Framework for crowdfunding regulation in Russia built up
Supervision over crowdfunding platforms should be guided by the market risks without hindering the development of efficient crowdfunding business models. That was the fundamental of the Bank of Russia’s approach to regulation communicated at the first meeting of the working group on monitoring, consumer risk assessment and development of proposals for crowdfunding regulation. The working group united representatives of more than ten Russian crowdfunding platforms.
Crowdfunding is supposed to be regulated in three main directions – regulating activities of crowdfunding platforms and determining requirements for their owners and management; determining requirements for issuers of securities (offered through the platforms) and borrowers; and determining requirements for creditors and investors using crowdfunding platforms.
The Service for Protection of Financial Services Consumers and Minority Shareholders, the author of the approach, believes that crowdfunding regulation should be introduced piecemeal – through oversight and voluntary polls of crowdfunding platforms, working out criteria for their classification and registration, reporting and subsequently establishing requirements for financial indicators and risk management. Consumer right protection is an absolute priority in developing the regulation framework.
Terminology calls for clarification as well. In particular, crowdfunding is suggested to be defined as a mechanism for raising borrowed funds or collective funding of companies or projects with the use of Internet platforms, e.g. p2p loans, targeted grants and donations, as well as investment, through acquisition of a company’s shares or bonds, project funding with a view to make use of its outcome (concert tickets, CDs, film-making, etc.).
The Bank of Russia has been polling crowdfunding platforms on a voluntary basis since 2015. The monitoring revealed both market growth drivers and key crowdfunding risks. Investors are driven by unlimited volume and maturity of investment and few formalities, while newbie entrepreneurs launching fresh startups are attracted by fund allocation procedure that is more simple as compared with credit institutions and microfinance organisations. Meanwhile, both investors and borrowers face risks from inaccurate identification, low quality of business project verification or other borrowers, to non-transparent activity of a platform and possibility of fraud, including Ponzi schemes. Besides, there is a risk of a fund loss if a project fails to raise enough money to be launched.
‘We based our concept of crowdfunding regulation on proportionate regulation and supervision guided by the expected risks, and took into account the needs of market participants who face difficulties in accessing certain funding sources’, said Mikhail Mamuta, the head of the Service for Protection of Financial Services Consumers and Minority Shareholders. ‘However, we have enough time, because crowdfunding market is only emerging and has yet to gain in volume’.
The working group will discuss the concept and submit its proposals to the regulator. These proposals are to become a core of the road map for transition to regulation of crowdfunding market in compliance with the Guidelines for the Development of the Russian Financial Market in 2016–2018.
At the moment, crowdfunding sector accounts for less than 500 million rubles in total liabilities, shows disproportion of different segments and high volatility. It is indicative of the emerging stage of the market.