The European Parliament has recently passed the Digital Services Act, a regulation that replaces and novates the previous liability regime for information society service providers, consisting of the E-commerce Directive EC Directive 2000/31. This contribution will analyze the main novelties and the continuities between the old and the new regimes.
European DSA (Digital Service Act)
5 July represents a very important milestone in the roadmap of European digital regulation. In fact, this is the date on which the European Parliament approved the Digital Services Act (DSA), presented by the Commission in December 2020 and on which political agreement had already been reached on April 23, 2022.
This regulation’s stated objective is to contribute to the proper functioning of the internal market for intermediary services by establishing harmonized rules for a safe, predictable, and reliable online environment that facilitates innovation and in which the fundamental rights enshrined in the European Charter of Fundamental Rights, including the principle of consumer protection, are effectively protected.
In other words, it aims to redefine the rules applicable to online platforms by amending the Directive 31/2000, the so-called ‘E-commerce Directive’ and the main regulatory reference with regard to “provider liability’ or “secondary liability’. Indeed, the digital transformation and the increased use of digital services have given rise to new risks and challenges for individual service recipients, for businesses, and for society as a whole, hence the need to revisit the previous regulatory framework, now more than 20 years old.
The new regulatory framework applies to ‘information society services’, i.e. entities offering services at a distance, by electronic means, at the request of a recipient, ‘normally for remuneration’.
The overall architecture of the E-commerce Directive is preserved, but new rules on transparency, disclosure requirements, and accountability are adopted, primarily reflecting existing case law. The choice of regulation rather than directive as the form for the new legislation is a significant continuity solution. The direct applicability of the DSA is anticipated to help eliminate disparities between national E-commerce Directive transpositions.
However, the responsibility exemption for providers engaged in mere conduit, caching, and hosting activities remains preserved. This exemption, which focuses on hosting providers, is based on the condition that the provider of such an information society service is not liable for data maintained at the recipient’s request. All of the above, if the provider lacks actual knowledge of illegal activity or illegal content and, with respect to claims for damages, is unaware of facts or circumstances from which the illegal activity or illegal content is apparent; and, upon acquiring such knowledge or awareness, acts expeditiously to remove or disable access to the illegal content.
Similarly, the absence of a general obligation to monitor the platform for user activity is maintained, but certain exceptions are added. In addition, the DSA introduces a sort of “Good Samaritan” language to highlight that intermediaries are permitted to conduct bona fide voluntary investigations or other efforts aimed at finding and deleting illegal content without the risk of losing exemptions for that reason alone.
In addition to replicating the above exemption framework, the Digital Services Act imposes:
1. due diligence obligations for some specific categories of intermediary service providers.
2. new rules for implementation, enforcement, cooperation and coordination between Member States on digital services.
Perhaps the most significant novelty is the introduction of a ‘scaled’ discipline with four categories of providers and a progressive increase in the obligations, proportionate to the influence played, and responsibilities placed on the platform due to belonging to one or the other of the specified categories. These obligations are summarized here in the Table below.
The categories would be intermediary services, hosting (e.g. cloud), online platform (e.g. social media) and very large platforms.
Transparency measure for the online platform
Requirements on terms of service that take into account fundamental rights
Notification, intervention and obligation to provide information to users
Transparency of user-facing online advertising
Transparency of recommendation systems
Supervision structure to deal with the complexity of the online space
Cooperation with national authorities following orders
Contact points and, if necessary, legal representative
Complaint, redress and out-of-court dispute resolution mechanism
External and independent audit, internal compliance function and public accountability
Cooperation in response to crises
Measures against illegal goods, services, or content online
Measures against abusive service and counter-notification
Special obligations for marketplaces, e.g. verification of credentials of third-party providers (‘KYBC’), compliance by design, random checks.
Risk Management Obligations
Codes of Conduct
Access by researchers and authorities to key data
Sharing data with authorities and researchers
The establishment of new national authorities to oversee the DSA’s implementation is an additional innovation of note. In Chapter IV of the proposal, the procedural structure of this body is outlined. This individual is known as the Digital Services Coordinator, and he or she will be responsible, in each Member State, for overseeing the precise application of the DSA with respect to the platforms that have their main establishment in that Member State. The Digital Services Coordinator will have three powers: investigative; enforcement, such as the power to order the cessation of violations, to impose corrective measures or interim measures aimed at avoiding the risk of serious harm; and the power to impound platforms that violate the DSA.
Finally, where the previous measures prove ineffective, coordinators also have the power to:
to require the adoption of an action plan setting out the measures necessary to bring the infringement to an end and to ensure that the provider takes such measures, and to report on the measures taken
to request the competent judicial authorities of that Member State to order the temporary restriction of access of the recipients of the service affected by the infringement.
Finally, platforms may also be sanctioned for submitting incorrect, incomplete or misleading information, as well as for failing to reply or rectify the same information, and for failing to submit to inspections. In these cases, however, penalties may not exceed 1 per cent of annual income or turnover (Article 42(3)).
After the European Parliament adopted the DSA at first reading in July 2022, the text must be approved by the Council of the European Union. The DSA will be signed by the Presidents of both institutions and published in the Official Journal following acceptance by the Council. Then, twenty days following its publication in the Official Journal, it will enter into force.
With the exception of the responsibilities for big online platforms and large online search engines, which will apply four months after their designation, the DSA will be directly applicable throughout the EU after 15 months or on 1 January 2024, whichever is later.
The Digital Services Act: An Analysis of Its Ethical, Legal, and Social Implications <https://www.researchgate.net/publication/357803324_The_Digital_Services_Act_An_Analysis_of_Its_Ethical_Legal_and_Social_Implications> ↑
You may have heard the word “blockchain” in the previous several years. Blockchain technology has established itself as an innovative record-keeping system, most notably serving as the foundation for the Bitcoin cryptocurrency. The most unique aspect of blockchain is its decentralized nature: it is not controlled by any single individual or organization. It is transparent in the sense that the ledgers are seen by everyone (if you know where to look). Blockchain technology is applicable to a wide variety of applications and is not restricted to cryptocurrencies. Non-fungible tokens (NFTs) are the most recent high-profile example of this nascent technology’s extensive applicability. NFTs are claimed to be immutable once “minted” (the Non-fungible token field’s term for “made”), because the information once placed on the blockchain is permanent and irrevocable.
NFTs are now sweeping the globe, as sports memorabilia firms and art auction houses use them to maximize the value of digital assets. In the first quarter of 2021, NFT sales hit $2 billion, with roughly twice as many buyers as vendors. For example, musicians, artists, and publishers have benefited from NFTs in order to commercialize their works and protect their intellectual property rights. We examine the intellectual property law implications of NFTs and related advancements in this paper.
NFTs are a global sensation.
Three weeks ago, fashion designer Karl Lagerfeld launched the first “non-fungible tokens” (NFTs). To begin, a black and white NFT figurine, which the internet site The Dematerialized sold in an edition of 777 for 77 euros each. A second, gleaming metallic NFT figurine by Lagerfeld, limited to 77 pieces, sold for 177 euros each.
The more costly version sold out in 33.77 seconds; the less expensive version took 49.09 minutes to sell out, Marjorie Hernandez, co-founder of The Dematerialized, disclosed during her presentation. The website where the NFTs were sold received traffic from all around the world. Sixteen percent are from the United States, 39 percent are from Europe, and 45 percent are from other countries. “Interest in the Karl Lagerfeld NFTs is international,” Hernandez continued. It extends the brand’s traditional marketing channels and targets new demographics, particularly younger generations.
How may NFTs be used to the world of art? Digital art is connected to a non-fungible token (NFT), which is produced online and then traded on a variety of exchanges. NFTs have had two significant consequences. To begin, they have lent an air of ‘authenticity’ to digital art. Second, they’ve established a potentially valuable online platform for digital artists to share works in a new genre of performative art. Because NFTs are one-of-a-kind tokens, they lend an air of authenticity to digital art in an age of copy-and-paste. This sense of ‘authenticity’ is encoded by NFTs.
According to a Deloitte survey on digital media trends, 87% of Gen Z consumers report playing video games on their cellphones, gaming consoles, or PCs on a weekly basis. Additionally, this generation is expected to prefer playing video games to watching video entertainment by a factor of more than two. The resulting blurring of the lines between younger consumers’ physical selves and virtual gamified avatars is ideal for ‘tokenisation’ – a unit of data stored on a digital ledger, or blockchain, that enables the trading and ownership of supply-constrained luxury collectibles, whether in conjunction with a physical purchase or exclusively online. The collaboration between digital sneaker brand RTFKT Studios and artist FEWOCiOUS led in a USD 3.1 million sale on non-fungible token (NFT) marketplace Nifty Gateway in under seven minutes. Each digital sneaker is paired with a physical counterpart – the ability for marketers to optimize their supply chains by selling a digital version of a coveted product while the consumer waits for the physical version is revolutionary.
The multiplicity of NFT structures
Why all the hipe? What are NFTs and what purpose do they serve in the metaverse? Finally, what contribution does new technology provide to the realm of fashion? Because one thing is certain: the Lagerfeld NFTs are only the latest example of a new technological adaption that is currently en favor, particularly among high-fashion brands: Burberry, Balenciaga, Gucci, and Louis Vuitton are all experimenting in this new arena. Digital fashion creates an entirely new sphere of action for fashion firms. They can sell their fashion not just in the physical world, but also via NFTs – particularly in the gaming world. Clothing also plays a growing role in this area. Players can build personal avatars, shop, attend fashion shows, interact with one another, and even own land and real estate in Metaverses. The possibilities are virtually limitless. In contrast to the majority of social media platforms today, a metaverse is a collective virtual space that is typically decentralized and frequently built on blockchains, for example, to safeguard one’s own money.
NFTs can be simply JPEG files. These non-fungible tokens are akin to digital certificates of validity that are often secured using blockchain technology and hence impenetrable to tampering. NFTs originate in the arts and gaming industries. Only in March of this year, Christie’s sold a photograph by artist Beeple for 69 million euros, making it the world’s most expensive JPEG file to date.
NFTs are a technique of tokenizing an asset, with a token representing a digital unit of value on a blockchain. These tokens can be used to represent a range of items and are subject to a variety of rules. The nature of a token is determined by the standard (a collection of rules agreed upon by developers) to which it is subjected. The ERC-20 standard is frequently used for fungible (not unique and thus divisible) tokens on the Ethereum blockchain, while the ERC-721 standard is frequently used for non-fungible (unique) tokens.
What does this mean legally?
