The world is changing, and with it, the way legal services are delivered. That is precisely why the Costaș, Negru & Asociații team is addressing a topic of great interest today: crowdfunding.
Intuitively, we tend to think of crowdfunding as a financing tool that emerged as a result of technological developments in the 21st century. However, you might be surprised to learn that the first form of crowdfunding is believed to have taken place in 1713.
That year, Alexander Pope set out to produce an English translation of Homer’s Iliad, a text containing 15.693 lines. Given the high costs of this project, the poet decided to raise funds from several people, each of whom was required to pay two gold guineas per volume. In this way, the English poet managed to raise funds from approximately 750 people, who were subsequently acknowledged in one of the first published editions.
The translation was published in six volumes between 1715 and 1720, and we can conclude that it was a true success that laid the groundwork for what we know today as crowdfunding or, under Romanian law, participatory financing services.
However, crowdfunding as we know it today began to develop after the appearance of the internet and was successfully implemented in the wake of the 2007 financial crisis, which drastically limited entrepreneurs’ opportunities to access funds from traditional lending institutions.
The development of technology and online platforms has thus created a new financing model, based on the participation of a large number of people who contribute small amounts.
National and European Regulations
At the European Union level, Regulation (EU) 2020/1.503 of the European Parliament and of the Council on european crowdfunding service providers was adopted on October 7th 2020.
This legislative framework lays the groundwork for crowdfunding at the European level, addressing how these providers are organized, their authorization by the competent authority, and the applicable organizational, financial, and operational requirements.
Once authorization is granted, the crowdfunding service provider is entered into the public register administered by the European Securities and Markets Authority (ESMA), and its activities are conducted under the ongoing supervision of the competent authority that issued the authorization.
A crowdfunding service provider that has been authorized in a member state may also conduct business in the other member states of the European Union, provided that it notifies the competent authority in accordance with the provisions of Article 18 of Regulation (EU) 2020/1.503.
Currently, the ESMA Register lists 259 entities that have been authorized in the Member States of the European Union. Of these, 7 entities have been authorized in Romania by the Financial Supervisory Authority (ASF).
According to the report “Crowdfunding in the EU 2025” prepared by ESMA, in 2024 the 181 entities authorized at the European Union level at that time managed to raise a total of 4.25 billion euros. Eighty percent of this amount was raised in France (1.45 billion euros), the Netherlands (1 billion euros), Spain (0.45 billion euros), Italy (0.29 billion euros), and Lithuania (0.28 billion euros).
In Romania, the provisions of Regulation (EU) 2020/1.503 were implemented through Law No. 244/2022. Under this legislation, the Financial Supervisory Authority was designated as the competent authority for the authorization, regulation, supervision, and control of crowdfunding service providers.
So then, what is crowdfunding, and how does it work?
Crowdfunding is a type of intermediation in which a crowdfunding service provider which assumes no risk in this activity, manages a digital platform open to the general public, designed to connect potential investors or lenders with project developers seeking funding. Such financing may take the form of loans, the purchase of securities, or other instruments permitted for the purpose of participatory financing.
As a result, startups or small and medium-sized enterprises (SMEs) are able to raise small amounts of money from a large number of people instead of obtaining traditional financing through a credit institution.
In addition to providing an alternative source of financing, including risk capital, crowdfunding can offer other benefits for businesses. It can validate a business idea, give entrepreneurs access to a large number of people who can share ideas and information with them, and can even serve as a useful marketing tool.
There are two types of crowdfunding regulated by Regulation (EU) 2020/1.503, namely:
a) Loan-based crowdfunding. In this form, the platform does not lend to projects from its own funds but merely facilitates the conclusion of loan agreements between investors and project developers;
b) Investment-based crowdfunding. In this case, the investment is made through the purchase of securities or instruments eligible for crowdfunding purposes and issued by project developers or an investment vehicle;
However, the European regulation does not govern donation and reward-based crowdfunding or initial coin offerings (ICOs), which are regulated under Regulation (EU) 2023/1.114, known as MiCA.
- Key Considerations for Crowdfunding Service Providers
The authorization procedure for crowdfunding service providers involves meeting several requirements set forth in Regulation (EU) No. 1.503/2020, in accordance with the provisions of article 12.
Below, we outline the most important aspects of the documentation required for the authorization of a crowdfunding service provider with the mention that this list is not exhaustive.
First, the legal entity established for this purpose must submit several documents to the authorizing and supervisory authority, such as: (a) a business plan describing the types of participatory financing services the entity intends to provide; (b) a description of the internal governance and control mechanisms applicable to the provider; (c) a description of the systems, resources and procedures used by the crowdfunding service provider to control and protect data processing systems; (d) a description of the entity’s operational risks; (e) a description of the provider’s business continuity plan; (f) a description of the provider’s outsourcing mechanisms and (g) a description of the provider’s procedures for handling customer complaints.
