How to regulate crowdfunding ?: Towards the desired impact

Hardly issuing a standard It has the possibility of causing so much impact in a financial market. And, together with other provisions aimed at promoting financing [1], the legal recognition of crowdfunding −which, by definition, is called to revolutionize the financial industry (hereinafter, always referred to the financial type) -, giving way to its expansion in Peru, implies great potential in the development of financing and investment in our country.

What does the realization of this potential depend on? Mainly, of the regulation. As has happened in the international experience, it is based on the rules and limitations that are chosen for market participants. crowdfunding, which can encourage or limit its growth.

However, financial regulation, certainly, still depends on the State, which has issued the norm in question (Emergency Decree No. 013-2020, hereinafter, DU), which, as is known, is the product of the work of the Central Government and financial regulators (without forgetting the momentum of the growing community fintech peruvian) and which contains a series of general provisions that I will discuss later, where the Superintendence of the Securities Market (SMV) has been designated as the regulatory and supervisory entity for the activity of crowdfunding.

However, being within the term that the SMV has to issue the corresponding regulation (270 days from the issuance of the DU), in line with the philosophy of the collaborative economy on which the Crowdfunding, It is important to call the attention of all the actors interested in the development of this nascent market about the importance of their active participation - more than criticism - in the specific regulation that is coming.

RIA: Towards a “participatory” crowdfunding regulation

In fact, citizen participation ordinarily materializes in the comments that can be made from the consultation that the SMV announces about a specific regulatory project, but the Government is giving significant advances for Implementation of Regulatory Impact Analysis (RIA), through Peru's entry to the Organization for Economic Cooperation and Development (OECD).

What is the RIA? It is a public policy tool in which both the benefits, costs and possible effects of a regulation are evaluated both before (ex ante) and later (ex post), in order to achieve quality of it, based on basic principles of rationality and proportionality.

In this analysis the interaction with the public is high. For example, public consultation involves interested parties through public hearings, advisory tables and informal consultations, thus generating a perception of belonging of the regulated to the regulation. In the case of the regulation of crowdfunding (called “Participatory Financial Financing” in Peru), the application of the RIA is more than necessary.

In principle, financial regulation has not been historically clear. There are many cases in which a certain rule has been left in a gray area, without the administrator understanding the motivation behind that rule. Also vice versa, that the financial regulator does not understand the scope of its own rules, that is, the regulatory impact. Thus, unlike what has happened in Chile, by way of example, where there have been advisory tables for the elaboration of the draft law on crowdfunding and a report which shows the analysis and perspective of the financial regulator itself (recently merged [2]), the cr regulatory projectowdfunding Peruvian, which is now in the DU, generated some uncertainty in some analysts.

Regulation of the digital era P2P model

In addition, the regulator is facing a business model that displaces the traditional financial intermediation schemes on which all the regulations of the stock market and the financial system have been built: peer-to-peer or from person to person, which is the base structure of the crowdfunding and other concepts such as initial coin offering (ICO) and cryptoassets (which includes the cryptocurrencies), of great prominence within the phenomenon fintech.

This model operates with a high digital component that makes it possible to connect surplus and deficit agents - which can also be cross-border -, regardless of traditional intermediaries, their procedures, face-to-face acts and papers.

While the benefits of the community connected through digital technology are evident in the drastic reduction of transaction costs (immediacy, commissions and lower interest rates, among others) - thus democratizing financial services -, identifying Scope of the risks of this model and establishing rules for its allocation and mitigation is a great challenge for financial regulators.

El crowdfunding It has been regulated in many countries since 2012, generating several revisions and reforms on the rules introduced in this market that are still observed by its participants, as in the case of U.S.A., Spain y United Kingdom - whose regulation is usually a model for countries such as Peru -, and a common regulation is also expected for the countries that make up the European Union. Also, in recent years the ICOsy cryptoassets They are being part of the agenda of national regulators and international organizations such as the International Organization of Securities Commissions (IOSCO) and the OECD, publishing reports and in some cases the first regulations.

Then, in a search context of regulatory quality, it is understood that it is also sought by the own SMV[3], the intention of this article is to present some scopes on the aspects that still need to be regulated and those contained in the DU that could be improved, hoping that this is one of the many contributions that can be made to the regulation of crowdfunding in Peru.