Due to the non-fungibility of NFTs, a new distribution mechanism for intellectual property monetization has emerged. Given some of the unique characteristics of NFTs, intellectual property owners’ intellectual property protection and licensing strategies must be rethought. As NFTs gain popularity, businesses and creators should incorporate NFT-specific intellectual property protections into their intellectual property protection plans. Due to the unique characteristics of NFTs, numerous new issues apply when licensing, assigning, or transferring intellectual property rights. Additionally, NFT creators should be aware of potential infringement risks when utilizing third-party intellectual property and should consider protecting their original inventions with intellectual property protection.
However, the utility of NFTs in terms of intellectual property (IP) rights appears to be far less persuasive. The issue is that holding an NFT does not imply ownership of an original work. An NFT is simply a digital ticket confirming that you possess a version of a work from a copyright perspective. Buyers’ impressions of their property do not always correspond to legal reality, and the firms involved in these transactions are opaque.
The buyer’s perception of what they are buying may not match the legal reality. NFTs being sold should contain exactly what they want to sell, as an NFT cannot be edited easily once recorded on a blockchain. An NFT does not grant ownership of a piece of work. It is in reality a digital note which verifies that you own a version of the work.
It’s unsurprising that third-party intellectual property is frequently entangled in NFTs without the rights holder’s express agreement or consent. NFTs may include unlicensed copyright-protected content. As expected, intellectual property owners are stepping up enforcement against illicit uses of copyrighted information in NFTs. While NFTs have enormous financial power in the entertainment and collectibles industries, it is unclear how they affect the underlying intellectual property. What is evident is that the rights involved with acquiring NFTs (apart from the right to own) are restricted.
NFTs appear to have immediate uses. To be more specific, this tokenized technology might be used to sectors such as watermarking, in which producers could utilize NFTs to validate the validity of digital artwork or trading cards. Whatever application of NFT technology occurs in the future, one thing is certain—NFTs should not be mistaken with inherent authentication of items. This is particularly critical since complaints of fake NFTs continue to rise.
It is critical to distinguish between ownership of the NFT and ownership of the underlying intellectual property when evaluating the intellectual property implications of NFTs. The rights granted by an NFT seller are contingent upon the rights transferred through a license or assignment, which differ each NFT. You may own a specific video clip or photograph of a LeBron James slam in NFT form, but the NBA owns the underlying rights. In the framework of copyright, ownership of the underlying rights will transfer only if the creator of the original work expressly consents to the transfer. In general, possession of an NFT does not automatically confer ownership of the underlying content or any associated intellectual property rights. As a result, an owner of an NFT may be prohibited from reproducing, distributing copies, performing, displaying, or creating derivative works of the original work. Rather than that, the copyright holder retains exclusive rights.
There are concerns about how will NFTs fit into current copyright law. For example, with regards to music, no artist would be selling the rights to the master version of the music. Those rights are retained by the artist, even as they sell a kind of licensed content to consumers.
However, people can mint NFTs of work they didn’t create. This is where we believe the largest legal issue lies. For instance what happens if someone mints NFT’s of heavily protected music such as the Beatles or Elvis or NFT’s of long established Disney characters? One assumes copyright infringement lawsuits will be plentiful and it appears that the market may not yet be prepared for the eventuality that a work’s original creator may claim copyright infringement.
For instance, The Hermitage, the most significant and big museum in Russia, in Russia has taken legal action against Rammstein‘s Till Lindemann over the “unauthorised” sale of an NFT bearing its imagery.
Last week, the German band’s frontman entered the world of non-fungible tokens (NFTs) by selling VIP style access to him along with special digital artwork. Fans were offered the chance to dine with the singer in Moscow, Russia as part of a €100,000 (£84,705) package. While he had been granted permission to film there for the clip, the museum says the musician breached the terms of their agreement by selling NFTs that include materials shot on its premises.
A statement from the State Hermitage Museum, posted to Facebook last Friday (August 13), claims that it has issued Lindemann with a “license violation warning” over what are claimed to be “illegal tokens”.
Financial regulations still applying
Whilst it is easy to point out the legal issues with NFTs and copyright law, the reality is that these tokens are hugely popular and potentially are here to stay. IP law and indeed lawyers will have to deal with these and perhaps rapidly.
While the majority of jurisdictions lack particular legislation or regulations governing NFTs, a slew of current regulations may nevertheless apply. This will rely on the following factors: the qualities and attributes of the token; the actions conducted in connection with the token; and the territorial reach of the applicable regulatory framework.
A few relevant examples :
For instance, in the United Kingdom, the Money Laundering Regulations 2017 define cryptoassets as “a cryptographically secured digital representation of value or contractual rights that utilizes a form of DLT and can be transferred, stored, or traded electronically,” and outline the activities that trigger a registration requirement when performed in relation to cryptoassets. Exchanging NFTs for cash or other cryptoassets, or arranging for others to do so, would trigger a registration requirement. If an NFT does not meet the definition of a cryptoasset, for example, because it does not reflect value or contractual rights, the regime does not apply.
Switzerland provides a favorable and attractive legal structure for cryptoassets, notwithstanding the absence of a dedicated legal framework. The regulatory framework enabling for the issuance and trading of cryptocurrencies has been in place for a few years. Switzerland has now strengthened its regulatory framework for tokens representing rights, such as asset tokens and utility tokens representing claims against the issuer or a third party, following the adoption of the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the DLT Act), which made numerous amendments to Swiss law to account for the potential offered by distributed ledger technology (DLT). Certain provisions of the legislation took effect in February, while the balance of the new provisions will take effect in August 2021. The DLT Act, in particular, established DLT rights as a new class of assets as a digital alternative to certificated securities. DLT rights should be transferrable exclusively via the blockchain. Additionally, Swiss legislation has developed a new sort of license category for trading venues that allow for the trading of DLT rights. Additionally, extra segregation rights have been introduced for cryptoassets kept in custody by a third party (e.g., a wallet provider) in the event of the third party’s insolvency.
Yet the the Swiss Financial Market Supervisory Authority (FINMA) has frequently declared that it will make no distinction between different technologies used for the same activity; in other words, it will apply the’same business, same rules’ concept to any new technology. This of course does not really fit with the specific problematics of NTF.
This lack of certainty about buyers’ intellectual property rights has not deterred users from investing millions on virtual land NFTs, with some speculating that it could be at the vanguard of a near-term virtual real estate bubble. Dapper Labs Inc., the Canadian business that pioneered the usage of NFTs in CryptoKitties, has done the most to address these IP concerns by developing an NFT License. Apart from the obvious draft difficulties, this helps customers understand they are not purchasing the copyright but rather a form of licensed content.
Are NTF new forms of intellectual property?
Without any doubt no. NFT will not change , and have not changed anything as to IP law.
While we can have been quick to point out the legal flaws in NFTs, we cannot overlook their cultural and technological novelty. There may be significant benefits for artists seeking to maximize the revenue generated by the usage of their work. As previously stated, artists have the option of minting their NFT according to a variety of various criteria. Therefore, if you desired to be compensated anytime your work’s rights were used, you would choose a token that established such restrictions (as it happens the ERC-1190 standard does this). And, as Valéry prophesied, innovation has the potential to alter our conception of what constitutes art and, consequently, what merits copyright protection and what does not.
It remains to be seen whether NFTs live up to the buzz around them. Whether the future is a world with a thriving NFT art market or a world where disgruntled crypto art collectors sue for consumer protection violations (or both! ), there are certain to be some intriguing legal challenges on the horizon.
Non-fungible tokens (NFTs) have existed for many years but have recently garnered enormous traction in the form of digital kittens (CryptoKitties), sports highlights (NBA Top Shot), music album downloads (Kings of Leon), and Christies-auctioned digital paintings. Sir Tim Berners-Lee recently sold an NFT with the original source code for the world wide web.
NFTs let companies to communicate directly with consumers in the digital age; they enable brands to instill a sense of scarcity and thus value in their digital collectibles, which include images, videos, and audio files. They might be the digital equivalents of the Panini trading cards traded by children in school yards during the 1980s and 1990s. Additionally, because NFTs enable the tokenization, storage, and ownership of rights in digital or physical assets, they are anticipated to find widespread application in industries such as financial services.
However, what are they, what do they represent, and what legal and commercial implications should be considered?
NFTs – what are they and what do they represent?
A non-fungible token (NFT) is a one-of-a-kind digital token that is created (or “minted”) and stored on a decentralized ledger known as a blockchain. NFTs can be purchased and traded just like other types of property, but they lack a physical form. NFTs are “non-fungible” (i.e. distinct and non-transferable) because each token contains unique data (e.g. code and other information) that differentiates it from other NFTs associated with the relevant blockchain.
NFTs can be created using blockchain systems such as the public Ethereum network, Polkadot, Cosmos, and Flow. The NFTs can then be purchased and sold via a website dedicated to the underlying blockchain solution (e.g. OpenSea). The blockchain solution is the back-end technology that keeps track of who owns the NFT. The NFT marketplace is the user interface via which token buyers trade NFTs.
In general, NFTs are classified into two types:
• First Category: the token is tied to a physical asset (e.g. luxury goods or diamonds). A buyer purchases a physical asset from a seller, and the parties agree (in the sale contract) that the seller will issue the buyer an NFT linked to the physical asset, which will contain a digital certificate of authenticity/proof of ownership (digital record) confirming the physical asset’s authenticity and the buyer’s details. This gives the buyer with an irreversible, digital record of ownership of a genuine asset, which the buyer can subsequently use to sell the physical asset. This is a far superior record to a paper-based one that is easily lost or doctored. When a physical asset is sold, the data contained in the digital record is changed, for example, to reflect the new owner’s information.
• Second Category : the token represents the right to act on a (licensed copy of a) digital asset. This is how it might work:
o The NFT contains unique data, such as a unique URL link that directs the token purchaser to a web server housing the relevant digital asset.
o The digital item is not included in the NFT since doing so would be excessively computationally intensive.
o If the digital asset is a media file (e.g., a music file), the NFT normally signifies the right to download and listen to the music, which is accessible via the URL link, for personal use.Legal and commercial issues
It is critical that there are underlying terms and conditions governing the sale of the NFT (both the initial sale after the NFT is minted and subsequent sales via the NFT marketplace) to ensure that there is clarity regarding what the token represents, the rights of the token creator, and the rights acquired by the token buyer.