Subsequently, the provider in question will have to demonstrate compliance with the prudential safeguards required by european legislation. More specifically, the provider must at all times maintain safeguards at least equal to the greater of the following: (a) EUR 25,000 or (b) one-quarter of the previous year’s fixed overhead costs, reviewed annually, which shall include the cost of administering loans for a three-month period, if the crowdfunding service provider also facilitates the granting of loans.
The aforementioned prudential safeguards shall take the form of (a) own funds; (b) an insurance policy covering the territories of the Union in which crowdfunding offers are actively marketed, or a comparable guarantee or (c) a combination of the first two.
Persons involved in such a project may not hold any interest in the crowdfunding offers on their platforms and are required to enforce and maintain effective internal rules to prevent conflicts of interest.
Furthermore, the persons responsible for the management of the entity providing these services must demonstrate that they are of good repute and possess sufficient knowledge, skills, and experience to ensure the proper management of the crowdfunding service provider.
It is important to note that crowdfunding service providers may not provide payment services as defined in Directive (EU) 2015/2366, since authorization to provide crowdfunding services does not equate to authorization to also provide payment services.
Consequently, these operators may outsource, in whole or in part, any operational function to third parties, including payment services, in accordance with the provisions of Article 9 of the Regulation.
The European legislator has also set a cap on the total value of crowdfunding offers made by a project developer, which is EUR 5.000.000.
- Key Considerations for Investors
Potential investors benefit from broad protections established in Chapter IV of Regulation (EU) No. 2020/1.503, which provides robust safeguards, particularly for non-sophisticated investors or retail clients, in accordance with Directive 2014/65/EU.
According to article 19 of the Regulation, providers must inform clients of all costs, financial risks, and fees associated with crowdfunding services or investments, the selection criteria for crowdfunding projects, and the nature and risks associated with crowdfunding services.
Furthermore, providers of these services must make available to investors the key investment information sheet prepared by the project developer for each offering.
Investors must be informed of the default rates associated with crowdfunding projects, which must be displayed in a prominent location on the crowdfunding service provider’s platform.
It is important to note that, pursuant to article 21 of the Regulation, providers are also required to conduct a prior assessment of non-sophisticated investors in order to grant them full access to the option of investing in crowdfunding projects on the platform. The purpose of this assessment is to verify the investor’s experience, investment objectives, financial situation, and basic knowledge of the risks associated with investments in general and those associated with the types of investments available on the platform.
We welcome this decision by the legislature to place this obligation on providers, as it becomes a fundamental right for investors who are just beginning their investment journey and do not have the same resources as other market participants.
Another essential right of the unsophisticated client is the pre-contractual cooling-off period established by article 22 of Regulation (EU) no. 2020/1.503. More specifically, investors have the option, at any time, to withdraw their offer to invest or their expression of interest in the crowdfunding offer without having to provide a reason and without facing any penalties.
Conclusions
In conclusion, crowdfunding facilitates access to financing and supports early-stage entrepreneurs or small and medium-sized enterprises by bringing together a large number of people willing to support a project. This form of alternative financing was not created by the aforementioned European and national legislation, rather these laws provided it with a unified legal framework designed to encourage the development of the economic market while ensuring an adequate level of protection for investors. In a challenging political and economic context, this form of investment can be a lifeline for entrepreneurs and small and medium-sized enterprises, thereby contributing to the development of a more accessible and dynamic entrepreneurial ecosystem.
Although Regulation (EU) 2020/1.503 aims to harmonize and simplify the framework governing crowdfunding services, in practice, there are significant challenges regarding the authorization process for crowdfunding service providers and compliance with regulations to ensure optimal operations, as well as regarding the protection afforded to investors as a result of these activities. In this context, specialized legal assistance is often an essential element for both crowdfunding service providers and participants in this alternative financing method.
This article was written for the Costaș, Negru & Asociații blog by attorney Raul Celmare of the Cluj Bar.
Costaș, Negru & Asociații is a law firm with offices in Cluj-Napoca, Bucharest, and Arad, providing legal assistance, representation, and consultancy across various practice areas through a team of 16 lawyers and consultants. Details regarding legal services and the team composition can be found at https://www.costas-negru.ro. All rights to materials published on the firm’s website and social media channels belong to Costaș, Negru & Asociații; reproduction is permitted solely for informational purposes and requires proper and complete citation of the source.
