Author: Andrea Michaelidou, SENIOR ASSOCIATE
Overview of Crowdfunding Financial Model
Crowdfunding is an established form of alternative finance for start-ups and small and medium-sized enterprises, typically involving small investments made through online platforms. Crowdfunding involves the concept of a crowdfunding service provider, without taking on own risk, operating a digital platform open to the public in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding.
Types of Crowdfunding: Such funding could take the form of loans (lending-based crowdfunding), rewards (reward-based crowdfunding), donations (donation-based crowdfunding) or the acquisition of transferable securities or of other admitted instruments for crowdfunding purposes (investment-based crowdfunding). Hybrid crowdfunding may be used, which combines elements of multiple types (e.g., reward and investment).
Regulatory Framework in Cyprus
The regulatory framework governing the provision of crowdfunding services in Cyprus is established by the Provision of Crowdfunding Services for Business Law of 2024 (L.123(I)/2024) (the “Law”) and the Directive issued by the Cyprus Securities and Exchange Commission (“CySEC”) for Crowdfunding Service Providers (Directive D173-2009-02) (the “Directive”). This framework is fully aligned with Regulation (EU) 2020/1503 on European Crowdfunding Service Providers for Business (the “EU Regulation”). CySEC serves as the primary regulatory authority responsible for the supervision of crowdfunding activities in Cyprus. A Cyprus crowdfunding license allows for operation within the EU, subject to compliance with local regulations in each member state.
Licensing Requirements
The key requirements for a Crowdfunding Service Provider (“CSP”) to obtain a license in Cyprus are as follows:
- Legal Establishment: The applicant must be a legal entity established in the Republic of Cyprus.
- Application Submission: A comprehensive application, accompanied by the applicable charges, must be submitted to CySEC in order to obtain authorisation as a CSP.
- Compliance and Reporting Obligations: CSPs are required to fulfil the following ongoing compliance and reporting obligations:
a) Annual confidential reporting of all projects which are funded through the platform.
b) Annual disclosure of default rates for lending-based platforms covering at least the previous three years.
c) Preparation and publication of an outcome statement within four months of each financial year’s end. This statement must include expected and actual default rates of all loans facilitated, categorized by risk.
d) Provision of a comprehensive Key Investment Information Sheet (“KIIS”) to prospective investors for each crowdfunding offer. The KIIS must be prepared by the project owner and include a clear warning regarding potential financial losses. The individuals responsible for the KIIS must be clearly identified and bear liability in cases where (i) the information is misleading or inaccurate; or (ii) the KIIS omits key information necessary to assist investors in evaluating the crowdfunding project. - Governance and Risk Management: CSPs must implement robust governance frameworks and risk management procedures to identify, manage, and mitigate potential risks.
- Prudential Safeguards: CSPs must maintain prudential safeguards equal to the higher of:
€25,000; or One quarter of the fixed overheads of the preceding year, reviewed annually, including the cost of servicing loans for three months where the CSP also facilitates the granting of loans.
Moreover,CSPs are required to pay an annual fee to CySEC as part of their ongoing regulatory obligations.
