Draft Act on crowdfunding (equity crowdfunding)

  • Michał Klimowicz
  • 26 July 2021
  • LSWNews

A draft act on crowdfunding for business ventures has been published on the website of the Government Legislation Centre.

The Act will complement the regulations on crowdfunding contained in the EU Regulation 2020/1503 of the European Parliament and the Council on European providers of crowdfunding for business ventures, which was adopted in October 2020. This is another important step to regulate the crowdfunding market in Poland.

Crowdfunding is an increasingly popular way for companies to raise finance. The dynamics of the development of this type of financing also translate into further changes and legislative novelties. New regulations are to concern social funding in the model of equity crowdfunding and loan crowdfunding.

What changes are introduced by the EU EP and Council Regulation 2020/1503?

Recall that thanks to the new provisions of Regulation 2020/1503, it will be possible for companies to raise crowdfunding of up to €5,000,000 over a period of 12 consecutive months through a public offering of shares, with simplified requirements, i.e. without the need to publish a prospectus and have it approved by the Financial Supervision Authority and without the intermediation of an investment firm. The condition will be that this offering is conducted through a crowdfunding platform authorised under the provisions of the new regulation. The new regulations are therefore important for crowdfunding platforms, but also companies seeking funding. From the platforms’ point of view, apart from the obligation to obtain a licence to operate, the most significant change is the possibility to operate cross-border across the EU (with prior authorisation). The Regulation also establishes several measures to protect investors and facilitate exit, including a cooling-off period for inexperienced investors during which they can withdraw from the investment, the obligation for platforms to conduct an initial knowledge test and simulation of loss taking by an inexperienced investor, as well as the possibility for the platform to operate a bulletin board where investors can advertise their interest in buying or selling shares of companies that were originally offered on the platform.

What changes for crowdfunding platforms are introduced by the Act on crowdfunding for business ventures?

The Act on crowdfunding for business ventures complements the provisions of the Regulation of the European Parliament and the Council of the EU No 2020/1503. Under the provisions of the Regulation, EU Member States were obliged to designate national authorities that will issue authorisations to operate crowdfunding platforms and supervise the crowdfunding market. Under the provisions of the proposed Act, in Poland, this authority will be the Financial Supervision Commission.

The provisions of the Act also establish several further obligations for crowdfunding platforms, including professional secrecy, document retention, and disclosure obligations. The Financial Supervision Authority will also have broad supervisory powers over platforms, including the ability to order an audit firm to audit the platform’s financial statements or an order to suspend the provision of crowdfunding services by a platform in certain cases. These are measures aimed at protecting investors investing in projects available on platforms. Platforms will also pay a licensing fee and an annual operating fee.

What changes does the Law on crowdfunding for business ventures introduce for companies seeking financing?

From the point of view of companies seeking financing, the most relevant provisions of the Act are those that implement the provisions of EU EP and Council Regulation 2020/1503 regarding the possibility for companies to raise crowdfunding of up to €5,000,000 over 12 consecutive months in a public offering, with simplified requirements.

If a company plans to raise funds through a public offering of shares in an amount of less than €1,000,000, within a period of 12 months, the existing regulations will apply, i.e. such an offering will not require the publication of a prospectus, nor will it require the intermediation of a crowdfunding platform or an investment firm. For offers of at least EUR 100,000 within a 12-month period (but less than EUR 1,000,000), only the preparation and publication of an information document on the issue is required, but this is not subject to approval by the KNF.

Public offerings between €1,000,000 and less than €5,000,000, over a 12-month period, will require the intermediation of a crowdfunding platform or an investment firm (such as a brokerage house). Such offers will also require the preparation and publication of an information memorandum (if the offer is made through a platform) or a key investment information sheet (if the offer is made through an investment firm). The memorandum and the spreadsheet, however, will not be subject to approval by the PFSA.

Offers of €5,000,000 and above will require the preparation of a prospectus, its approval by the FSA, and the obligatory intermediation of an investment firm to carry out the public offer (at present, the prospectus obligation applies to offers of at least €2,500,000; the intermediation of an investment firm, on the other hand, is obligatory for offers of at least €1,000,000).

Importantly, however, these regulations will only apply from 10 November 2023. During the transitional period until 9 November 2023, fundraising will only be facilitated up to €2,500,000. Companies will be able to raise funds through public offerings of shares with simplified requirements (without the need to draw up a prospectus and the intermediation of an investment firm) between €1,000,000 and an amount of less than €2,500,000, provided that such offering is made through a crowdfunding platform authorised under the new regulations. In this case, it will additionally be necessary to draw up and publish a key investment information sheet. Of course, it will also be possible at all times to make public offerings of no more than €1,000,000, over a 12-month period, under the existing simplified requirements.

The provisions of the proposed act will also impose new obligations on companies seeking financing and making a public offering. The company will have to notify the Financial Supervision Authority of its intention to conduct a public offering of shares no later than 7 business days before the information document or the information memorandum (depending on which document applies in a given case) is made available. However, the commencement of a public offering will not require the approval of the information document or memorandum by the PFSA. The obligation to notify the Polish Financial Supervision Authority (PFSA) of the intention to conduct an advertising campaign for a public offering also returns – the company will be obliged to submit to the PFSA a schedule of the course of the advertising campaign no later than 7 days before the day on which it commences.

Controversies arising from the draft act

The most controversial issue arising from the draft act is the prohibition on offering to take up and acquire shares of a limited liability company to an unspecified addressee. In practice, this ban will make it impossible for crowdfunding platforms serving only limited liability companies to operate. Furthermore, this regulation will make it significantly more difficult for limited liability companies to raise capital, which should not be the case. The need for such a ban does not arise from the provisions of Regulation 2020/1503. It is, therefore, possible that this ban will be removed or softened in further consultations and legislative work.

When will the provisions of the Act come into force?

The planned effective date of the Crowdfunding for Business Ventures Act is 10 November 2021. (subject to the above provisions which will come into force from 10 November 2023). The Bill is currently at the consultation stage. From 10 November 2021, the provisions of EP and EU Council Regulation 2020/1503 on European crowdfunding providers for business ventures will also start to apply, with the proviso that platforms will be able to continue to operate under their existing rules (in accordance with the applicable national law) until 10 November 2022. (the so-called transitional period).

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