In this article, we'd like to introduce you to the concept of crowdfunding, a method for raising funds to finance various projects—most often involving new, innovative solutions. It's currently a very popular method. Interestingly, gaming companies were among the first to use it in Poland, in which case they did so through public fundraising.
The legal act that regulates crowdfunding in all EU countries is the Regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (hereinafter referred to as the ECSP Regulation). The Regulation entered into force on November 10, 2021, although its draft was created over a year ago, on October 7, 2020.
The regulation regulates in particular two types of crowdfunding:
- equity crowdfunding – raising capital from many investors in exchange for share rights in the company's share capital,
- loan crowdfunding – raising capital from many investors, with a returnable title.
Crowdfunding takes place online. The internet allows for easy communication about projects and the creation of a community around them. The project owner submits the project for funding, while the crowdfunding platform acts as an intermediary between project owners and investors.
Therefore, the provisions of the Act on the provision of electronic services of 18 July 2002, Journal of Laws of 2020, item 344, will apply to this type of activities. Additionally, in a situation where the supporting entity (investor) is a consumer, the provisions of the Act on Consumer Rights of 30 May 2014, Journal of Laws of 2020, item 287, will also apply. In the context of this Act, we should pay attention to Article 27, which concerns the right to withdraw from a contract concluded at a distance or off-premises within 14 days.
According to the ECSP Regulation, the creation of a crowdfunding "ecosystem" requires, in particular, a person/team who will prepare the project (the originator), investors and entities that act as intermediaries between project owners and investors.
Raising funds through crowdfunding has raised numerous doubts in the Polish legal system. The essence of crowdfunding activity is remarkably similar to that of investment firms, and therefore, this method should be subject to oversight by the European Securities and Markets Authority and financial regulators. Furthermore, investors lacked adequate protection for their investments, reflecting the risks involved. The aforementioned doubts, among other factors, led to a need to systematize the topic of raising funds from this type of public "fundraising."
The ECSP Regulation introduces uniform requirements for the provision of crowdfunding services, the organization, licensing, and supervision of crowdfunding service providers. These measures are intended to enhance investor protection for those who choose to support project creators.
The ECSP Regulation introduces a number of requirements regarding crowdfunding, including some of the most important:
- licensing of activities – crowdfunding will only be possible through entities that obtain a permit issued by the competent authorities of a Member State,
- changing the maximum financing threshold without the need to prepare a prospectus, in accordance with Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and repealing Directive 2003/71/EC, to EUR 5 million over a 12-month period. However, individual Member States may introduce a lower threshold than the EUR 5 million indicated above (one of these countries is Poland, where the threshold has so far been EUR 2.5 million and, pursuant to Article 49 of the ESCP Regulation, it will remain at this level until November 10, 2023, and will then increase to EUR 5 million);
- Changes to investor protection – imposing an obligation to provide investors with information about the risks and fees associated with the services of crowdfunding providers. Previously, investor protection existed under other acts (e.g., as mentioned above, the Act on the Provision of Electronic Services). Currently, in addition to the above-mentioned acts, restrictions have been imposed on social financing platforms, requiring them to provide information to investors to protect their interests.
Finally, it's worth noting that crowdfunding is sometimes confused with Initial Coin Offerings (ICOs). While similar in nature, it differs slightly from the one discussed here. Crowdfunding is a type of public offering in which funds are raised by purchasing coins or tokens (in the case of tokens, we refer to Initial Token Offerings) from the company organizing the ICO, either for "traditional" funds or for digital currency. In Poland, the Polish Financial Supervision Authority (KNF) addressed the issue of ICOs. In a statement, the commission highlighted the investment risks involved. ICOs in Poland have been defined as a new way of raising funding using virtual currency, albeit one that can be quantified (e.g., exchanged for cash). The situation becomes even more complicated due to the involvement of cryptocurrencies, although the idea for such a platform is definitely worth considering.
This alert is for informational purposes only and does not constitute legal advice.
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