Starting point: Crowdfunding and the Peruvian financial market

Since the year 2009, the market of crowdfunding has grown steadily to be a market for trillions globally, where China and the United States reach higher volumes. Thus, as can be seen in the table below, the United States covers almost the total of this market (all modalities of crowdfunding, including donations and pre-sales, as well as other financing alternatives such as lending) within the American continent.

Source: Cambridge Center for Alternative Finance

En Latin America, Brazil, Mexico y Chile they are the countries where the market of crowdfunding has reached its highest volume, which, among other aspects, prior to the specific regulation (implemented, in the case of Brazil and Mexico, and in the project, in the case of Chile), had a general financial regulatory framework that allowed the emergence of platforms that offered collective financing.

In the Peruvian case, we are in sixth place in size in terms of alternative financing (after Colombia and Argentina). In this regard, as shown in the following table, we have developed the market for crowdlending (loans between people), balance sheet consumer lending (direct loans with the company's own funds fintech to consumers), and invoke trading (invoice financing, which can be between people or direct).

Source: Cambridge Center for Alternative Finance

The absence of the modality of equity crowdfunding In Peru, it is explained by the general regulation of the stock market supervised by the SMV, which is activated on operations that involve the issuance of transferable securities (securities issued in bulk, such as bonds and shares) through public offers ( invitation addressed to the public to perform investment acts, and properly disseminated, which includes web platforms; which has been warned publicly by the SMV.

This means that, before the implementation of the DU, a receiving company that intends to obtain financing through platforms of crowdfunding - offering shares, for example -, must submit to the securities market regulations as an issuer; what implies the inscription of the informative leaflet of his actions in the registry of the SMV, the fulfillment of periodic informative obligations (facts of importance and financial statements), and other traditional regulatory burdens.

Even though the SMV has created a segment of the stock market aimed at small and medium enterprises with more flexible rules compared to the general regime, called Alternative Stock Market (MAV), the regulatory burden still existing for issuers, the lack of incentives for investors (such as tax exemptions), and the supply power of the banking system, keep this market away from its growth.

In this regard, it should be noted that the high concentration of supply (banking sector and its conglomerates) and demand (institutional investors such as AFPs) of the Peruvian financial market, as well as its asymmetries in tax treatment and interest rate fixing have already been identified as problems for the development of the Peruvian capital market in a study made by the World Bank.

Meanwhile, there is an unattended demand: MSMEs. We are recognized as the most enterprising country in Latin America and fifth worldwide. Our microfinance environment It has also been recognized worldwide, but the lack of adequate competition (without alternatives to bank financing) means that the interest rate offer remains high, or that MSMEs do not access financing, as noted in the reports National Strategy for Financial Inclusion of Peru.

The good: Freedom of interest rates

Hence the importance of equating the freedom to set interest rates, commissions and expenses, which until before the DU only had the companies of the financial system that are supervised by the Superintendence of Banking, Insurance and AFPs (SBS). Think of short-term or high-risk financing, where financing schemes such as crowdfunding, investment funds and public offerings of transferable securities, and other companies supervised by the SMV, can now be competitive against the banking system.

The interesting thing: Primacy of reality for SBS and SMV

Now, certainly what has been said about the application of the securities market regulations (regarding collective financing obtained through public offers) loses “legality” when what is used to obtain financing is not transferable securities, that is, securities securities issued in bulk, whose issuance has traditionally originated in paper.

In the area beyond the regulation of the SMV are collective financing formalized through loan agreements (crowdlending), which is the market we have most developed, according to the information presented in the table above (P2P Consumer Lending, until 2017). This, despite the fact that in reality, in the case of companies (P2P Business Lending), in this modality there are several investors with credit rights, as in a bond issue.

However, it should be added that, before the DU, the crowdfunding It was in certain gray areas in the face of the SBS regulation, which - fulfilling its protection function over public savings - has been pronounced more than once (indicating the possibility of financial informality) on companies that usually receive money from third parties and place these resources in credits or investments, under any contractual modality (as do the companies that administer the platforms of crowdfunding).

