Regulation of crowdfunding in the Czech Republic from next year
Regulation of crowdfunding is gradually coming into force in Europe. An investment tool that allows people to take advantage of investment opportunities that were previously only available to very wealthy individuals. Small investors can thus participate in the proceeds of real estate projects in the Czech Republic and abroad through crowdfunding platforms. The European Parliament approved a special proposal in 2020, which came into force last year. A transition period is currently underway, with all EU countries having until next year to prepare so that the regulation can work and all platforms can manage to apply for a licence. All this should bring more certainty and confidence to the new real estate business.
Young and as yet unregulated:
The relatively young crowdfunding sector has not yet had any official regulation. For investors, this meant that there were virtually no restrictions on who could or could not do this business. This has been the case in most EU countries so far. Few countries have regulatory rules that set the rules. Only the handling of investor funds by central banks is regulated at the moment. Not crowdfunding itself. Investments can be offered through an online platform, but for payment services, a licence is already required. At the same time, the general obligations arising from the regulation of the Anti-Money Laundering Act (AML) must be taken into account. Know Your Customer (KYC). And be compliant with the General Data Protection Regulation (GDPR).
"The way crowdfunding has evolved in recent years, the business is projected to be worth almost $869 billion within five years, which can no longer be left unregulated. This is a huge business that needs to have set rules of operation," says Jan Večerka, founder and CEO of BrikkApp, a crowdfunding platform that facilitates collective investment in real estate in various European countries.
But regulation has already been approved:
Regulation of crowdfunding was already approved at the European Parliament in 2020. However, the European Parliament has issued a supplementary regulation (EU) 2020/1503, which should soon be in force in all EU member states. It came into force last November, with a one-year transition period to allow individual countries to prepare and platforms to be able to obtain licences. Some countries, not excluding the Czech Republic, took a very long time to integrate this into their legislation. The transition period was therefore extended this September by one more year until November 2023 in order to get everything done.
New rules will give crowdfunding more credibility:
New rules could give investors greater certainty for their investments and sow more confidence in the platforms they invest through. There has been mistrust among many people because of various projects that have not been completed in the past, which has damaged the crowdfunding business to some extent. Regulation should therefore make the crowdfunding market more transparent and give the whole industry more credibility. The market should become more certain. It could also widen the pool of those who will invest in this way.
"If today some people are hesitant to micro-invest in real estate and have various fears about such investments, when the EU regulation comes into force, this could change. They could already feel more confident investing if they invest through platforms that will have official certification for their real estate crowdfunding business. At the same time, this will also be true on the other side. It will not be possible to operate a real estate crowdfunding platform without official certification. And this will only be obtained by a company that meets the conditions of the regulation," says Večerka.
So what exactly will be regulated?
European real estate crowdfunding providers and investors themselves will have to comply with a few basic points. Providers will be required to avoid and prevent conflicts of interest. All providers will be required to obtain a special "passport" for their business and go through an authorisation process. This will apply to all platforms that announce and collect investments of up to five million euros per year. Platforms will also need to have a single form for their investors and provide client-investors with two-factor authentication to enter their investment portfolio, similar to the way, for example, internet banking is provided. Another thing that regulation will affect is that client money will have to be strictly separated from the platform's money so that it does not count towards its assets in the event that it goes bust and is seized by a bailiff. Those wishing to offer their projects for funding through real estate crowdfunding will be required to have a key investment sheet for each of their projects.
"It is hoped that the regulation will increase interest in this way of investing their own projects and investors will have more to choose from. Investors will also have to fill out a suitability and adequacy test, as with other investment instruments, to see to what extent they themselves are willing to bear any losses when investing," says Večerka.
