10 changes due to the new ECSP license
Written by Peter Stolze on 14 December 2022
In August 2022, Lendahand was the first Dutch crowdfunding platform to obtain the new European Crowdfunding Service Provider License from the Financial Markets Authority (AFM). The European Crowdfunding Regulation has been applied since November 10th of 2021. After an intensive application process, Lendahand obtained the license allowing it to exercise its services in Europe. What does this new license mean for our investors?
Why have a license?
Lendahand has had a so-called MiFID license since 2016. We applied for this license at the time because we felt it would be better to fall within a legislative framework and not work with an exemption (sort of a tolerance construction). Only this license is unnecessarily burdensome for a crowdfunding platform. Therefore, we eagerly awaited the ECSP license, which would be lighter and easier to implement.
To be fair, the application was more extensive than expected, even though we already had almost all the documentation filed. All in all - after a preparation period of 2 months - it took another 5 months before we obtained the license. In principle, we no longer need the MiFID license, so we are now researching if it’s better to keep it or not.
Changes under ECSP
Regarding the new European Crowdfunding Service Provider license, a few changes are visible on our platform. We briefly explain the changes below:
1. More 'loans', less 'bonds'
In view of the auto-invest opportunity offered under ECSP, we are going to offer more ‘loans’ and less ‘bonds’.
Investors can invest in the offered projects through the Lendahand platform. The investments usually come to the borrowers in the form of bonds (notes), issued by the borrowers to investors. However, the new license allows auto-invest to be offered to the crowd. This means that money held in the wallet or repayments can automatically be reinvested in projects of their choice. A requirement, however, is that this is done with loans, not bonds. In the coming year, we will therefore convert contracts with borrowers to loans as much as possible, insofar as this has not already happened.
Although loans and bonds are both financial instruments representing a debt to the borrower, there are some legal differences, namely:
- A loan agreement is signed by both parties (namely, the borrower and the lender)
- A loan agreement contains obligations for both the borrower and the lender
- The contract terms of a loan are more extensive than the contract terms of a bond
- A loan agreement cannot be traded
2. Blacklist of high-risk countries
The EU no longer uses a list of high-risk countries but a blacklist.
Previously, the EU provided a list of countries that required additional scrutiny before being approved on the platform. Transactions with parties in these countries were then possible. With the new license, this list has become a no-go list. For Lendahand, this means that it is no longer possible to do business with (existing) borrowers in Nicaragua, Uganda, Cambodia, and the Philippines, as long as these countries are on this list. Repayments from projects in these countries are still being processed.
3. The Information Document becomes a KIIS
Instead of an Information Document, a KIIS is required from now on (Key Investment Information Sheet).
Until recently, the MiFID license required us to provide an Information Document with the projects (project owners) on the platform. The document described the risks, management, owners as well as the latest financial information of the respective borrower. Under the new license, a new template has been made mandatory; the KIIS. This Key Investment Information Sheet contains approximately the same information as the Information Document, just in a different order. The KIIS must be available in the languages of the countries where the crowdfunding platform operates. In the case of Lendahand, the document is currently offered in Dutch, English, French, and Spanish.
4. New: KYC Light accounts
Soon, Lendahand will offer a KYC Light account for investors investing smaller amounts.
Until now, all investors were required to undergo a full screening process regardless of the amount they invest: investor test, identity document upload, selfie verification, bank account validation, and sanction checks. Under ECSP, an investor can now also opt for a Light account. It allows investors who invest smaller amounts and do not wish to use a Lendahand wallet to skip a part of the screening process.
5. Investor test and simulation
In addition to the traditional investor test, a simulation must now be completed before being able to invest.
In the investor test (10 multiple choice questions), the investor's main concern is the risks involved in investing. The new simulation, the loss calculator (3 questions), examines the investor's ability to bear losses. Since there is a potential risk, it is good to be as aware as possible of the percentage of available investment capital that should be employed for crowdfunding. Just like before, the results of the test and simulation are informative and non-binding.
6. Indicating how interest rates are set
Crowdfunding Service Providers are now required to disclose how the offered interest rates are set.
A new requirement under the ECSP license is that a crowdfunding platform must disclose how the interest rates offered on projects are set. Lendahand sets the price (interest rate) of a crowdfunding offering based on the risk framework, credit scoring model, and market factors. The interest rate ultimately applied to a project includes interest for investors (the crowd) and a management fee for Lendahand.
7. Credit score per project
Each project should now show a risk rating, including an explanation.
Lendahand uses a credit scoring model - partly automated - in its credit assessment. The credit scoring model consists of 5 categories:
- Investee characteristics
- Financial performance
- Funding capacity and track record
- Macro factors
In the credit scoring model, each category consists of 4 to 7 questions, each yielding a score from 1 to 5. Based on the weightings of the individual (sub)scores, a total score is thus ultimately obtained. This total score leads to a risk categorization of the crowdfunding offering and is also used to determine the total interest rate of the offering. The score is dynamic, meaning that it can change through regular reporting and monitoring and will be adjusted accordingly. Read about the credit scoring process here.
8. More information about expected defaults
The new license also requires more information about borrower bankruptcies (such as expected defaults).
Lendahand has been showing portfolio statistics for years. In response to the new license, we have revamped the entire investment portfolio overview and made the webpage much more complete. Check out the portfolio page here.
9. Large amounts pop up
Those who invest more than EUR 1,000 in one project will see a warning.
A new feature is that visitors to the website will see a pop-up notification when they want to invest an amount larger than 1,000 euros in one project. The notification is required by the European Commission to alert investors to the potential risks of crowdfunding. Incidentally, the period that an investment can be canceled has also been extended from 24 hours to 4 days.
10. Modified general terms and conditions
The general terms and conditions should be amended in accordance with the requirements of the license. The final changes resulting from the new license are reflected in the general terms and conditions. They include, for example, that the cooling-off period has been extended.
The purpose of these changes required under the European Crowdfunding Service Provider license is to provide a uniform framework for all platforms in Europe and to better inform investors.