IP will be critical in regard to Category 2 NFTs, where the token creator grants the right to use a digital asset associated with the NFT. For instance, is the token purchaser acquiring a right to the linked digital asset’s intellectual property or merely a restricted license to use the linked digital asset? In the case of Category 2 NFTs, when the connected digital asset is a unique URL to a freely downloadable music file, the token buyer often acquires the right to download and listen to the music file for personal use, not the right to own the music file (copyright in the music file is not being transferred to you). As a result, the token creator is allowed to duplicate and market the song.
Rules governing financial regulation
There is no regulatory structure specifically for digital tokens, including NFTs. Thus, a critical concern for blockchain platforms and brands is whether the NFT will likely represent a regulated financial instrument or would be subject to anti-money laundering regulations.
Whether an NFT is classified as a financial instrument, such as a security, is determined by the NFT’s attributes and the rights granted to the token buyer. The non-fungible nature of the token has no bearing on the NFT’s regulatory status.
If the NFT just reflects ownership in an asset or copy, it is unlikely to be regarded a security and is more likely to be classified as a utility or exchange token if all it does is give the right to own and trade the asset.
However, if the NFT resembles a security, such as a share or a unit in a collective investment scheme, it may be deemed a “security token.” This may also contain fractionalised NFTs. The majority of NFTs are unlikely to be classified as e-money tokens, considering the fundamental property of e-money is its intrinsic fungibility.
While the majority of NFTs have not yet crossed these regulatory boundaries since they are focused on rights to an asset or copy in sports, art, or music, use cases are anticipated to increase rapidly.
There is a need to consider these issues because anyone or company conducting business in this area would be subject to the same regulation as traditional financial service providers. For instance, the issuer may be required to obtain a license or to comply with anti-money laundering rules, and the same analysis would apply to exchanges that facilitate the buying and selling of these NFTs, as well as token custodians or wallet providers.
Additionally, many jurisdictions may have marketing limits or even prohibitions on NFTs that are classified as utility tokens or exchange tokens, which will need to be addressed if NFTs are sold or distributed more extensively.
Along with legal considerations, technical practicalities must be considered. For instance, what if the web server that hosts the digital asset fails? A growing number of developers are creating tokens using hashes of IPFS URLs. IPFS is a peer-to-peer file storage system that enables material to be distributed over several computers, replicating the file in numerous locations. This guarantees that the digital asset will always be available as long as there are willing nodes to host it. The digital asset’s worth can be increased by storing it on a peer-to-peer file storage system.
Numerous brands are pursuing additional commercialization of their intellectual property through the establishment of NFTs. Due to the fact that these brands frequently lack the technical competence necessary to develop the NFT and/or to develop and administer the NFT marketplace, they employ blockchain vendors to undertake these functions on their behalf. The brand grants the blockchain provider permission to host a copy of the relevant digital asset. The blockchain provider then produces a unique URL for the hosted digital asset and combines it into a newly minted NFT. Additionally, the brand may grant a license to the blockchain supplier to use its trademark (which is then incorporated into the NFT marketplace), ensuring that token buyers interested in purchasing the NFTs are aware they are authentic. In exchange for the license to the digital asset and trademark, the brand often receives a cut of any fees produced by the blockchain supplier’s sale of any NFTs. To avoid brand reputational difficulties, such companies must ensure that the blockchain supplier delivers the offering in line with local regulations and provides an acceptable level of service to token buyers. For instance, if the NFT marketplace is perpetually inaccessible, this will have an effect on the brand linked with the NFTs’ reputation. Additionally, great attention should be made to what happens if the brand’s contract with its blockchain supplier is terminated. For instance, is the blockchain supplier no longer permitted to generate new NFTs but is permitted to sell/resell existing NFTs (Existing NFTs)? To what degree can the brand then license its relevant IP (to the extent that such IP is unrelated to any Existing NFTs) to a new blockchain supplier, who can then produce new NFTs for a new NFT marketplace that may compete with the prior blockchain provider and its Existing NFTs?
NFTs provide marketers an exciting new channel for connecting with their customers and supporters. Tiktok is only one of the latest brand to get into the NFT Business. Brands, token purchasers, and token creators should consider the issues surrounding the tokens – including liability, consumer protection, data protection, intellectual property protection, financial regulation, technical feasibility, and brand reputation – all the more so as the number, complexity, and variety of NFTs continue to grow (and this will no doubt lead to more complicated issues to consider and resolve).
Data governance refers to all the organisations and procedures put in place within a company to control the collection and use of data. According to a study conducted by Reach Five and Opinion Way, 78% of French companies harvest data to personalise the customer experience. However, simply collecting data is not enough to improve competitiveness: companies need to learn how to use this data in an optimal way. This collection is subject to restrictions such as the respect of users’ privacy. Therefore, in their data governance process, it is necessary for companies to take into account the limitations posed by both national and European legislation.
Personal data refers to all information that makes it possible to identify a natural person. France was a forerunner in the supervision of its citizens’ data. As early as 1978, it introduced legislation to protect users, even though at that time the Internet was foreign to the general public. The French law of 6 January 1978 has established the principle of freedom to create nominative files and to process data by computer, but this freedom has its limits: the collection of data must respect the principle of fairness and transparency. This means that companies are obliged to inform the persons concerned of the compulsory or optional nature of their replies, of the list of legal persons to whom their replies are addressed and of the consequences of these replies. However, if the absence of a response leads to an inability to access the proposed service, can we still consider that the user has a choice in the disclosure of his data?
One of the fundamental notions of this law is the right of opposition and rectification of the information collected. This issue has been the subject of litigation and the courts are trying to enforce this rule. Through a judgment of 14 March 2006, the criminal chamber of the french court of cassation considered that : « It is a collection of personal data to identify electronic addresses and to use them, even without registering them in a file, to send electronic messages to their holders. It is unfair to collect, without their knowledge, the personal e-mail addresses of natural persons on the public space of the Internet, as this process impedes their right of opposition. ». It can be seen that data is not treated as a commodity that can be exchanged, but rather as the property of an individual who must give his or her consent to its use and to its knowledge.
The 1995 Directive and the RGPD Regulation
In reaching this solution, the judges relied on the Directive of 7 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, which led to the amendment of the law of 6 January 1978. However, the aim of this European legislation remains the same as the former French legislation: to regulate data flows and protect users’ information.
To comply with these rules, companies must implement a clear and precise data collection policy. First, it is important to consider the methodology to be adopted in the data collection process. This is essential to ensure compliance with the regulations and effective use of the data. To this end, a data management plan should be drawn up to define the data collection methods and organisational systems, as well as the legal and ethical framework surrounding this information: how will the data be shared? How will you protect the identity of your users?
In addition, it is necessary to define precisely how the data will be stored in order to put in place a security system to prevent data leakage. As a company you need to have systems in place to protect against breaches that could lead to the disclosure of user information and how you will react if this happens. Anticipating the risks and your attitude to them is paramount: knowing that you are prepared in case of an incident gives users confidence.
Finally, it is imperative that you, as a company, ensure the quality of the data. How can you ensure that your data is reliable? This control is achieved by implementing monitoring and processing methods. Poor quality or badly structured data is a security risk because it will be more difficult to determine what data is at risk and what the level of risk actually is. How to monitor and determine what data is at risk? The implementation of data governance tools is a necessity to manage data and to determine the areas at risk.
Today, good management and protection of user data is fundamental to a company’s image. The giant Facebook is proof of this: in April 2021 data of 533 million Facebook users leaked . Facebook stated that the data came from an illegal collection that exploited a security flaw discovered and fixed in 2019. This case does not improve the giant’s image in terms of data protection. This is not the first time Facebook has faced a disclosure of its users’ information. In 2018, Cambridge Analytica The UK and US press revealed a massive misuse of users’ personal data for political purposes. This case illustrates the extent to which individuals’ personal information can play a role in shaping behaviour.
Unfortunately, the provision of personal information is nowadays indispensable when you want to surf the Internet, but how can you protect yourself as a user? You have to be vigilant. In the case of Facebook, users were aware of the data leak, but in many situations individuals do not know that their data has been disclosed, so when you receive an SMS, an email, you should check who the sender is. If the message asks you to log in to your personal space, never click on the link directly but type the address of the site into your bank.
Introduction of GDPR in Data Governance
The European Union has taken action to ensure that users of internet platforms have their data protected via the regulation (UE) 2016/679 of the European Parliament and of the Council of 27 April 2016, on the protection of individuals with regard to the processing of personal data and on the free movement of such data which repealed the 1995 Data Protection Directive. First of all, the GDPR has placed an emphasis on consent and transparency, these two principles are at the heart of the data protection rules: ‘The principle of fair and transparent processing requires that the data subject be informed of the existence of the processing operation and its purposes’. It is on this basis that companies must inform users about how their data will be processed: no operation can be carried out without the consent of the owner of the data. The question arises as to who should prove consent. However, it must be clear and unambiguous.
The RGPD grants new rights: the right to data portability implies that it is possible to recover one’s data and transfer them to a third party. The aim here is to give people back control over their data, and to partially compensate for the asymmetry between the data controller and the data subject.
For the first time, the European Union has taken specific measures for minors under the age of 16: the child must be able to understand the information on data processing and the consent of those with parental authority must be obtained.
This regulation offers ever greater guarantees to users, with in particular a simplification of procedures in the event of prejudice, with in particular the introduction of class actions. In addition, the RGPD institutes a code of conduct to ensure the proper application of the regulation. In particular, this code requires cloud computing providers in Europe to put in place physical means of safeguarding and processing data on European territory. Microsoft has taken a public position : data of Europeans will remain within the European territory.
The broad scope of the data protection regulation was seen during the covid-19 crisis. The French CNIL had to intervene to remind employers of their obligations regarding data collection. The sensitive nature of data relating to a person’s state of health justifies the special protection afforded to it: but how to reconcile respect for privacy and personal security? In principle, the CNIL states that: “the employer does not have to organise the collection of health data from all employees“. The employer is only allowed to take individual action against an employee if the employee himself reports that he had been exposed or had exposed some of his colleagues to the virus.
The GDPR has sought to address this issue more comprehensively by introducing 2 exceptions to allow disclosure of an individual’s medical data:
Employees self-report their situation
The need for a health professional to process this data for the purposes of preventive or occupational medicine, (health) assessment of the worker’s working capacity, medical diagnoses etc.
The Luxembourgian position
Like the French authorities, the Luxembourg National Commission for Data Protection has intervened, notably by issuing opinions on draft laws concerning measures to combat the Covid-19 pandemic. In its opinion on the proposed law n°7808 on the Covid-19 screening strategy in structures for vulnerable persons and in support and care networks.
