There is no definition of crowdfunding (No. Folkefinansiering) in Norwegian law, and crowdfunding exists in various forms. A common feature is that there are three parties involved; the investors/financiers, the borrower seeking the funding and the party who connects the two and administers the financing through an electronic platform. The financing is either equity based; typically subscription of shares in the borrower for cash, or loan based; the investors grant loans to the borrower. Whether the party operating the crowdfunding platform needs authorization in Norway, depends on how such party has organized its business.
Author: Partner Hillevi Myhre
Why is there a proposal to change the crowdfunding regulations?
Loan based crowdfunding has become more popular and there are currently several providers in the Norwegian market. A proposal for changes to the regulations relevant for loan based crowdfunding has recently been announced. The proposal means, if it is adopted as proposed, that there will stricter requirements and partly clearer rules for providers of loan based crowdfunding platforms. The Norwegian Ministry of Finance and Financial Supervisory Authority motivates the proposal on the basis of concern for both investors and consumers.
How is crowdfunding regulated today?
Today, there are no special Norwegian regulations for neither equity based, nor loan based crowdfunding. Providers of crowdfunding solutions must observe and comply with the existing regulations and licensing requirements for operation of financing business, payment services, investment services etc. One special rule is however introduced in the Act on Financial Enterprises § 2-18; Exceptions for loans through platforms for loan based crowdfunding. This rule stipulates that loans through a crowdfunding platform does not require the lender to have authorization as a credit institution provided that i) the platform is operated by a loan broker or financial institution and ii) the lender does not lend more than one million NOK per year. This is a welcome clarification which will enter into force on 1 June 2019.
Pursuant to current regulations, loan brokers who offer loan based crowdfunding services may, subject to compliance with certain conditions, operate their business without any authorization, so long as they are registered with the Norwegian FSA.
What is the content of the proposed new regulations?
The main content of the new proposal is that it will become mandatory to have authorization for loan brokers offering loan based crowdfunding.
The Norwegian FSA also want to have an absolute prohibition for offering of loans to consumers for any loan brokers other than financial enterprises. Furthermore, the proposal means that loan brokers operating loan based crowdfunding platforms will become subject to strengthened regulations, similar to requirements applicable to other regulated financial enterprises. Loan brokers may have to meet the following requirements:
- investigate whether a loan is appropriate for any particular lender that is not a professional investor and who lends out more than NOK 10,000,
- give information on risk factors in marketing material,
- be organized as a Norwegian «AS» (limited liability company) with a managing directors and minimum three board members,
- suitability test for owners, board members and management,
- compliance with sound business practices and mandatory action plan for the event the loan broker becomes subject to bankruptcy or voluntary liquidation,
- liability insurance,
- independence and routines identifying and managing conflicts of interest, the loan broker may not act as security agent for the lenders etc,
- out of court dispute resolution mechanism,
- requirement that the lender and borrower has a direct contractual relationship.
The current proposal means that the new rules will be introduced through an entirely new regulation on loan brokers operating loan based crowdfunding platforms. The form of regulation is preferred over an act of law since new EU regulations on crowdfunding are also expected but it is not known when. By adopting the new Norwegian rules through a regulation, it will facilitate any potential amendments as may be necessary to adapt the national rules to the EU regulations.
Will the new regulations facilitate operation of crowdfunding platforms?
There are no indications of decreased regulations or fewer legal requirements for operation of crowdfunding services. Many of those who operate Norwegian crowdfunding platforms today have some form of authorization, e.g. as a payment services provider, in addition to being a registered loan broker. For those, the new rules will probably imply fewer adaptions to the business than those parties who have no authorization today. It is anticipated that existing loan brokers will be offered a temporary period of exemptions for making necessary applications and adaptions but it is currently not known for how long.
When will the new regulations enter into force?
Comments on the proposed new regulations may be made until 1 September 2019. It is not known what the final proposal will look like after such comments have been processed. Accordingly, we consider it unlikely that new regulations on loan based crowdfunding will enter into force before end of 2019, probably more likely in 2020. Parties offering crowdfunding services should however start to make plans for necessary adaptions of its business to the new anticipated rules already now.
SANDS assist several established players in the crowdfunding market and we have a close cooperation with the Norwegian Crowdfunding Association. Please do not hesitate to contact us if you have any questions on this theme or if you have observations in respect of the proposed new regulations that you would like to discuss.
Hillevi Myhre for loan based Crowdfunding and Kristin Nyhus Halvorsen for equity based Crowdfunding.