French crowdfunding laws to change

Out-Law Analysis | 01 Oct 2014 | 11:49 am | 7 min. read

FOCUS: The rules governing the raising of investment from the public in small batches, or crowdfunding, are changing in France.

An order inserted into the French Monetary and Financial Code and a Decree will come into force today and will regulate intermediaries in participative financing (IPF), or those who engage in crowdfunding. This new regulatory framework is geared towards operators whose main activity is to connect project leaders with people seeking to invest in projects through an online platform.

In this respect, this regulatory framework is putting an end to the legal blur surrounding this activity especially with regards to intermediaries which were not otherwise subject to any regulations, for instance as payment services providers.

This new regime is far less stringent than other regulatory regimes applicable to financial services. Under the regime, crowdfunding services can be offered in conjunction with other financial services, such as payment services.

Obtaining IPF status

An IPF must be registered on the French intermediary register. The registration process should be determined by a decree to be enacted and it has already been specified that the registration will incur a €250 annual fee.

From 1 July 2016 an IPF must be covered by a professional liability insurance. Until then the IPF must disclose to its clients whether it has such insurance.

An IPF’s manager, usually the corporation’s chief executive, must meet the requirements of professional competency and of 'honorability', meaning that they cannot have a criminal conviction amongst other things.

Examples of acceptable skills or experience include:

  • a bachelor’s or master’s degree in banking, economic sciences, management, mathematics, physics, banking law and other degrees and qualifications t be specified in a ministry order to be enacted;
  • two years of professional experience at executive level in relation to financial or payment services or business consulting within the five years prior to the registration as an IPF;
  • three years of professional experience at any level in relation to financial or payment services or business consulting within the five years prior to the registration as an IPF;
  • evidence of at least 80 hours of professional training in banking or finance;

Unlike other regulated financial activities the status of IPF does not include, to date and subject to any regulatory change, any requirement to be established in France.

Any violation of these obligations will lead to specific criminal sanctions of up to 5 years of imprisonment and a fine up to €375,000 in addition to criminal sanctions, meaning fines mostly, associated with any violation of general consumer protection rules. This would be any non-compliance with the scope of information to be provided to lenders and project leaders. 

Operating a crowdfunding platform:

At this stage, the regulatory framework provides principles and general obligations as to the architecture of the platform and the scope of information to be provided to users. It is likely that further detail will be added later through the enacting of additional decrees or the issuance of guidelines by the regulation authority..

Information for the public and platform users:

Contact information of the IPF must be available on the website and on any communication. This should enable users to effectively get in contact with the platform operator and should include:

  • the corporate name
  • the address of the registered office
  • an email address
  • the registration number and, where applicable, the license number of its PSP license;

The regulations set conditions on projects and project leaders. The regulatory framework restricts the nature of loans which can be granted to different types of project leaders depending on whether they are a natural or a legal person and on whether they are raising funds in a professional or personal capacity. Loans can be with interest; without interest or donations.

The amount and term of loans are restricted:

  • each individual lender may not lend more than €1,000 per project if the loan is with interest or €4,000 per project if the loan is without interest.
  • each loan recipient may not borrow more than €1m per project;
  • the loan may not last longer than seven years.

An annual activity report must be published by 30 June each year covering the past calendar year. It should include information on:

  • the IPF’s governance structure;
  • the total number of projects received and processed during the year;
  • the number of projects eventually financed;
  • the total number of loans broken down into the various types of loans or gratifications allowed;
  • the total number of lenders;
  • the average number of lenders per project;
  • the average total amount of loans, broken down into the various types of loans or gratifications allowed;
  • statistics on failure of projects;

'Know your customer' rules

There must be a registration process for any lender or project leader. This is known as 'know your customer' (KYC).

For individuals, the following information must be collected: given names, last name, date and place of birth, home address, email address;

For legal entities, the following information shall be collected: corporate name, address of registered office and SIREN number.

The registration process must include an opt-in confirmation that users are aware, have read and consent to the terms and conditions, and there should be a simple procedure to unsubscribe to the service for users which are not involved in a financing operation.