The CNPD states that the processing of data carried out in the context of proposed law no. 7808, which provides for the obligation to carry out Covid-19 screening tests for external service providers and visitors to certain structures, must “rely on one of the lawfulness bases listed atArticle 6 of the GDPR as well as meeting one of the conditions referred to in article 9, paragraphe (2), of the GDPR insofar as data relating to the health of data subjects may be processed. ».
Moreover, the CNPD’s reflection is interesting because it raises issues that are not related to data protection but that will have to be framed: “The CNPD wonders, in terms of labour law, about the consequences of a refusal by an employee or an external service provider to submit to such obligations. Will the employee have to work at another job? What will be the consequences for an external service provider when the organisation is not its employer?
The CNPD concludes by stating that it cannot comment further on the data protection issues as “the text under opinion would not meet the requirements of clarity, precision and predictability that a legal text must meet“. This response demonstrates the importance of this institution, and of supervisory institutions in general, because it is thanks to it that the legislator was able to realise that it did not meet the criteria of clarity and intelligibility of the law required by European texts.
We can see that the protection of our data and its legislation is a very broad area. Regulation will have to continue to adapt as new technologies evolve. Companies need to check the compliance of their data processing policies with current legislation and users need to be vigilant about how they disclose their personal information.
The institutions of the European Union play a fundamental role in the realisation of the single European market, notably through the adoption of treaties, their interpretation by European judges or the control of the institutions over the actors who impact on this market. However, it cannot be achieved without the active intervention of the Member States, which must respect the Union’s rules and ensure that they are respected by both natural and legal persons. National institutions play an essential role in monitoring the correct application of regulations within the States.
One of the pillars of European Union law is its competition policy, which is one of the means of achieving the European internal market and above all the four freedoms: free movement of services, capital, goods and persons. This involves a ban on abuses of dominant positions and agreements between companies that would distort competition. Moreover, state aid paid to certain companies that would restrict competition is also prohibited, although certain exceptions are allowed.
The different competition authorities of the European Union member states
To ensure that competition policy is respected, in each of the Member States, competition authorities monitor that companies’ actions comply with the competition rules. In order to strengthen European competition policy, the institutions have put in place various measures. The first step was the adoption of the regulation 1/2003 which created a European Competition Network (ECN) in which national competition authorities enforce competition law in a decentralised way while cooperating with each other and with the European Commission.
The European Union has embarked on a new phase in its competition policy. This aims to consolidate and strengthen the role of national competition authorities by harmonising their powers, means of intervention and operating rules. To this end, the directive (EU) 2012/1 of the 11th of decembre 2018 The aim of this directive is to provide the competition authorities of the Member States with the means to implement the competition rules more effectively and to guarantee the proper functioning of the internal market. The aim of this directive is to ensure uniform application of European competition law, in particular by strengthening cooperation within the European Competition Network between the Commission and the national authorities. The system governing European competition law is decentralised and based on trust and dialogue between the authorities and the Commission. The new EU Directive does not fundamentally change the ECN, it only aims at strengthening cooperation between the actors and harmonising the implementation of EU competition rules in all Member States.
The search for independence of national authorities
As regards the institutions themselves, the aim of the Directive is to “ensure that NCAs [National Competition Authorities] have the guarantees of independence, resources and powers of coercion and fine-setting necessary to be able to apply Articles 101 and 102 of the Treaty on the Functioning of the European Union effectively“. This includes the possibility for the authorities of each Member State to impose effective, proportionate and dissuasive fines on companies that engage in behaviour that is contrary to European competition rules. The Directive provides that the fine will be set in proportion to the company’s worldwide turnover.
Initially, the power or lack of power for Competition Authorities to sanction actors that violate competition law depended on the States. For example, in Ireland, the Competition Authority could not itself impose sanctions on companies that engaged in anti-competitive behaviour, it had to look to the courts to impose sanctions, but it was found that this system was ineffective and in fact very few sanctions were imposed.
In France, there was already a system of administrative sanctions that could be imposed by the Competition Authority. The main change brought about by this new directive is that of the opportunity to prosecute provided for in Article 4(5) of the directive : « National administrative competition authorities shall have the power to set their priorities in order to carry out the tasks necessary for the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union, as referred to in Article 5(2) of this Directive. To the extent that national administrative competition authorities are required to examine formal complaints, these authorities have the power to reject such complaints on the grounds that they do not consider them a priority. This is without prejudice to the power of NCAs to reject complaints on other grounds defined by national law. » National administrative competition authorities shall have the power to set their priorities in order to carry out the tasks necessary for the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union, as referred to in Article 5(2) of this Directive. To the extent that national administrative competition authorities are required to examine formal complaints, these authorities have the power to reject such complaints on the grounds that they do not consider them a priority. This is without prejudice to the power of NCAs to reject complaints on other grounds defined by national law, in the article L462-8 of the Code de commerce . With this new competence, the question arises as to whether this new system is totally at the discretion of the Competition Authority, as Article 4 does not define the principle of discretionary prosecution, and the risk of abuse must be taken into account, particularly with regard to the lobbying of companies targeted by the complaint. Moreover, it implies that some cases may be treated in priority to others, what recourse will there be in the event of too long a delay due to this new principle of expediency of proceedings?
Secondly, in order to strengthen the powers of the national authorities, the Directive introduces investigative powers for these authorities, powers that will ensure the effective application of Articles 101 and 102 of the TFEU. In the course of these investigations, the Competition Authorities will be able to issue any interim measure they deem necessary, in accordance with Article 11 of the Directive, which provides that Member States shall ensure that, at least in cases of urgency justified by the risk of serious and irreparable damage to competition, national competition authorities are empowered to act on their own initiative to order, by decision on the basis of a prima facie finding of an infringement of Article 101 or 102 of the Treaty on the Functioning of the European Union, the imposition of interim measures on undertakings and associations of undertakings. This possibility offered to the competition authorities constitutes a new power in many countries, as is the case in Ireland, where the powers of the Competition Authority were previously limited.
The question then arises as to what impact this directive will have on companies. Will they have to make special arrangements to prepare for the new rules? The competition rules are not intended to change with this directive, it only aims to strengthen the authorities of each Member State, therefore, it will influence the activity of companies at international level because they will be able to obtain more easily the respect of the competition rules in all the States of the Union, this is allowed by the fact that it encourages a homogenization of the rights and the rules of procedure.
In France, however, the Directive may have a significant impact on trade associations in which many companies are involved. Article 15 of the directive provides that “the maximum fine that national competition authorities may impose on each undertaking or association of undertakings participating in an infringement of Article 101 or 102 of the Treaty on the Functioning of the European Union shall not be less than 10% of the undertaking’s or association of undertakings’ total worldwide turnover in the business year preceding the decision. In France, the maximum amount of the tax was set at €3 million, but from now on it will be raised to 10% of the total turnover of the company or association. This change may be significant for some professional associations. However, it should be remembered that the Competition Authorities are subject to the principle of proportionality of the sanction they impose in relation to the facts in dispute. Consequently, this ceiling may only be imposed very rarely. This measure is justified by the principle of harmonisation of European Union law and is accompanied by the principle of financial responsibility of companies sanctioned as a result of the cartel.
The Irish Situation
In addition to the introduction of a ceiling, the Directive provides for the introduction of civil financial penalties. This provision makes major changes to certain laws, such as Irish law. Until the entry into force of the Directive, only criminal fines could be imposed by the Irish Competition Authority, which meant that the courts had to intervene to implement it and the Authority had to prove the infringement of the competition rules before the courts, without any doubt. This complex system meant that the Authority only imposed criminal fines for the most serious competition law infringements and where the cartel was characterised. The introduction of civil sanctions is likely to lead to an increase in sanctions and activity by the Irish Competition Authority, due to increased enforcement powers. These measures should introduce a more effective competition law regime in Ireland but also in most EU countries.
Finally, it can be seen that this directive has not had the same impact in all Member States. While some countries, such as France and Spain, already applied most of the rules, in other countries, the power granted to the Competition Authority was less, as was the case in Ireland. Therefore, in the latter, the directive will have a greater impact.
Taxation plays a fundamental role in orienting the behaviour of actors on the territory, and therefore on the economy. This orientation is achieved in particular through the implementation of tax benefits granted as a result of certain behaviours. In particular, tax benefits are granted to investors in participatory financing platforms, in order to encourage us, as savers, to invest in the real economy via certain projects. It is therefore important to be aware of the tax rules in order to know which type of contribution in participatory financing is the most advantageous from a tax perspective.
There are no specific tax rules for equity crowdfunding, which means that it is subject to the classic income tax rules that depend on the nature of the gain.
The 2018 French Finance Act reformed the taxation of savings to make it more favourable to taxpayers by introducing an unified tax, the PFU(prélèvement forfaitaire unique) 30% (including 12.8% income tax and 17.2% social security contributions) on income from movable capital. For example, dividends from shares in a company financed by a contribution from equity financing will automatically be taxed at 30%. This rate is independent of assets and taxable income.
However, as the main aim of this reform is to support investment, if it appears that taxation on the progressive income tax scale – in force before 2019 – is more favourable to you, you have the option of keeping this taxation. From then on, it is up to you to calculate which taxation is more favourable to you and to know which income should be taken into account in the calculation and how it is taken into account, e.g. the progressive scale of income tax is based on overall income whereas the PFU applies essentially to financial investments.
Secondly, in addition to the tax advantage of the income generated by the participatory investment, any losses are deductible. The investor can offset losses against the amount invested, which means that if one of his investments fails, the resulting losses will reduce the interest generated by other equity loans granted for other projects in the same year or the next five years. As an investor, it is therefore necessary to diversify the projects financed so that, in the event of failure, the losses of one project are compensated by the interest of others.
Similarly, capital losses on securities (shares, bonds) in one year can be offset against capital gains in the following years. But this rule is subject to certain specific conditions.
The maximum reduction rate and amount vary according to the taxpayer’s marital status. The 2019 Pact Law has allowed for a broadening of the securities and bonds offered by the participatory financing platforms eligible for this scheme. Thus, when you subscribe to an investment in an SME, it is necessary to ensure that this investment meets the conditions for benefiting from this tax exemption. Like France, Belgium wanted to encourage investment in SMEs. Since 1 July 2015, if the investment in a startup meets a certain number of criteria, it is possible to benefit from a tax reduction on personal income tax corresponding to 30 to 45% of the amount invested up to 100,000 euros per person and per taxable period. In concrete terms, this means that a person who invests 10,000 euros in a start-up can reduce his or her taxes by up to 4,500 euros.
