We share our analysis on the novelties in the legal regulation of the crowfunding activity with a company.
In this document, we collect the prerequisites for the registration of the company and the start-up of the business.
- NEW EUROPEAN AND NATIONAL REGULATIONS ON CROWDFUNDING SERVICES
The Spanish regulations about ”crowdfunding” is regulated in details in Title V of the new ”Ley Crea y crece” – hereinafter ”the Law” – that was executed and is in force from November 2022, in order to harmonize with the European legal regime, according to the Regulation (EU) 2020/1503 on European providers of crowdfunding services for companies – hereinafter ”the Regulation” -. This regulation unified regulation at the European level, so that crowdfunding platforms authorized and supervised in accordance with the Regulation can provide their services freely throughout the European Union.
Before analyzing the steps to follow in order to carry out a crowdfunding, it is important to indicate a list of those entities excluded from the scope of application of this Regulation:
- Those engaged in participative financing services provided to project promoters who are consumers.
- Nor shall it apply to credit agreements secured by a mortgage or other comparable security commonly used in a Member State over real estate property or secured by a right relating to same.
- When all the intermediated equity financing offers are for an amount higher than 5 million euros within a 12-month period.
In other words, the scope of application of the regulations is focused on promoting this new financing channel for projects aimed at the creation and growth of companies, since the financing of loans made as consumers or for the purchase of real estate is already regulated under other rules and regulations.
- REQUIREMENTS TO START AN EQUITY FINANCING SERVICES
We will now proceed to analyze the requirements of the new law for those who intend to start this type of activity and are included in the scope of application of the Law and the Regulations:
- First, any entity wishing to provide participatory financing services in Spain regulated by the Regulations, must apply to the National Securities Market Commission and obtain an authorization to operate as a provider of these services. A government fee must be paid for this authorization.
- If a New Co is incorporated to carry out this purpose, after its incorporation and registration in the corresponding public registry this authorization. it will be registered in the corresponding registry of the CNMV after obtaining the aforementioned authorization. In the case of entities previously incorporated and registered and whose economic activity is different from the actual one, it will be necessary to modify the company’s bylaws to include as its exclusive corporate purpose the activities listed in the Law and, subsequently, it must be registered in the CNMC registry.. This registry must contain the updated data of the company name, Internet domain address and registered office of the participatory financing platform, as well as the identity of the administrators and a list of the shareholder with significant participation.
In response to the question of what should be included in the application for authorization, in general terms, we can highlight the following:
- Deed of incorporation, legal name, the internet address of the website used by the future supplier.
- Indication of the shareholding structure and, for each legal entity shareholder, the shareholdings in the capital stock that directly or indirectly represent a percentage equal to or higher than 20%.
- For each of the significant direct and indirect partners, legal entities, the ledger/annual accounts with the Commercial Registry for the last two fiscal years must be provided. Also a questionnaire of honorability for each of these legal entities, but also for each of the members of the board.
- Certificate of criminal record issued by the Ministry of Justice of Spain and/or by the equivalent entity of the country of origin, where the applicant has been working or living in the last 10 years: of the legal entity, of each of the significant partners and of the members of the board.
- Description of the business plan, including a balance sheet and profit and loss accounts for the next three fiscal years, derived from the activity as a PSFP.
As additional requirements, (a) prudential safeguards (guarantees) must be available at all times for a minimum amount equal at least to the following:
- a) 25.000 euros
b) One quarter of the previous year’s fixed overhead, revised annually, which should include the cost of loans per service for three months when the equity financing service provider also facilitates the granting of loans.
These “safeguards” or guarantee can be i) equity; ii) insurance policy, providing a copy of the policy or iii) a combination of both.
Also, (b) the board of the provider of these services shall establish rules that allow for “effective and prudent” management, observing a minimum level of due diligence with respect to project developers operating on its platform and shall have “prompt, impartial and consistent” complaint procedures for clients. - REGULATIONS APPLICABLE DURING THE DEVELOPMENT OF THE CROWDFUNDING ACTIVITY
Considering the requirements that Title V of the Law and the Regulations impose for initiating this type of services, it is appropriate to point out that there are other obligations and restrictions that must be respected during the development of the activity. These are the following:
The entity must prepare an Internal Code of Conduct that contemplates possible conflicts of interest and the terms of participation of administrators, managers, employees and representants in financing requests made through the platform.
The providers of participative financing services that provide individualized loan portfolio management services will be able to decide, on behalf of their investors, within the agreed parameters without having to ask the investors to study all the participative financing offers or to make an investment decision regarding each one of them. From that point, they will be able to invest on behalf of the investors on the basis of a mandate contract that must include the information of the service and investments to be made. However, the platforms are expressly forbidden to provide financial advice, as well as the use of funds without authorization.
Providers of equity financing services must provide potential investors with an investment factsheet, the content of which is the responsibility of the promoters of the investment, as well as a platform factsheet, the content of which is the responsibility of the platform provider.
A disclaimer and a risk warning should be included in the key facts sheet that providers of crowdfunding services must provide to potential investors.
Additionally, a distinction must be made between non-experienced investors and experienced investors. A knowledge test must be carried out by the provider of equity financing services on the non-experienced investor in Article 21, a knowledge test is not necessary for experienced investors. In the case of non-experienced investors, it is provided that they must “expressly acknowledge that they have received and understood the warning issued by the equity financing service provider”.
Regarding the limits on investments requiring special information obligations on the part of the financing service provider, such as sending the investor a risk warning and requiring his express consent, the Regulation establishes such limits on investments exceeding 1,000 euros or 5% of the non-accredited investor’s net worth.
