Blog: Crowdfunding providers now regulated by the Central Bank –

New regulations aimed at protecting people who stump up money to crowdfunding service providers have come into place.

he Central Bank of Ireland said the changes would mean investors are informed of the potential risks of crowdfunding.

The provisions of the Consumer Protection Code will now apply.

Crowdfunding has grown in popularity in this country.

It is the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, usually online.

Irish startups raised more than €6m in total from members of the public in the first eight months of 2021, according to Spark Crowdfunding.

Now the Central Bank has said it has been designated the competent authority for crowdfunding regulation in Ireland under European Union regulations.

Two main types of crowdfunding are covered by new regulation – investment-based crowdfunding and peer-to-peer or loan-based crowdfunding.

This means the new rules will apply to the six main investment-orientated crowdfunding firms in this country, rather than small time community groups or individuals raising money for the likes of a cancer operation for a child.

Until now, crowdfunding was not a regulated activity in Ireland.

However, EU member states were required to adopt the Crowdfunding Regulation by May 10 last and apply those measures from the end of last year.

The Central Bank acknowledged that crowdfunding brings new funding possibilities for businesses and new opportunities for investors.

But it is important that investors are protected and well informed about potential risks, it said.

A number of provisions of the Consumer Protection Code 2012 will now apply to advertising by crowdfunding service providers in Ireland.

Adverts will now have to be “fair and clear and must not mislead or seek to influence consumers unduly in their investment decisions”, the regulator said.

Crowdfunding service providers must display a prominent warning message on all adverts that investment in crowdfunding projects entails risks, including the risk of partial or entire loss of the money invested.

Investors will have to be told that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme.

The new framework will require crowdfunding service providers to be authorised and they will be subject to operational and prudential requirements as well as investor protection measures, the bank said.

Director of financial regulation, policy and risk, at the Central Bank Gerry Cross said crowdfunding provides a form of alternative finance for startups and SMEs, typically relying on small investments.

“Trust, confidence, and fair dealing are essential for any financial market or product. It is therefore vital that investors are made aware of the risks of any such investment.”

He said the fact that the Central Bank is now applying its advertising rules to crowdfunding service providers will ensure that Irish consumers receive the same protections in relation to advertising by crowdfunding service providers that are required of other financial service providers.

Linked Finance welcomed the Central Bank’s announcement on crowdfunding regulations. It said the move marks official recognition of the important role peer-to-peer lending has to play as a source of funding to help growth in the SME sector in Ireland.

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