New investor classification methods: what changes with the new EU regulation

On November 10, the new European ECSP regulation and among the most important changes is a new way of investor profiling. In this article we look in detail at what really changes for the investor.

Sophisticated and non-sophisticated investor: new profiles

The distinction between professional and retail investor, as we knew it, is retiring with the new regulation. Replacing it, we have the figures of thesophisticated invest or and theunsophisticated investor; while the possibility of investing as a legal or natural person remains valid, but let's go in order.

Who is the sophisticated investor

Thesophisticated investor, as specified in the new regulations, is that user with a proven track record in the financial world. Because of his or her knowledge, skills, and disposable income, he or she is able to make informed investment decisions and have a thorough understanding of the risks to which he or she is exposed. This category includes all investors who meet the following requirements:

For legal entities at least one of:

• own funds of at least €100k
• net sales of at least €2mln
• balance sheet of at least €1mln

For individuals at least two among:

• having a personal gross income of at least €60k per tax year or a portfolio of financial instruments, including cash deposits and financial assets, worth more than €100k
• working or having worked in the financial sector for at least one year in a professional position that requires knowledge of the operations or services involved, or having held an executive position for at least 12 months within legal entities that meet the requirements described for legal entities (see above)
• have conducted transactions of significant size in the capital markets with an average frequency of 10 transactions per quarter in the previous four quarters

If meeting the requirements, the user, in order to qualify as a sophisticated investor, must follow and complete a special qualification procedure made available by Mamacrowd. However, sophisticated investor status is valid for 2 years.

Sophisticated investors are also to be considered all those who fall under the definition of a professional client, as understood in European regulations. The following are included in the category of sophisticated investors professional clients by way of example but not limited to: investment firms, other authorized or regulated financial institutions, insurance companies, collective investment schemes and management companies of such schemes, pension funds and management companies of such funds, dealers in commodities and commodity derivatives , other institutional investors and stockbrokers, large companies (which meet at least two of the size criteria set out in the relevant regulations).

Again, in order to qualify as a sophisticated investor, it is necessary to follow and complete the special qualification procedure made available by Mamacrowd.

What is meant by unsophisticated investor

Theunsophisticated invest or is, by exclusion, anyone who does not meet the requirements we mentioned earlier and related to the sophisticated user.

Testing and loss simulation for the unsophisticated investor

The new regulation aims at equity crowdfunding that is increasingly inclusive and respectful of the peculiarities of each investor and marks an important step toward financial education and the promotion of safer investing. For this reason, platforms such as Mamacrowd must verify the level of knowledge, experience, and understanding of the individual unsophisticated investor with respect to the services offered on the platform and also make available the "simulation of the ability to sustain losses": a tool through which the unsophisticated investor can quantify the amount of any losses he or she would be able to sustain without suffering excessive financial consequences. Moreover, the platform, for each individual offering, must calculate an investment threshold and possibly impose an investment limit per offering depending on the results of the assessment conducted on the individual investor.

For these reasons, the unsophisticated investor will have to fill out a knowledge-verification entry test and a simulation that takes into account the investor's economic situation and ability to bear any losses. One can continue investing with greater protections and full transparency.

Mamacrowd is ready to help you deal with these changes. It has been working for some time to get ready for November 10. Keep following our blog, where we will update you on further news and insights.

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