What is crowdfunding?
Crowdfunding is an overarching term for various alternative financing methods. These methods have in common that a large number of contributors finance a specific project advertised on a platform. Crowdfunding is inter alia a way to provide capital to SMEs for which i) the capital market is too expensive, and ii) cannot rely on bank loans (e.g. because they do not have access to sufficient collateral).
What types of crowdfunding operations exist in Switzerland?
The terminology for the individual types of crowdfunding is inconsistent. Generally, four types of crowdfunding may be differentiated:
- Crowddonating: In donation-based crowdfunding, there is no reward for the contributors as the funds are used as a donation.
- Crowdsupporting: In reward-based crowdfunding, contributors give money and receive a (generally minor) non-financial reward in return (e.g. the financed product).
- Crowdlending: In crowdlending models, investors provide debt capital. Accordingly, investors grant a loan and receive interest payments on it.
- Crowdinvesting: In equity-based crowdfunding, investors provide equity capital. As such, investors finance companies and receive shares in the company or participate in the company’s profits in some other way.
What does the Swiss crowdfunding market look like?
Generally, the Swiss crowdfunding market shows relatively stable overall growth over the past years. In 2022, CHF 662.2 million was raised by crowdfunding (which marks the first decrease in 10 years, when compared to the CHF 791.8 million raised in 2021).
Based on a study by the Lucerne University of Applied Sciences and Arts (HSLU), which relies on information of the crowdfunding operators, there were 35 crowdfunding platforms operating in Switzerland in 2022. In general, a lot of fluctuation in terms of market entries and exits exists.
In terms of financing volume, crowdlending far exceeds the other types of crowdfunding and, therefore, seems to be the most popular type of crowdfunding in Switzerland.
Is a license required to operate a crowdfunding platform in Switzerland?
Whether a crowdfunding platform needs to be licenced by the Swiss Financial Market Supervisory Authority (FINMA) or not, largely depends on its business model. As crowdfunding business models vary, it needs to be assessed on a case-by-case basis, if a license needs to be obtained. Generally speaking, a crowdfunding operator in Switzerland may need i) a banking licence, ii) a FinTech license, or iii) no license at all.
A banking license pursuant to the Swiss Banking Act (BankA) is required if the crowdfunding operator accepts deposits from the public (Publikumseinlagen) and pools such funds by way of its own accounts (i.e. the collected funds are kept in accounts of the crowdfunding operator from where they are distributed to the project developers). In other words, if the platform passes on the funds to the project developers or transfers them back to the investors in the event the financing fails, it needs a licence. In terms of compliance, this is the most burdensome outcome, as the crowdfunding operator would have to comply with certain (extensive) organisational, risk management and compliance standards and would be subject to supervision by FINMA.
The FinTech-license (also known as banking license "light") allows crowdfunding operators to hold public deposits on the platform’s account for more than 60 days – even without a "full" banking licence – provided that this money (or crypto-based assets) does not exceed CHF 100 million. The advantage over the "full" banking license mainly lies in i) the application of less strict accounting and auditing standards, ii) the non-application of the provisions on deposit insurance, and iii) lower capital requirements.
Crowdfunding operators that do not accept deposits from the public and do not pool the funds through their accounts (i.e. do not use own accounts to keep the collected funds until they are transferred to the project developers) are generally not subject to a license requirement. Simply put, if the platform only brokers investors and project developers without being involved in the payment process, no FINMA-license is required. Such business models generally operate by channelling funds through a third party (e.g. an escrow agent), who is independent from the project developers, platform operators or investors. In practice, crowdfunding operators often use third-party payment providers to transfer the funds to a bank, which will hold the funds in an escrow account.
To ensure that no unauthorized banking activity is carried out, it is common practice that a crowdfunding operator requests a "negative ruling" (Bestätigung der Nichtunterstellung) from FINMA. In such ruling, FINMA confirms that – based on the business model and activities described in the request – no license requirements are triggered. The assessment of the activities of the crowdfunding platform by FINMA generally incurs a fee but provides legal certainty.
Other Swiss law considerations for a crowdfunding operator
Irrespective of a FINMA-license requirement, a crowdfunding operator must comply with the general Swiss financial market regulation (if applicable in the particular case).
If the crowdfunding platform’s activities qualify as "financial services", the Financial Services Act (FinSA) applies. Such qualification needs to be assessed on a case-by-case basis. A platform provides a financial service, inter alia, when it accepts or transmits orders relating to financial instruments or when it makes personal recommendations relating to transactions in financial instruments. For example, if a crowdinvesting platform accepts and transmits orders of investors for shares or other securities of project developers, it provides a financial service. Equally, if a crowdfunding operator makes personal recommendations to investors regarding crowdfunding projects, based on which an investor may acquire shares or other securities, it provides a financial service.
The applicability of the FinSA triggers a number of regulatory obligations. The crowdfunding operator needs to segment its clients (this classification determines the level of applicable client protection). It further needs to comply with a number of rules of conduct (e.g. information and due diligence requirements as well as documentation and reporting duties) and organisational measures (including measures to avoid conflicts of interest). Further, the crowdfunding operator may have to register its client advisers with a client adviser registry and affiliate with an ombudsman.