Information shall be provided on the data to be collected and processed to run the platform, including a potential display of some information provided by users on the website.

Information for lenders and project leaders

Information should be provided to the lenders and project leaders on:

  • features of the projects and of the loan or donation, such as interest rate, duration, reimbursement, withdrawal period;
  • description of the eligibility criteria for selection of projects and project leaders and the information collected from project leaders to run such analysis;
  • information on the failure rate of crowdfunding projects over the last 36 months; calculated as follows: the ratio of the number of loans and the amount of outstanding capital where instalments have been due for at least two months against the total number of loans and the total outstanding capitals of all loans associated to the same projects, and the ratio of the total number of projects for which instalments remain unpaid against the total number of projects for which reimbursement is ongoing;
  • availability of a tool for the lenders to assess the amount of a viable loan, taking into account their current income, costs and savings;
  • the IPF’s remuneration structure and amount, mentioning all applicable fees;
  • a description of the project including: the analysis of the project in light of the information collected through the eligibility check process; the financing plan for the project stating the total amount to finance, the portion of the project leader’s own contribution if any, the amount and the nature of all loans and the existence of subsidies; confirmation whether the project leader has or not subscribed to an insurance on the claimed loan and, if any, the privileges and securities associated with the loans;

A contract template should be provided to formalise the financing conditions. It should include the following information:

  • the identity of the parties, including name, address and SIREN number where relevant;
  • the total amount of the loan;
  • the payment terms;
  • where applicable, total amount of interests;
  • the term for reimbursement of the loan;
  • the fixed interest rate;
  • the amount of fees due to the IPF;
  • the total cost of the loan;
  • the conditions for allocation of the funds to the project leader;
  • the registered office and phone number of the IPF, IPF’s registration number and, where applicable, the IPF’s PSP license number;
  • confirmation of whether a right of withdrawal exists for lenders and, if applicable, information on its starting date, the duration and the conditions to exercise this right;
  • confirmation whether a right of anticipated reimbursement exists and, if applicable, information on the conditions to exercise this right;
  • the address and phone number for the customer claims service;
  • the conditions to seize an ombudsman;
  • a recovery plan in the event of a project failure;

Before any loan contract is entered into, the IPF is responsible for informing all parties about:

  • the amount of all funds made available pursuant to a contract between the lender and the project leader;
  • the total duration of the loan,
  • the interest rate applicable for the lender;
  • the amount of the instalments to be collected by the lender, both capital and interest;
  • the instalments timetable;
  • confirmation of whether a right of withdrawal exist for lenders and, if applicable, information on its starting date, the duration and the conditions to exercise this right;
  • the amount and the calculation method for the IPF’s fees, both in Euros and in percentage of the total amount borrowed;
  • the conditions for the unlocking of funds and their allocation to the project leader;
  • the respective responsibilities and role of the lender, the project leader and the IPF, as well as of any other party involved in the event of the project leader’s failure;

The IPF is also responsible for informing the lender about the specificities of participative financing as a loan and, especially on the risks associated with a failure to reimburse from the project leader; the absence of any security covering these risks, and the impossibility to exercise any right on the funds loaned.

The IPF must also inform the project leader on the consequences of excessive indebtedness and payment default. It must also provide a summarising document addressed to project leaders on the total amount of the project and, where applicable, the interest rate, duration, reimbursement terms and total cost of the loan.

Control and follow up

The interest rate must be inferior to the rate set in the consumer code Article L313-3. Currently maximum rates vary from 3% to 20% depending on the nature or purpose of the loan, the duration of the loan and the total amount of the loan.

The operator must define processes to ensure the follow up of the financing and management of the projects until their end, including where the IPF ceases its activities. There is not much detail in the regulations on this issue yet. The only requirement is for IPFs to secure a back-up service by contracting with a PSP in the event that IPF would be unable to provide its services.

Annabelle Richard is a technology specialist at Pinsent Masons, the law firm behind Out-Law.com