All these advantageous tax procedures are intended to encourage investment. Another way to achieve this goal has been the introduction of cashback, but this time by the companies themselves. This is initially a promotional technique whereby a player undertakes to pay back to buyers part of an initial purchase price. Cashback has evolved into a real source of investment. It allows consumers to build up savings on their daily purchases, which can then be reinvested on participatory financing platforms such as MCC.
Other participatory financing platforms go further by setting up sponsorship offers, such as the bienprêter platform which encourages investment by granting cashback to their investors who sponsor other future investors. This is a way for them to encourage investment and to see their community grow.
What about investments not regulated by the legislator?
The problem with this form of investment is that it is not regulated by the legislator: there are no specific rules on how it should be taxed. It is therefore necessary to find out how the legislator understands this form of income.
In addition to this adapted tax system, the question arises as to how the tax is levied. Knowing how the tax is deducted ensures that the system is applied correctly. Since 1 January 2019, the deduction of taxes at source has been implemented in France. It consists of having taxes paid at the same time as the income is received. This implies that the French taxpayer is less aware of the benefits of his investments and the taxes collected, to mitigate this and allow them to control the tax paid, the participatory finance platforms are obliged to provide taxpayers with a single tax form that allows them to control the accuracy of the amount deducted. In the event of an error concerning the tax deduction, an appeal against the tax administration is possible.
As a taxpayer, you are obliged to file a tax return. Any deliberate false statement is considered tax fraud and may result in criminal penalties. A simple error on the part of the taxpayer will result in additional penalties. It is therefore essential to keep track of the income you earn from your investments and to have a thorough knowledge of the tax rules to avoid any mistakes.
Le régime en Belgique du crowdfunding
In Belgium, there are various taxes applicable to investments in general. Depending on your status, you will not be subject to the same taxation rules: what are they? The first tax is the tax on stock market transactions: this is a tax that the participatory finance company levies on the securities bought or sold. There are three applicable rates: 0.35%; 1.32% and 0.12%. The application of the rate will depend on the nature of the investment product, so it is important to find out which rate applies to the investment you have made. Then there is the withholding tax, which works simply: it is a tax at source, meaning that the participatory finance platform deducts the tax itself and pays it to the tax authorities. On most of the dividends or interest you earn from your investments, you will pay 30% withholding tax. But there are exceptions, in some well-defined cases it is possible to pay only 15% of the tax and others are exempt from the tax, for example the interest on the first 15,630 euros (for 2021) of loans to start-ups is exempt, as well as the first 200 euros (for 2021) of interest on loans to social enterprises The last tax is the capital gains tax on bond funds, whereby the bank has to levy 30% withholding tax on capital gains from the bond component (and/or cash) of capitalisation shares of cash funds, mixed funds or bond trackers. The question arises as to the amount of investment from which a fund or tracker can be considered a bond fund.
Finally, there is no common tax system in the European Union concerning participatory financing, so it is advisable to find out the applicable tax system in each country.
The European Union aims to create an “area of freedom, security and justice” within which people can move freely, but the emergence of certain behaviours has led to the idea that, in certain well-defined situations, freedom of movement must be limited to guarantee the security of the internal market. This was the case, for example, with the emergence of forum shopping, which is a practice whereby the litigant brings a case before the court most likely to uphold his or her own interests. But beware, this practice is not a fraud on jurisdiction because the latter consists of an active fraudulent manoeuvre such as the voluntary alteration of the location of the company’s registered office with the aim of evading the rules of the lawsuit. Although the European Union admits forum shopping, the CJEU has been led by its case law to restrict this possibility.
A recent decision : CJUE Vereniging van Effectenbezitters 2021
In a judgment of 12 May 2021 the European Court of Justice restricts jurisdiction under Article 7(2) of the Brussels I bis Regulation for investor actions. The European judges consider that only the courts of the state in which a listed company has to fulfil its legal disclosure obligations can be seized for such disputes.
In this case, the Dutch shareholder association Vereniging van Effectenbezitters (VEB) brought an action before the Amsterdam courts against British Petroleum. It is accused of disclosing inaccurate and misleading information in Germany and the UK about the oil spill in the Gulf of Mexico that occurred in April 2010. According to VEB, British Petroleum’s disclosure of this information caused the company’s share price to fall, harming VEB investors who bought shares between 2007 and 2010 through an investment account in the Netherlands.
This case led the Dutch Supreme Court to ask the CJEU whether the Dutch courts had jurisdiction to hear a collective action and to hear claims for damages brought subsequently by the injured investors on an individual basis. The questions referred for a preliminary ruling are as follows:
The main issue that emerges from this judgment is the following: the Dutch Supreme Court asked about the interpretation of Article 7 of Regulation 1215/2012: is it to be interpreted as meaning that the direct occurrence of a purely financial loss on an investment account in the Netherlands is sufficient to consider that the Dutch court has jurisdiction to rule? According to this interpretation the place of occurrence of the damage would be relied upon to establish the international jurisdiction of the court, as the damage results from “investment decisions taken on the basis of generally available but inaccurate, incomplete and misleading information from an international listed company”. Thus, this judgment addresses the relevant criteria for locating damage caused by an issuer’s failure to meet its transparency obligations to the market. Article 4 of the Brussels Ia Regulation determines the general jurisdiction and provides that “persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State”, i.e. the courts of the defendant’s domicile without jurisdiction. However, Article 7(2) of the Regulation provides for an exception: it establishes the rule that it is possible to bring proceedings in the courts of the place where the harmful event occurred or is likely to occur. A fundamental question that arises is how to interpret the concept of “place of damage”.
The European Court of Justice answered this question in the Bier v. Mines de Potasse judgment in 1976. It adopted a broad interpretation of this concept, considering that it includes both the place where the unlawful act causing the damage was committed and the place where the effects of the unlawful act were felt. Nevertheless, the case law has evolved and has progressively restricted this notion of the place of damage.
In this judgment of 12 May 2021, the judges of the European Union insist on the fact that this notion of “place where the harmful event occurred” must not be interpreted in an extensive way. Therefore, it is necessary to establish a close link between the place of residence of the claimant and the place of the damage. The mere fact that the claimant would have suffered financial loss in another Member State is insufficient to characterise the fact that it is the “place where the harmful event occurred”. The Court concludes that “the mere fact that financial consequences affect the claimant cannot justify conferring jurisdiction on the courts of the claimant’s domicile, such conferral of jurisdiction being justified in so far as that domicile is in fact the place of the causal event or the place where the damage materialised. This principle aims at preserving the objective of foreseeability, which implies that a defendant should not be sued in a court where he could not reasonably be expected to be sued.
Therefore, in this case, the CJEU held that British Petroleum had no obligation to disclose information to the Netherlands, which implies that it could not foresee being sued in the Dutch courts. It therefore held that the mere location of an investment account in a country is insufficient to establish a close link with the jurisdiction of that country and give it jurisdiction under Article 7(2) of the Brussels I bis Regulation.
A decision in line with the usual case law of the Court of Justice of the European Union
This decision of the Court of Justice seems rather contradictory with the European orientation of recent years. Indeed, if one applies the facts of this case to the Directive 2004/109 on transparency of information of issuers on stock markets and Regulation 596/2014 on market abuse, British Petroleum should have made available periodic information likely to have an effect on its share price. While only the UK and German authorities were obliged to disclose some of this information, it was available to all EU Member States in accordance with EU law, not just to the German and UK public. Thus, it seems questionable to consider that British Petroleum could not foresee that the information disclosed would not be disclosed throughout the European Union and therefore could have repercussions in all Member States.
The CJEU therefore confirms its restrictive interpretation of Article 7(2) of the Brussels I bis Regulation in the context of financial losses and strengthens its position in order to avoid forum shopping.
Case-by-case limits: state resistance and European collaboration in the French case
However, although the issue of forum shopping was initially an international one, it seems to be emerging within the States themselves. In France, the Macron Act of 6 August 2015 for growth, activity and equal economic opportunities introduces a form of French-style forum shopping. It leads to competition between specialised jurisdictions, ensuring greater attractiveness of French law in cross-border insolvency proceedings.
The Macron Act aims to improve the management of groups of companies in insolvency situations, and to this end it has created specialised commercial courts and derogatory rules of jurisdiction.
The French legislator wanted to avoid the debtor choosing his court. Article R600-1 of the Commercial Code provides that “in the event of a change in the registered office of the legal person in the six months preceding the referral to the court, the court within whose jurisdiction the initial registered office was located shall remain the only competent court”. This means that the debtor has no interest in changing the jurisdiction of its registered office before the implementation of proceedings. In application of this article, the competent court to open an amicable or collective procedure in France is the one in whose jurisdiction the company has its registered office. But a question arises: what are the rules applicable to a group of companies whose various registered offices may be scattered? Indeed, this connecting rule could lead to a scattering of proceedings in multiple jurisdictions. To alleviate this problem, Article L662-2 of the French Commercial Code provided for a system of deferral of proceedings “when justified by the interests at stake“. The Macron Law of 6 August 2015 will maintain this system but will add the possibility of referring the case to a specialised court. Moreover, it will replace the system of coordination between courts by a regrouping of all amicable collective proceedings under the jurisdiction of a single court: the court seized first. As a result, the debtor now has the choice of bringing the case before the commercial court in whose jurisdiction the registered office of one of the companies in the group is located, and this will become the sole court for the entire group. The Macron Law has quietly introduced a version of forum shopping in France and in the group of companies, which now allows the debtor to exercise a choice in favour of the court that is most favourable to him, to a certain extent.
The Insolvency Proceedings Regulation 2015/848
The main risk of forum shopping is that it undermines legal certainty, but the new EU Regulation 2015/848 on insolvency proceedings seems set to change this. The European legislator distinguishes between virtuous and fraudulent forum shopping. Forum shopping would consist of a debtor moving the centre of its main interests while informing its creditors of the new location from which it operates. On the contrary, Recital 29 provides that it is necessary to put in place “a number of safeguards to prevent fraudulent or abusive forum shopping”. In order to combat fraudulent forum shopping, the Regulation introduces in its Article 3 a waiting period of 6 months which implies that the procedure will be unenforceable in case of transfer of residence to another Member State by an individual.
The European Regulation provides that the competent State court is the centre of the defendant’s main interests, Article 3, paragraph 1 provides that “The courts of the Member State within the territory of which the centre of the debtor’s main interests is situated shall have jurisdiction to open the insolvency proceedings”. However, this concept remains vague, what are the criteria for characterising the centre of a person’s main interests? The European legislator has attempted to answer this question in this same article by stating that “the centre of main interests corresponds to the place where the debtor habitually manages his interests and which is ascertainable by third parties”. Thus, two conditions must be met for a place to be defined as the centre of main interests: it must be the place where the debtor habitually manages his interests and it must be verifiable by third parties.
