NBS's position on crowdfunding – a way of raising money
Národná banka Slovenska (NBS) considers it necessary to inform the public about the crowdfunding activities of non-supervised entities to protect consumers, since no common rules on crowdfunding1) have yet been adopted.
The aim of NBS’s position on crowdfunding is to provide the public with up-to-date information in this area, while pointing to possible risks.
A. General information on crowdfunding
In general, crowdfunding means raising funds from a large group of people in different ways, each of whom contributes a relatively small part of the total value.
The basic types of crowdfunding include:
- rewards-based crowdfunding,2)
- donation-based crowdfunding,3)
- equity crowdfunding.4)
Crowdfunding can also be seen as financing of projects or businesses through a group of individuals who are not typical “creditors” (investors), which are usually banks or non-banking institutions.
Národná banka Slovenska perceives crowdfunding as a topical issue with rapidly expanding potential. Although NBS monitors crowdfunding activities, it warns the public that it is not a supervisory authority for the area of crowdfunding and related activities. Individuals take part in such activities at their own risk. The NBS also points out that funds that are part of crowdfunding activities are not subject to any deposit protection or investment protection.
B. Risks related to “peer-to-peer lending”
One of the basic types of crowdfunding is “lending”. Its most typical sub-group is “peer-to-peer lending”.5)
As a rule, peer-to-peer lending involves three main parties:
- borrower – a person that borrows funds,
- lender (creditor/investor) – a person lending funds to a borrower,
- internet platform – a platform matching borrowers with lenders.
Both lending and borrowing through such a platform involve certain risks for the lender (creditor) and the borrower (debtor).
The main creditor (investor) risks include a threat that a lender:
- is promised a certain appreciation of funds, which may not be realised;
- suffers a loss because the borrower becomes insolvent, due to imprudent or fraudulent behaviour;
- suffers losses owing to the failure of the internet platform, or gets into uncertainty because of the loss of reputation of the internet platform;
- relies only on information on a borrower in the platform, does not know the borrower in person and is unable to verify the borrower’s ability to repay a loan.
The main risks for borrowers include a threat that:
- the agreed funds are not paid out to the borrower or are paid out under other terms than previously agreed;
- information provided by the lender or internet platform is inadequate, unclear, incomplete or untrue, in particular with regard to the borrower’s rights and obligations or the total cost of loan;
- borrowers do not have the opportunity to verify how the internet platform works and who really lends them money; the borrower receives a template contract that he or she does not have the knowledge or possibility to change, and which may contain unacceptable contract terms;
- for loans, there is no regulation governing the size of the consideration;
- verification of a borrower’s creditworthiness by the platform is insufficient, as a result of which the borrower may become insolvent.
C. Crowdfunding regulation
The area of crowdfunding is not currently regulated in Slovakia. Similarly, at the European level, there is no uniform regulation or legal framework (e.g., directive, regulation) that would regulate crowdfunding in a binding way. However, negotiations on crowdfunding have been ongoing at the EU level since 2014.6) In 2016, the Expert Group of the European Securities Committee (EGESC) asked Member States to map the current situation in this area. EU Member States have approached the regulation of crowdfunding (group loans) in different ways; some countries regulate it by granting permission, others apply a registration principle, and some countries do not regulate crowdfunding at all.
1) The European Commission document on the definition of crowdfunding:
2) The most common type of crowdfunding, characterized by a large number of platforms in which it is realised. At first sight, it may seem (especially by name) that contributors in this model always receive a financial reward, but that is not the case. They usually receive a non-financial reward at a later stage for their contribution to a project (for example, a product which the founder of the project plans to produce). Projects funded this way generally raise public awareness in a compelling way and usually include arts (film, music), socially beneficial projects, or projects supporting certain communities.
3) This type of crowdfunding is based on collection. Its contributors make financial contributions for a smaller scale project. Motivation for contributors is to make a charitable donation to improve the economic situation of an individual or a group, to support science and technology or the like. It is a typical model for the projects of charities and non-profit organizations.
4) This model is investment-based. Individuals who support the project become shareholders of a given company (i.e. acquire a stake in its business). It is based on an investment made by an individual who becomes the co-owner of the company this way, which is a system similar to trading on a stock exchange.
5) The abbreviation P2P means “peer-to-peer” or “person-to-person”. The name implies that the lender or provider of a loan is not a bank but a natural person or several such persons. In practice, we can see terms such as P2P lending, P2P loans or collective lending and collective loans.
6) The document on the definition of crowdfunding:
A case study on Oscar’s PlasticsFactory:
A reference to the recommendation of the European Banking Supervisory Authority (EBA):
National Bank of Slovakia
Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic
Tel.: +421-2-5787 2142, +421-2-5865 2142, +421-2-5787 2169, +421-2-5865 2169
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