Real estate crowdfunding is still a young and growing industry, and thus many countries do not have a set of regulations for it, making it a challenge for regulators. However, with the global real estate crowdfunding market expected to reach almost $869 Billion by 2027, it’s hard to ignore its presence. This has triggered the EU parliament to announce Regulation (EU) 2020/1503 which applies to all EU member states and will come into force in November 2021.
The regulation is designed to formalize the process of service provision for crowdfunding and widen the pool of investors. Currently, countries operate under their own regulations – in the UK, the FCA (Financial Conduct Authority) directly regulates crowdfunding investments, France uses ORIAS (The Organization for the Single Register of Intermediaries in Insurance), and Spain uses the CNMV (Comisión Nacional del Mercado de Valores). This disparity in regulations among EU countries has made cross-border crowdfunding operations difficult and costly, but the new regulations are bound to make things easier for new and old investors alike.
What are the new rules?
There are five fundamental points that all European Crowdfunding Service Providers (ECSPs) and investors need to be aware of:
- Project owners need to provide a key investment sheet for any crowdfunding offer
- ECSPs have a duty to avoid and prevent conflicts of interest
- Anyone interested in being a crowdfunding investor needs to complete a suitability and appropriateness test, which assesses the ability to bear potential losses
- There is a new mandatory passport and authorization process for all ECSPs
- The regulations apply to all ECSPs with projects raising up to €5 million over a 12-month period
Why new European crowdfunding regulations bring positive changes
With the global economy recovering from the effects of the COVID-19 pandemic, more ECSPs will be able to secure funding for projects with the new regulations and thus making the investing process more accessible.
The additional protections, from the key investment sheets and suitability test, will increase the trust and confidence in the industry. Real estate crowdfunding has been unfairly accused by some commentators as being untrustworthy due to a few examples of projects not being completed by developers. However, the new set of criteria and due diligence requirement gives investors a renewed sense of trust that their investments are secure.
What does it mean for the real estate industry?
As investors become more comfortable with the idea of alternative investments, there is likely to be a spike in interest in real estate crowdfunding, which will lead to an increase in real estate developments. Investors who may have taken a financial hit due to the COVID-19 pandemic, and previously lacked an understanding of the real estate crowdfunding process, could be persuaded by the benefits of the new rules.
The uniform rules for all ECSPs are certain to have a significant impact on the industry when they come into effect this November. Real estate crowdfunding investors will have more real opportunities and assurances that their investments are safe than ever before. Furthermore, real estate crowdfunding platforms will be able to work seamlessly with developers across the European continent for all projects under €5 million. While the real estate market recovers in 2021, these new rules will aid growth in the real estate crowdfunding sector, as a safely regulated market allows liquidity to follow.
This post is a condensed version of an article written by our CEO Jan Večerka.
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