As stated above, an anti-forum shopping device has been introduced. For companies and legal persons, the presumption that the centre of main interests is the place of the registered office. But this presumption “shall only apply if the registered office has not been transferred to another Member State during the three months preceding the application for the opening of insolvency proceedings”. The habitual nature of the definition of COMI therefore presupposes a certain stability in the location of the registered office of the company.
Despite the European legislator’s mistrust of abusive forum shopping, which aims to fraudulently evade its creditors, it nevertheless wished to provide a framework for virtuous forum shopping. Provided that it is legitimate and carried out in a transparent manner, the transfer of the debtor’s centre of main interest is allowed. This implies that the debtor will have to inform its creditors of the change in the registered office of its company. For example, in the Eurotunnel case, brought before the Commercial Chamber of the French Court of Cassation on 30 June 2009, the fact that the company moved its registered office in a “virtuous” manner by informing its creditors led the court to consider that the parent company of a group can constitute the centre of main interests of its foreign subsidiaries. This led the judges to consider that it is possible to open collective proceedings, subject to French law, against all the companies in the group.
Respect for competition rules is one of the fundamental principles of the European Union. The European single market cannot be achieved without a competition policy that guarantees free access to the market for all. The Treaty on the Functioning of the European Union aims to prevent restrictions and distortions of competition within the internal market. Despite these rules aimed at ensuring the proper functioning of the internal market, there is evidence that some players continue to engage in anti-competitive behaviour. The European Commission, as guardian of the EU Treaties, is responsible for sanctioning players who do not respect the competition rules in the European market.
A very hot issue for the commission
This competition regulation, guaranteed by the Commission, applies directly in all EU Member States and prohibits certain behaviour that could harm the proper functioning of the internal market, such as agreements aimed at fixing prices, allocating customers in the market or limiting production. The second major prohibition is the abuse of a dominant position, which consists of behaviour by a company in a dominant position on a market which is designed to eliminate other players from the market or to deter others from entering the market, thereby distorting competition.
In 2018, the giant Google was criticised by the Commission for engaging in such behaviour. The company was fined €4.34 billion for illegal practices regarding Android mobile devices in order to strengthen the dominant position of its engine. The company was forcing mobile device manufacturers to install its applications. Margrethe Vestager, European Commissioner for Competition Policy, said: “Google is using Android as a vehicle to consolidate the dominant position of its search engine”. This behaviour has consequences in many areas, “These practices have deprived its competitors of the possibility to innovate and compete on their merits. They have deprived European consumers of the benefits of effective competition in the important market for mobile devices. This practice is illegal under the European Union’s rules on anti-competitive practices.
This practice used by Google in order to strengthen its dominant position on the market is considered as an anti-competitive practice and sanctioned as such. The CJEU has had the opportunity to define the concept of a dominant position a few times, starting dating back in 1978 : “To a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors , customers and ultimately of its consumers . ” – Judgment of the Court of Justice of 14 February 1978, United Brands v Commission. This definition by the European judges remains very general and does not really answer our questions: what acts can be sanctioned on the basis of abuse of a dominant position? The answer is left to the national authorities.
The Irish law : a packed yet very efficient system
In application of European law, Irish law prohibits the abuse of a dominant position. Competition in Ireland is, of course, regulated by European provisions but also by the Competition Act de 2002(CA 2002), latest amended in 2017, and by the Competition and Consumer Protection Act de 2014. Both act mainly give the government itself the ability to attack law-breaking companies, allowing court to judge in very fast trials. However, the Commission for Communications Regulation , a mainly bureaucratic institution, also has powers to enforce Articles 4 and 5 of the Competition Act and Articles 101 and 102 TFEU. It worth noting that the CCPC may not grant injunctions or interim measures , which function is confined to the courts, making it a mainly prosecutorial body.
The article 5 of the CA 2002 prohibits conduct by one or more undertakings which amounts to an abuse of a dominant position in a market if it is capable of affecting trade in Ireland. In order to be characterised, the dominant position must exist in Ireland and the effect on trade must occur in Ireland, yet the abuse may take place outside Ireland. This means that a Spanish company, which has no premises in Ireland, can be punished for abuse of dominance in Ireland if its action in Ireland would affect trade in Ireland. There is no exemption from the abuse of dominance prohibition under Irish law. In addition, both the High Court, Court of Appeals and Supreme Courts have given extremely broad definitions in cases such as in the HB/Mars/Ice-cream (This litigation started in Ireland and culminated in the Court of Justice of the European Union (CJEU) judgment in Case C-344/98, Masterfoods Ltd. v. HB Ice Cream Ltd., 2000 E.C.R. I-11369.) . Abuse has been alleged and mostly found to exist in regard to issues such as :
discriminatory pricing, (Island Ferries Teoranta v. Minister for Commc’n, Marine & Nat. Res.  IEHC 388)
and tying. (Competition Auth. v. O’Regan  IESC 22 (Supreme Court); and Blemings v. David Patton  1 IR 385 (High Court).)
The Irish regime creates no provision for non-economic (or, more precisely, non-competition) factors (e.g., public policies favouring preservation of multiple market participants or protection of small businesses). This is consistent with Irish competition law in general, which is entirely focused on competition and unaffected by other factors (except in the case of media and newspaper mergers). Irish anti-abuse of dominance laws have not been widely applied. As a result, they remain underdeveloped in the Irish context. There have been relatively few cases over the nearly three-decade lifespan of the rules—many of the cases have involved alleged dominance (which is sometimes not established) in the case of State entities. The fact that the (now) CCPC’s first major case about dominance failed (the Competition Authority v. O’Regan and others case  IESC 22 (Supreme Court).) does not inspire private litigants to bring cases, and thus more public enforcement is needed to encourage private enforcement.
The French law : a classic continental position
Exactly as Irish law, the French system also sanctions for abuse of dominant position, but provides a more precise definition than that laid down by the CJEU. The article L420-2 du Code de commerce states that « It is prohibited, under the conditions provided for in in the article L. 420-1,the abuse by an undertaking or group of undertakings of a dominant position in the internal market or in a substantial part of it. […] The abuse by an undertaking or group of undertakings of a position of economic dependence of a customer or supplier on the undertaking or group of undertakings shall also be prohibited where it may affect the functioning or structure of competition. ».
The French definition is of course broader, as it directly focuses on both consumers and suppliers But how do you know when a company is really in a dominant position? Article L420-2 of the French Code du Commerce lists a series of acts that can constitute an abuse of a dominant position: refusal to sell, exploitation of a state of dependence, etc. …. However, this list is by no means exhaustive, and the European Commission has published a guide to implementing the article 102 du TFUE sanctionning anti-competition practices. It provides in particular that factors such as the geographical area and the existence of barriers to market entry must be taken into account in order to consider that there is an abuse of a dominant position. Secondly, there can be a dominant position without abuse, and it is therefore this notion that must be characterised so that the actions can be sanctioned. The abuse may, for example, consist of a significant reduction in prices in relation to competitors, which has the consequence of reducing the market share of competitors and of creating new barriers to entry, thus preventing the arrival of new companies on the market.
But the situation of abuse of a dominant position is not so simple to characterise. At what stage can it be considered that the actions are sufficiently serious to constitute an abuse of a dominant position? The French Court of Cassation recalled this in a decision of 15 July 1992: only an appreciable harm to competition can characterise an anti-competitive practice. Therefore, only abuses of economic dependence that are sufficiently significant can be sanctioned. Moreover, the infringement can only be sanctioned if a causal link between the situation of economic dependence and the offending practice can be demonstrated. If both the existence of harm and the direct link are underlying in European jurisprudence in matters of abuse of dominant position, they are explicit in French law. For instance, a state of dependence must lead to the abuse in French law : a company must first be in a situation of dependence and then it will take advantage of this situation to obtain even greater benefits, for which abuse will be found.
Lack of link in French law between monopolies and abuse of dominance
Unlike Irish case law, which gives a direct link between monopoly and abuse of dominant position, the French case law do not link the two. Abuse of a dominant position is the act that is sanctioned, and it can lurely lead to a monopoly, which is a market situation in which a single seller faces a multitude of buyers. However, one has to be careful: not all monopolies arise from situations of dominance. Monopoly is explained by the existence of “barriers to entry”, which means that new companies cannot enter the market to provide the service in question / sell the same products. These barriers to entry can be set by the companies themselves, as in the case of abuse of a dominant position. But another hypothesis is the presence of barriers that are inherent to the activity carried out. The first hypothesis is the existence of high fixed costs due to the size of the market, expensive infrastructures, high research and development costs, etc., which may prevent new players from entering the market because without significant financing they cannot start their activity. High fixed costs are a characteristic of network economies such as electricity where, in order to enter the sector, it is necessary to be able to build power stations, ensure distribution etc., which implies very high costs and is a brake on the entry of new players in this market.
The second category of barriers to entry is the existence of economies of scale in certain industries with increasing returns. Economies of scale refer to the fact that the unit production cost of a product or service decreases as output increases. These economies of scale do not allow small companies to be profitable, so they block them from entering the market. This is for example the situation Google is in: the company invested many years ago in hardware and was able to grow and establish itself allowing its turnover to increase considerably compared to the financial requirements to generate these profits. If a company were to enter the market today, it would have to face extremely high fixed costs that would not allow it to be profitable compared to Google.
A third hypothesis concerning barriers to entry, which can lead to a monopoly, is the state: we speak of legal monopolies. These are monopolies that are authorised and regulated by law. They aim to restrict competition in certain markets in order to pursue strategic or regional planning objectives or to guarantee a public service. How can a monopoly be compatible with the competitive requirements imposed by the European Union? The combination of these two requirements in the European Union is complex. Since the Single European Act of 1986, the questioning of public monopolies has appeared in Community law. It is from this treaty that many sectors previously entrusted to national monopolies have been opened to competition. For example, in Italy, the Mammi law was passed in August 1990 to abolish the RAI (radiotelevisione Italia) monopoly, allowing access to television to be opened up to private groups. And the end of state monopolies has multiplied in many EU member states with the major role it plays in our economy. The European Commission is not clearly opposed to public monopolies but considers that these services must be provided efficiently and at low cost. The risk for a public company not subject to competition is that it will charge too high prices, which is why the European Commission considers that any activity should be subject to free competition unless it is incompatible with it.