Additionally, we had a not very happy formula established in Law No. 30050, which states that all advertising of financial assets could only be carried out by authorized or supervised subjects by the SMV and the SBS; which, in a literal application, could have limited the market for crowdfunding and lending, but at the same time - apparently - it was not enough to empower the SMV to act on investment acts that do not rest on transferable securities (unlike what happens in the United States with the concept of Securities).

This possible lack of competition could have been a limit on the supervision functions of the SMV in financing operations through ICOs, which have also been subject to advertisements by the SMV [4].

Thus, the provision contained in Law No. 30050 has been modified by the DU, stating that the prohibition now falls on advertising relating to financial assets under the jurisdiction of the SMV and the SBS, which is made in order to obtain money from the public in exchange for a financial return, a credit, proprietary or property right or of participation in the capital, or in the profits of the recipient of the funds, under any modality. To this effect, it is added that these regulators may apply the principle of primacy of reality, regardless of the denomination given to the financial asset.

Innovation and regulation of the hand: flexible regulator and sandbox?

Before mentioning the specific regulatory framework established for the crowdfunding in Title IV of the DU, which contains general standards to which the management companies of the platforms of crowdfunding (hereinafter, administrators) that correspond to the companies supervised by the SMV, it is important to highlight that the SMV has been empowered to determine: i) new obligations, responsibilities and prohibitions to those established in the DU with respect to the administrators and; ii) the conditions under which exceptions may be granted to the obligations and other provisions set forth in the DU.

This power to establish exceptions to a rule with the rank of law for the SMV is, to say the truth, very required in all the regulations that this body monitors. This, obviously, based on the natural development of the market that always goes one step before the regulation. So, it has been well done in recognizing this reality for the market of crowdfunding, so that the regulator can adapt its rules to the extent that the development of the market so requires, without having to go to the legislator.

In addition to this, we have the possibility that the SMV and the SBS can establish the temporary realization of activities through innovative or innovative models, as well as the conditions or provisions necessary for their development. This leaves a clear sample of the regulators' openness to business models. fintech that are coming, picking up the sounded sandboxes that have been implemented in other countries. But the analysis of the effectiveness and costs of a sandbox, compared to a Innovation Hub, which is a point of contact between the regulator and regulated, where the latter can find a guide for the development of their business more freely.

Specific regulation: What is pending

Considering all of the above, what follows (the regulation) is as or more important than the DU.

In principle, the information obligations (both users and regulators), the duty to have methodologies, risk management policies and compliance with the prevention of money laundering, established in the DU on the administrators, provide of the long-awaited legal certainty and confidence in this market, so you are welcome.

Likewise, it is observed that the regulatory option in Peru has been to allow the administrators to take care of the entire value chain implied by the operations of crowdfunding, including payment channelings. In this sense, it is a success that has declared the intangibility of bank accounts where the funds of the investors or the recipients of the financing are maintained, which mitigates the so-called bankruptcy risk of the administrator.

However, it is advisable to review the services, obligations and prohibitions established in the DU so as not to limit the operation of the platforms of crowdfunding in its different modalities.

In this regard, it is worth noting a very worrying point that is in the prohibition of the direct or indirect participation of the administrator, either as a recipient of the financing or As an investor

Although it is necessary to encourage the impartiality of the administrator - with which, the restriction of advice and recommendations is valid - it is not possible to go to the extreme of prohibiting this and its related parties the possibility of investing in a specific financing project, preventing the administrator can align with the interests of investors, sharing the investment risk (that is, having skin in the game), which finally encourages the diligence of the administrator.

While the SMV can correct this prohibition, it is expected that the formula does not require administrative procedures that involve bureaucratic barriers or disproportionate limitations.

On the other hand, it should be noted that the aspects that have been pending regulation are the following.

i) Other crowdfunding modalities, other than those based on the issuance of transferable securities (capital and / or debt) and loans:

On this point, the SMV must take into account the specific treatment that can be given to the model of Invoice Trading through crowdlending (crowdfactoring), where certain information disclosure rules established for the recipient of the financing should be adapted considering that the credit risk rests mainly on the companies acquiring the goods and services of the invoices.