In addition, the crowdfunding operator must publish a prospectus in accordance with FinSA, if it offers securities (such as shares or bonds) to the public. This is particularly relevant for crowdinvesting or crowdlending activities, where i) investors may acquire shares or bonds in return for their contribution, and ii) the offer is not directed at limited number of persons. Crowdfunding operators that offer securities to the public may need to consider the prospectus exemptions for their business model. For example, if the offer is made to professional customers exclusively, is addressed at fewer than 500 investors or does not exceed a total value of CHF 8 million over a 12-month period (de-minimis rule), no prospectus has to be published.
Must a crowdfunding operator register with a client adviser registry?
Crowdfunding platforms that provide a financial service pursuant to FinSA need to consider the duty to register their client advisers with a client adviser registry. Client advisers are natural persons acting on behalf of a financial service provider (see above). Client advisers of foreign crowdfunding platforms as well as non-supervised Swiss crowdfunding platforms may carry out their activities in Switzerland only if they are registered in a register of advisers. An exception from the registration requirement may apply if the foreign crowdfunding operator is subject to prudential supervision and limits its financial services to professional or institutional clients
Crowdfunding operators generally provide their financial services through the platform itself, rather than via direct involvement of natural persons. As a result, there is some uncertainty as to how crowdfunding operators are meant to comply with the registration obligation. The general approach of the client advisor registries follows the same logic as in the case of financial services being provided by software-based applications such as robo‑advisors or neo-brokers. Instead of the natural person, a substitute is to be registered for the platform. Generally, such substitutes are i) the person(s) primarily and technically responsible for the provision of the financial service, or if i) does not exist, ii) the member of the executive board responsible for the financial service to be provided.
Must a crowdfunding operator affiliate with an ombudsman?
If the FinSA applies to a crowdfunding operator, also the obligation to affiliate with an ombudsman must be considered. The crowdfunding operator must affiliate with an ombudsman if it provides financial services not exclusively to institutional or professional clients. Crowdfunding operators may limit their services accordingly.
Do the Swiss anti-money laundering laws apply on crowdfunding?
Under the Anti-Money Laundering Act (AMLA), financial intermediaries need to comply with certain due diligence obligations (e.g. reporting and KYC obligations). Financial intermediaries that are not supervised under special legislation (e.g. Swiss Banking Act, Swiss Insurance Act, Swiss Financial Institutions Act) must affiliate with a self-regulatory organisation (SRO) recognised by FINMA. Such financial intermediaries are persons who, on a professional basis, accept or hold assets belonging to others or assist in the investment or transfer of such assets. In particular, the considerations are as follows:
- If a crowdfunding operator requires a banking license (light), it qualifies as a financial intermediary and therefore falls under the AMLA. However, it would not be obliged to affiliate with an SRO as it is supervised by FINMA.
- If a crowdfunding operator uses its own bank accounts to collect and transfer the money but does not require any banking license (because it does not meet the conditions), it is also subject to the AMLA: Persons who provide services for payment transactions qualify as financial intermediaries for the purposes of AMLA and need to affiliate with an SRO.
- If a crowdfunding operator does not channel funds through its accounts and does not require a banking license (light), the application of the AMLA needs to be assessed based on the structuring of the specific business model.
Do the Swiss consumer laws apply to crowdfunding?
The Swiss Consumer Credit Act (CCA) covers crowdfunding operators as "crowd loan intermediaries" (Schwarmkredit-Vermittlerin). A crowd loan intermediary is a person that organises coordinated consumer credits for individual consumers on a commercial basis, in which several non-professional lenders (the crowd) can participate. Loan agreements or similar financing arrangements for natural persons used for non-business purposes are considered consumer credit agreements.
The applicability of the CCA depends on the type of crowdfunding and the business model of the operator. Generally, the CCA does not apply to crowddonating or crowdsupporting (no loans or other similar financing arrangements are granted). Similarly, the CCA will often not apply to crowdinvesting or crowdlending activities, as the project developers will often i) not be natural persons, and ii) not use the funds for non-business purposes. Such project developers do therefore not qualify as consumers under the CCA. However, if funds are provided to consumers via the platform and the crowdfunding-operator (or the investors) act professionally, the CCA will generally apply. It needs to be noted that the CCA contains a number of exceptions (e.g. credit agreements of less than CHF 500.– or more than CHF 80,000.– are not covered).
The applicability of the CCA triggers a number of obligations for the crowdfunding operator. For example, an authorisation by the competent cantonal authority needs to be obtained, the consumer credit agreements (via the platform) need to be concluded i) in written form, and ii) contain the prescribed content pursuant to the CCA, and certain limitations on the interest rates apply. It also needs to be noted that the consumer (i.e. the project developer) has a statutory right of withdrawal of 14 days upon receipt of its original counterpart of the contract.
Overall, it can be said that crowdfunding operators accepting funds are well advised to evaluate which license they require (if any), before starting their business activity in Switzerland. While the license requirement largely depends on the crowdfunding operator’s business, a number of requirements under the FinSA, AMLA and – in some cases – the CCA may need to be complied with, even if no license is required. Non-compliance with these requirements can lead to administrative fines or civil liability.
If you have any questions on operating or setting-up a crowdfunding platform in Switzerland, please do not hesitate to reach out. Please find your contact below.