The European Law : evolving but not yet fixed as to public monopolies
Article 37 of the Treaty on the Functioning of the European Union provides a framework for these public monopolies, stating that “Member States shall arrange national monopolies of a commercial character in such a way as to ensure that no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States”. This implies that Member States have a duty to provide these services fairly and in accordance with the general interest. The Court of Justice of the European Union is there to supervise the States and to sanction the bad management of their monopoly. For example, in the 2010 Stoss and Carmen Media Group judgments, the European judges ruled that the public monopoly on sports betting in Germany did not ensure that the general interest objectives invoked by the German legislator were achieved in a consistent and systematic manner. This decision was justified by the fact that the monopoly holders were running intensive advertising campaigns and that the competent authorities were at the same time pursuing policies to encourage participation in other games that could lead to a high risk of addiction for players.
Despite strict rules governing legal monopolies, they are set to disappear due to the influence of European ideas. One of the major monopolies of the French state ended in 2020: the railway market. The aim was to allow private operators to run their trains on the rail network. This reform was prompted by the European Union to improve service performance. However, the situation is now more complex as there is little competition to the SNCF. This can be explained in particular by the very high costs of entering the market. This raises the problem of how to encourage companies to invest in this sector, a situation that the global pandemic has not improved.
Finally, it can be seen that the European Union makes it a point of honour to ensure that competition in the market is respected, but the situation is not so simple and the abuse of a dominant position can happen quickly, so it is important, as a single player in the market, to ensure that it does not take unfair advantage of its situation.
« (1) Tout abus par une ou plusieurs entreprises d’une position dominante dans le commerce de tous biens ou services dans l’Etat ou dans toute partie de l’Etat est interdit.
(2) Sans préjudice de la généralité du paragraphe (1) , un tel abus peut notamment consister en :
(a) imposer directement ou indirectement des prix d’achat ou de vente déloyaux ou d’autres conditions commerciales déloyales,
(b) limiter la production, les marchés ou le développement technique au préjudice des consommateurs,
(c) appliquer des conditions différentes à des transactions équivalentes avec d’autres parties commerciales, les plaçant ainsi dans une situation de désavantage concurrentiel,
(d) subordonner la conclusion de contrats à l’acceptation par d’autres parties d’obligations supplémentaires qui, par leur nature ou selon l’usage commercial, n’ont aucun rapport avec l’objet de ces contrats. » ↑
Article 102 TFUE : Est incompatible avec le marché intérieur et interdit, dans la mesure où le commerce entre États membres est susceptible d’en être affecté, le fait pour une ou plusieurs entreprises d’exploiter de façon abusive une position dominante sur le marché intérieur ou dans une partie substantielle de celui-ci.
Ces pratiques abusives peuvent notamment consister à :
imposer de façon directe ou indirecte des prix d’achat ou de vente ou d’autres conditions de transaction non équitables,
limiter la production, les débouchés ou le développement technique au préjudice des consommateurs,
appliquer à l’égard de partenaires commerciaux des conditions inégales à des prestations équivalentes, en leur infligeant de ce fait un désavantage dans la concurrence,
subordonner la conclusion de contrats à l’acceptation, par les partenaires, de prestations supplémentaires qui, par leur nature ou selon les usages commerciaux, n’ont pas de lien avec l’objet de ces contrats. ↑
The coronavirus crisis has led to a development of participatory financing platforms which have seen an exponential increase in their revenues. But with the development of these platforms, the risk of fraud has itself increased, with more and more platforms setting up fictitious projects, often offering investors high interest rates. How can you, as an investor, build up legal guarantees to protect yourself against these fraudulent platforms? The subject is very vast, and can be divided in a few different thematics. In this paper, we will explore the different problematics that an investor can encounter when someone invest and he can answer them from a legal standpoint.
How to protect yourself from platform fraud?
Many platforms are mainly located in countries where the regulation is very legimited, thanks to the flexible regulation on the subject. This has lead in the past to some problems. For instance, at the beginning of 2020, many Estonian crowdfunding platforms were no longer able to pay back their investors, initially the Estonian police became interested in the mismanagement of these platforms. The investigations led to the discovery of evidence of fraud.
To understand how this fraud was organised, it is worth recalling how a crowdfunding platform works. When you invest in a project through a crowdfunding platform, you should be aware of the risk inherent in this type of investment: if the project fails, the investment will collapse and be lost. However, there are ways to limit this risk. The investment platforms themselves insure themselves against this risk and this means that they are not accountable to investors for the success or failure of investments. They are only subject to a duty of care which takes the form of verification of the identity of borrowers and their ability to repay. Once this obligation is fulfilled, platforms do not have to guarantee the success of the investment made by the capital providers. Crowdfunding is therefore a platform that is totally conducive to scams: there is no justification for the failure of the investor to repay. In this situation, it is necessary to know how to recognise a fraudulent platform in order to be able to turn against it if you are a victim.
Wisefund is one such Estonian crowdfunding platform suspected of fraud. It aimed to finance extremely diverse projects ranging from the manufacture of microbiological fertilisers to the purchase of car parts for export. One irregularity drew the attention of investors: the guarantee allowing the platform to redeem bonds from investors in return for a discount was unilaterally deactivated. This constitutes a unilateral modification of the contract between the platform and the investors, and this possibility is regulated in the majority of EU member states’ laws, in this case Estonian law applies: how does it regulate the unilateral modification of the contract by a crowdfunding platform?
The capital providers discovered that this guarantee was provided by a Hong Kong company, Best Treasure Limited, located in a letterbox building. Despite these irregularities, the platform continued to operate, making numerous late payments and justifying its loss of capital by the risks associated with the investments. The investors decided to file for insolvency in the Estonian civil court (equivalent to a writ of reorganisation) on the basis of alleged fraud.
In a judgment of 14 January 2021, the Estonian civil court rejected the investors’ claim, considering that once fraud is suspected, only the criminal courts have jurisdiction. In this situation, a crowdfunding platform cannot be sued in insolvency, so the creditors must initiate criminal proceedings. This decision was confirmed by the Estonian Court of Appeal on 26 March 2021.
This is a decision that applies the classic division of competences between civil and criminal matters. The civil court denies jurisdiction in all situations where fraud is suspected. This implies that investors can only be reimbursed if they initiate proceedings before the criminal courts. As in French law, the courts have held that the civil court cannot substitute itself for the criminal court in judging criminal acts.
It is likely that this ruling, handed down by the Estonian courts, will set a precedent within the European Union. Investors do not have a claim on the platform but on the final borrower, so in case of fraud, they will have to turn to the criminal courts and not to the civil courts. The investors of the Wisefund platform had to pay additional sums to bring this action, which was ultimately unsuccessful. This case shows that it is necessary to determine which type of action to take to avoid incurring additional costs and lengthy proceedings.
It is possible to imagine certain hypotheses whereby investors would engage the civil liability of the participatory finance platform, in particular on the basis of its due diligence obligation, and they could then have been compensated on civil grounds. In this case with the Wisefund platform, the initiation of this procedure would have forced the platform to provide evidence of fraud or the absence of fraud. Similarly, it would be possible to hold the platform liable before the civil courts if, on reading the contract between it and the investors, it appears that certain clauses are abusive.
At present, criminal proceedings are underway and the Estonian police have contacted the local police of the investors. The investigations have led to the discovery of evidence that suggests a Ponzi scheme, a criminally punishable financial fraud. But how can you, as an investor, identify them?
A second case : the platforms Envestio and Kuetzal, which offered capital providers to invest in empty companies or in existing companies but did not seek investors on the platform in order to recover the money provided by the investors and not to reimburse them by invoking the failure of the project. At the end of 2019, investors on the crowdfunding platforms investigated the projects that Envestio and Kuetzal were offering to fund, revealing the fictitious nature of some of them. These revelations led investors to demand their money back, causing the collapse of the Kuetzal and Envestio platforms. This collapse is explained by the fact that any financial intermediary does not have enough funds to pay back all its investors at once. In June 2020, the bankruptcy of both companies was declared by the Estonian courts.
Faced with this situation, investors organised themselves to form a collective action against the 2 participatory finance platforms. A procedure has been implemented at European level to facilitate the application process for the platforms’ investors. Criminal investigations have been initiated and are still ongoing, but the Estonian police suspect the platforms of being fraudulent and organising money laundering activities.
Other platforms such as Monathera or Grupeer have also experienced difficulties in repaying their investors. Initially, this was considered to be caused by mismanagement and default by borrowers, however, it now appears that these companies are suspected of embezzlement.
Investors in the Grupee platform have come together to coordinate action against it and investigations appear to reveal a scam. The Latvian authorities, where the platform is based, have stated that Grupeer has no licence to provide financial services in Latvia. Although the platform was originally established in Latvia, it was legally transferred to Ireland and therefore falls under Irish national regulation and should have obtained a licence to operate in Latvia. The characterisation of the applicable law is fundamental here, as the rules that apply will differ between a Latvian platform and an Irish platform.
It seems that this crisis of the crowdfunding platforms has raised awareness. It has revealed the lack of supervision of equity crowdfunding platforms, for example, there is no supervisory authority for platforms in Estonia to ensure that their projects are genuine. It was noted that it is difficult to engage the civil liability of the platform, but if the bankruptcy of the platform is not due to fraudulent manoeuvres, only the civil courts can be used, and it will therefore be necessary to determine on what grounds to base oneself in order to be compensated. Similarly, no procedure was really provided for to enable collaboration between the national authorities concerned and foreign investors; this was born out of practice, in particular by drawing on existing procedures. There was no European framework for crowdfunding, leading to a disparity of rules within the Member States: but how to determine the law applicable to the platform?
To address these issues, the European Union has taken steps to create a harmonised regulation between EU countries, the regulation on this issue will be applicable from 10 November 2021. It provides a framework for crowdfunding, notably by imposing certain obligations on the investment platform, such as information obligations towards the investor. Being aware of the obligations incumbent on a crowdfunding platform is becoming a necessity, as breaches of these obligations have important legal effects.
Moreover, Estonia now wants to strengthen its legislation to regulate the activity of P2P platforms more strictly and to prevent such a situation from happening again. In addition to complying with European regulations, the Estonian legislator wishes to create a framework for P2P consumer loans, similar to the one applicable to companies. It is also intended to regulate crypto-currency services, which are currently very poorly regulated. The Estonian Ministry of Finance’s draft regulation provides that all service provision activities related to virtual currencies will be placed under the jurisdiction of the Financial Supervisory Authority, increasing the control over these institutions, which should help limit fraud.
