitled to act as a Crowdfunding Service Provider, actual commencement of the provision of such services will require prior approval by CySEC.

A CIF that wishes to act as a crowdfunding service provider must submit an application for authorization before CySEC. The Application Form must be duly completed and submitted to CySEC, accompanied by all documents specified therein, by existing Cyprus Investment Firms (CIFs) or entities that are applying to obtain a CIF authorisation and wish to provide crowdfunding services. All applicants must also pay the application fee.

However, the obligations of entities authorized to provide crowdfunding services extend beyond mere authorization. Crowdfunding Service Providers offering such activities must establish and implement effective internal rules for the avoidance of conflicts of interests, the safe-keeping of the transferable securities acquired in the context of crowdfunding services and comply with transparency obligations with regards to provision of information to clients as well as the conduct of due diligence.

Providers in avoiding conflicts of interests shall not accept any of the involved persons as a project owner in relation to a crowdfunding project on the platform managed or operated by it. Furthermore, they need to ensure that information, including marketing communications, addressed to clients or potential clients about the CIF acting as crowdfunding service provider, about the costs and charges related to crowdfunding services or investments, the crowdfunding conditions, including crowdfunding project selection criteria, or about the nature of and risks associated with their crowdfunding services are clear, comprehensible, complete and correct.

At A.G. Paphitis & Co LLC, we primarily aim to stay on top of the rapid growth of financial regulations allowing us to advise our clients accurately and effectively and be able to support them in every step in their authorization process and ongoing regulatory compliance needs.

The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.

Should you have any questions please contact us.