Giving a clear framework for action for this modality is especially important if you consider the great potential of the invoice financing market in Peru, which has so far presented a high growth rate (due to the standards issued to boost it).

This is also a great opportunity to analyze and introduce the use of Tokens to obtain financing, as well as hybrid instruments that share the characteristics of capital and debt instruments.

ii) The minimum capital, financial requirements and penalty system:

To the extent that funds from investors and recipients can be managed, and it is also expected that the administrators can operate with high amounts progressively, it is understandable that there is the possibility of reaching considerable fines.

But this sanctioning aspect, such as that of the minimum capital and other requirements such as offering guarantees, must proportionally address the risks and the size of the administrator (phased regulation).

iii) Maximum limits of resources to be collected per project, per recipient of financing, as well as limits to investors

It is understandable that the trends in the regulations that have been applied to the crowdfunding in other countries, but it is necessary to take with tweezers an aspect that has been very criticized by the market and that has caused regulatory reforms, which will surely follow that line, as I have noted at the beginning of this article.

Likewise, this paternalistic regulatory logic has been more criticized in those countries such as ours in which casino or lottery games have no limitation, thus demonstrating the lack of equitable treatment in relation to freedom in the use of money from persons.

Moreover, in the Peruvian case, it should be taken into account that in the framework of freedom of interest rates (which until before this standard was only applicable to companies in the financial system and which has been strongly defended by the bank guild), there is no restriction on the financial decisions of consumers regarding credits that can reach very high rates (150% annual, inclusive), which makes us one of the countries with spreads highest average banking in the world (the second highest in Latin America, after Brazil).

Apparently, the limitations are intended to protect investors, but the real effect may be to kill the industry. This is what the regulations have understood in NZ, Lithuania y Singapore, that in addition to the information obligations, in the last two cases, they have established that it is the investor's knowledge and not their equity that limits him from accessing a financial vehicle such as crowdfunding.

Final Thoughts

It is necessary to achieve a regulation that is not shy. The market of crowdfunding It has matured for many years even proving that the platforms of crowdfunding They can create good market practices (self-regulation).

A restrictive regulatory framework will only cause investors to go to trading platforms. crowdfunding foreigners - as in fact they do - which will ultimately mean that no real competition can be generated in the Peruvian financial market, which is precisely the Desired scenario in our country: where MSMEs and consumers can access financing at competitive interest rates, as well as potential investors (retail and institutional) can access the investment and obtain alternative returns for their capital.

It is better to look at countries with small markets that have achieved remarkable growth (such as the Baltic States, which include Estonia, Latvia and Lithuania) from a reasonable regulatory framework for investment, financing and technology, attracting participants from all over the world.

At the end of the day, reach and exceed expectations like those of the study Global Fintech Index 2020 About the growth of the fintech market in Peru is in our hands.


[1] The aforementioned Emergency Decree contains a normative package with a series of financing incentives that deserve to be analyzed individually. In this article, I will only address the provisions related to Participatory Financial Financing.

[2] The merger of the Superintendence of Banking, Insurance and AFP (regulator of the financial system) and the SMV (regulator of the stock market) is totally worthy of another article, but it should be noted that considering the regulatory work that the SMV is for Assume, the coordination that you must have with the SBS and, most importantly, the need to strengthen the SMV, is an issue that should be reassessed.

[3] A good indicator of this is observed in the Historical Citizen Consultation that the SMV records, where for the first time a document is published in which the comments made by citizens are analyzed.

[4] In this regard, it would be very educating for the market to know the supervisory actions that the SMV has been able to perform on the ICO that was carried out for the cryptocurrency Perucoin which, according to the platform Icoholder, has managed to raise funds.

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Jacqueline Escobar
Jacqueline is a specialist in Fintech, Legaltech, Financial Regulation and Capital Markets. Fellow in financial services by the International Bar Association (IBA) and ITEC Scholarship Training Program. He has worked as a Legal Analyst in the Superintendence of Banking, Insurance and AFP (SBS), in the Superintendence of Securities Market (SMV) and as an Associate of the Banking and Finance area of ​​the Rebaza, Alcázar & De Las Casas study. Currently, he is In-house Legal Counsel of Finsmart Peru and Legal Counsel of Fintechlab.

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