The National Bank of Hungary (MNB) issued guidance regarding the regulatory treatment of lending- and investment-based crowdfunding models last fall. The guidance meant to provide an overview of the conditions and circumstances under which the crowdfunding platform operator, investors or project sponsors seeking financing might fall in a regulatory or licensing requirement. Nevertheless, we anticipate that crowdfunding is not currently feasible under Hungarian law.
The MNB analyzed the regulatory treatment of crowdfunding from the perspective of banking, investment and payment services regulations. In the case of lending-based crowdfunding, the MNB concluded that the activity of a crowdfunding operator does not fall within the scope of the banking regulation itself, but noted that investors (i.e. private persons who want to invest relatively small amounts of money into projects with a promise of a higher return than savings accounts) may be deemed as providing a lending activity.
In Hungary, lending is subject to a licensing requirement if it is performed as a business. In the practice of the MNB, one single action may be considered a business activity, provided that it was performed with a view to entering into other or a series of transactions. In its guidance, the MNB emphasizes that one investor can participate in several projects and, therefore, the regularity of such deals is not excluded. The investors’ activity might, therefore, fall under the scope of the licensing requirement. Furthermore, in case the investors perform a lending activity as a business, the platform operator would be deemed their agent, which is also subject to licensing.
Turning to an analysis of the activity of the project sponsors, the MNB noted in its guidance that under certain circumstances resulting from poor structuring of the platform, the project companies might be deemed to be collecting a deposit from the public, which is an activity strictly reserved for banks. The MNB concluded that the platform is open to anyone who wants to give money to the projects and that the repayment obligation is usually not excluded in the terms of the investment. Therefore, the sponsors may be seen as providing financial services and a license may be required. In such a case, the platform operator may also be deemed an agent (this time of the sponsors), which would again require the platform operator to obtain the respective license from the MNB.
The MNB analyzed the lending- and investment-based crowdfunding models from the perspective of investment services and payment services regulations. As for the latter, the MNB concluded that the licensing requirement is not triggered if the payment is made via a bank transfer directly to the sponsor’s bank account, without the involvement of the platform. As for the investment services regulation, the conclusion was that if no financial instrument is involved in the investment structure (i.e. the investors do not buy bonds, notes, certificates, derivatives or other financial instruments), no license will be required from the participating parties.
Investors are typically private individuals looking to invest a certain part of their savings into higher risk ventures with a higher potential rate of return, whereas sponsors are typically micro enterprises or private entrepreneurs looking to start or expand their business, but struggling to obtain financing. Such investors and sponsors obviously lack the resources to meet the licensing requirements. Thus, with the theoretical possibility that either participant of a crowdfunding model might fall under a licensing requirement, we believe that this model is not currently feasible in Hungary.