To prevend fraud, check reliability.
But how can you be sure of the reliability of a crowdfunding platform? This is a question that is currently at the heart of the news with the discovery of numerous scams set up through participatory financing platforms.
TFGCrowd is one such crowdfunding platform suspected of fraud. A class action suit was filed by investors after the service became increasingly late in making payments. It seems that it is suspected of fraud. This raises the question: what are the elements, the clues that allow us to control the reliability of a participatory financing platform?
Initially, the TFG Crowd platform offered investment plans to its members, so it acts as an investment advisor. The idea is that investors send money to the platform, which will invest it in a diversified portfolio. This diversification of the portfolio reduces the risk of loss to the investor, but other schemes would have allowed investors to limit their risk.
The risk of investing in a project is that if it fails, you will lose the money invested in it, so you need to put safeguards in place to minimise the losses your investments may suffer.
One of these guarantees is the fact that investing in many different projects allows you to reduce losses if a project fails. However, the downside of this diversification is that it involves additional work: before investing in a project, it is essential to find out whether the project is reliable. The more projects you invest in, the more work you have to do to analyse the market and balance the gains and risks. The advantage of this type of financing platform is that it takes care of this work of analysis and of the investments while respecting the principle of due diligence, so as to balance the risks and the interests of the investments, but how can we be sure that the work provided by the platform is sufficient?
On paper, the TGF crowdfunding platform seems ideal: a minimum of work for investors, a high interest rate, guarantees put in place by the platform. However, before investing in any crowdfunding platform, it is advisable to analyse it thoroughly to ensure its reliability; and irregularities concerning the TFG Crowd platform have not been slow to emerge: what are these clues to detect fraudulent projects set up by a crowdfunding platform?
The first problem with this platform is the lack of transparency: investors have no idea how the money is invested and if it is really invested. TFG Crowd displays a multitude of projects on its website, but it is impossible to get in-depth information about them, for example, the location of the properties is not necessarily indicated, the guarantees provided are not specified, or even how investors will get their money back. This lack of transparency is reminiscent of the Envestio platform, which was investigated as a scam. However, information obligations are imposed on participatory finance services in the majority of EU Member States and the institutions have sought to standardise these obligations within the EU. Today, the absence of information for investors on the guarantees provided to them constitutes a violation of European law, which you can invoke as soon as the applicable law is that of a State that is part of the European Union. It is therefore appropriate to question the methods of application of European law within the Member States.
The second suspicious element is that the TFG Crowd funding platform provides investors with a fixed annual interest, independent of the returns on investments, which is extremely high. This interest can represent from 14 to 26% of the initial investment. The size of this income should have alerted investors: how can an investment yield so much with such low risks? This is not possible unless the platform is using reprehensible financial arrangements, which one must be aware of in order to recognise and protect oneself.
Secondly, the TFG platform claims to have a buy-back guarantee fund in the event of default by a project contributor. This sum would be used to guarantee the repayment of the face value of the loan and the accrued interest. However, when one examines the amount of this guarantee, it appears derisory in relation to the amount of projects financed. FT Crowd claims to have a special fund of €1,437,000 to be used in the event of a project failure, but the amount allocated to this fund is very small and a single failed project would be enough to wipe out this repurchase promise.
In addition to this buy-back guarantee, TFG Crowd is putting in place a corporate guarantee to secure the investments made through its platform. It guarantees the repayment of the loans issued with the movable and immovable assets it owns, which will be secured by their shares. During the period in which the loans received are active, TFG Crowd Limited undertakes not to pay dividends to its shareholders or reduce the value of these guarantees, for example by disposing of any of its property or assets. Similarly, the share capital, on which the value of this guarantee depends, must be analysed in detail. The value of this guarantee is zero because the share capital is only 1GBP, so that an action to enforce this guarantee would be of no interest to the investors. This situation illustrates that once you have an investment
Finally, the guarantees offered by the platform are illusory, and this situation shows that simply reading the contract between the platform and the investor is insufficient to know the level of protection granted to investors. As a provider of capital, it is necessary to inform you of the real issues surrounding this contract and to inform you of the reality of the guarantees it grants you. This effective information allows you, in the event of the platform’s failure, to take the most appropriate course of action to turn against the participatory financing platform.
Limit your losses
How can you protect yourself from certain unforeseen risks when investing in crowdfunding? The subject is vast and the problems multiple: one of the risks as an investor in a crowdfunding platform is that of the insolvency of the platform or the investment.
Insolvency of the platform means that the participatory financing platform, as a company, does not have sufficient cash flow to repay its debts. Since the platform is the intermediary in many cases, such as in crowdlending, this can have a significant impact on the distribution of the loan interest. On the other hand, the insolvency of the investment means that the project whose capital provider participated in the financing is no longer able to pay off its creditors, and the investment is lost. In these two cases, it is necessary to have legal guarantees in order to be able to take action against the platform in the event of damage: knowing how to protect oneself from losses in the event of insolvency becomes a necessity.
Yet solutions exist. In France, for example, any insolvency can be broken by legal action. In the event of even partial insolvency, the platform may be subject to collective proceedings, a judicial measure aimed at guaranteeing the continuation of the company’s activity and maintaining employment, while ensuring that the rights of creditors are respected.
Among the various procedures, the most widely used is that of judicial liquidation, which is opened when the debtor is in a situation of “cessation of payments and whose recovery is clearly impossible” (Article L640-1 of the Commercial Code).
Liquidation has a particularly important impact on the company because it means that the recovery of the company’s finances is impossible (Cour de Cassation, Chambre commerciale, 8 July 2003, 00-13.627), particularly when a company is in a situation of cessation of payments, meaning that it is “unable to meet its liabilities with its available assets“. In this situation, the company can no longer meet its debts and the procedure will organise the end of the debtor’s activity; it is therefore appropriate to ask: How, as an investor, can you obtain the repayment of your claim when the debtor is insolvent? As soon as the judicial liquidation is pronounced, a procedure aiming at paying off the creditors is put in place. However, this action plan will affect the creditors of the company in liquidation by limiting their power to act. The main goal is to be able to pay the creditors in the end, but liquidation is not always the best solution.
First of all, it implies the freezing of the debtor’s liabilities, i.e. the debtor is prohibited from paying creditors whose claims arose before the opening of the judgment. Similarly, as a creditor of the platform, the investor will have to declare his claim in order to hope to be paid. This means that any creditor can no longer sue his debtor individually.
During the course of these collective proceedings, a creditors’ representative is always appointed who has a monopoly on action: the liquidator; he acts on behalf of and in the interest of the creditors (Article L641-4 of the Commercial Code). The liquidator will receive the damages that will be distributed among the creditors. In principle, the distribution is carried out by respecting the order of privileges: unsecured creditors will only be paid once the privileged creditors have been paid. It is therefore necessary to ask how a creditor can provide guarantees in order to benefit from the status of preferred creditor. During the judicial liquidation procedure, creditors remain subject to their contractual obligations. Indeed, as a matter of principle, “The co-contractor must fulfil his obligations despite the debtor’s failure to perform commitments made prior to the opening judgment. Failure to perform these commitments only entitles creditors to a declaration of liabilities” (Article L641-11-1of the Commercial Code). This means that you remain subject to your obligations under the contract in the same way as if the liquidation proceedings had not been initiated, e.g. the investor must pay all the funds that he had undertaken to deliver to the platform; however, certain assumptions are allowed for the automatic termination of the contract. However, the Court of Cassation has accepted that a situation in which the contracting party expressly declares its intention not to terminate the contract and the liquidator does not oppose this has legal effects. (Court of Cassation,Civil, Commercial Chamber, 17 February 2015, 13-17.076).
In principle, “the judgment closing the judicial liquidation for lack of assets does not allow creditors to exercise their individual actions against the debtor” (Article L643-11 of the Commercial Code). However, there are exceptions to this rule and it is therefore necessary to consider how the individual action can be exercised and in what situations. This is notably the case when “the claim originates from an offence for which the debtor’s guilt has been established or when it concerns rights attached to the creditor’s person“; but the criminal chamber of the Court of Cassation specified in a decision of6 April 2016 that when the claim originates from an offence for which the debtor’s guilt has been established, the recovery of the individual action can only take place after the closure of the compulsory liquidation procedure.
When it comes to crowdfunding, platforms that go bankrupt are a common occurrence. In France in 2018, the Unilend platform was declared insolvent, meaning that it no longer had the capacity to settle its debts. This situation can happen to any professional and to any participatory finance platform, so it is necessary to take measures to limit the consequences of this.
However, no collective action has been taken and the company has undertaken to reimburse each of the investors. It can be seen that judicial proceedings are not systematic and that it may be worthwhile to consider an out-of-court procedure when the judicial procedure does not correspond to the interests of the investors. Out-of-court proceedings are a mechanism for parties to a dispute to assert their rights without going to court: knowing the interests at stake, such as financial means or the need for confidentiality, is therefore necessary to determine whether an out-of-court settlement of the dispute would be more appropriate.
In recent years, class actions against crowdfunding platforms have increased, especially at European level. In January 2020, two crowdfunding platforms, EnvestioandKuetzal, were subject to compulsory liquidation proceedings. At present, the trial is still ongoing but investigations have revealed that they were fraudulent platforms. The Kuetzal collapse is said to have affected more than 550 people and to represent €3 million in liabilities. Envestio is said to have affected more than 1,800 people who are claiming €10 million from the company.
A collective action has been implemented. The companies are established in Estonia, so they are subject to Estonian law. In addition to being subject to a law that is not that of their country of origin, investors must contact the Estonian authorities and join a collective action based in Estonia, thus in a language that is not their mother tongue. In order to address these issues, a European regulation of 2017 has been put in place to regulate the insolvency of a company. It facilitates access to proceedings for litigants by setting up a form allowing them to contact directly the authorities in charge of the procedure as well as to have all the necessary information concerning the insolvency proceedings in progress. Moreover, it provides that the courts opening insolvency proceedings must contact the creditors concerned by the insolvency proceedings.
However, it does not standardise the law of the Member States of the Union on the question of collective proceedings, for example, the time limits and procedures to be followed differ from one State to another. It provides that the competent court is the one that opens the proceedings, which is a fundamental concept because the applicable law will be that of the place where the proceedings are opened. Similarly, this regulation provides for the possibility of opening one main procedure for all the injured creditors or several territorial secondary procedures. It will therefore be necessary to determine which procedure is the most suitable for your situation.