Who is crowdfunding for?

Crowdfunding is primarily intended for innovative start-ups, but nothing prevents entrepreneurs with other ventures from using it. Crowdfunding can be a beneficial solution both for those who are just starting their business and for those who are in a difficult financial situation and need additional funds to improve the health of their business.

Types of crowdfunding

In practice, there are several models of crowdfunding:

• equity crowdfunding – this is used to fund entrepreneurs who operate a business in the form of a commercial company. In this type of crowdfunding, each investor receives shares in the company in exchange for invested funds;
• loan (debt) – this type of funding represents a loan bypassing financial institutions. Interested investors lend their funds to the entrepreneur who has organised the collection;
• pre-sales – the entrepreneur provides investors with a product that they can use before it goes on sale officially;
• rewards-based – the entrepreneur who raises funds for his or her business goal makes available to investors who have participated in the financing of his or her venture all kinds of goodies, discounts on purchases or the possibility to participate in all kinds of company events.

Law on crowdfunding

On 7 July 2022, the Act on crowdfunding for business ventures and assistance to borrowers (“the Act“) was enacted, which implements into the Polish legal order the provisions of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European providers of crowdfunding services for business ventures (“theRegulation“). The Act entered into force on 29 July 2022. The changes resulting from the aforementioned Act primarily concern providers of crowdfunding services for business ventures. In the Polish legal order, the operation of crowdfunding providers was not regulated at all and crowdfunding itself did not have its own legal definition.

The regulation applies to crowdfunding platforms operating on the basis of the so-called share model, in which an investor will be able to acquire securities issued by a specific entrepreneur in exchange for a payment, and on the basis of the so-called loan model. At present, crowdfunding offers funding of €2.5 million. This amount will increase in November 2023, when the threshold will be raised to €5 million.

Obligation to obtain a licence to provide crowdfunding services

The aforementioned Regulation, which has been directly applicable since 10 November 2021, introduced uniform requirements in Member States for the conduct of business and organisation of crowdfunding service providers. The harmonisation primarily concerns the requirement to obtain authorisation to conduct this business activity. Interestingly, a payment services licence, on the basis of which community financing service providers have previously provided crowdfunding services, is not sufficient to provide community financing services.

From the date of entry into force of the Act on Community-Funded Business and Borrower Support, a community-funded business service provider must obtain a business licence to set up and operate a crowdfunding platform. These licences will be issued by the Financial Supervision Authority. During the authorisation process, a fee equivalent to EUR 4,500.00 will have to be paid.

The authorisation may expire by operation of law or may be revoked by the Financial Supervision Authority.

Obligations of crowdfunding service providers

The Act also imposes numerous obligations on crowdfunding service providers, in particular:

1. the obligation to maintain professional secrecy covering:

• information concerning the legally protected interests of entities for which crowdfunding services are provided;
• information obtained in connection with other activities carried out as part of the business conducted under the provisions of the Act or Regulation 2020/1503, subject to supervision by the Commission or the competent supervisory authority in another Member State, as well as information concerning activities carried out in the exercise of that supervision;

1. the obligation to store and archive documentation;
2. the obligation to provide the Financial Supervision Authority with information on its activities, financial situation and events that may affect its activities in the provision of crowdfunding services or its financial situation (key investment information sheets);
3. the obligation to pay an annual supervisory fee, determined on the basis of the average value of revenues in the last three financial years preceding the year for which the fee is due;
4. the obligation to conduct a preliminary test of the knowledge of potential inexperienced investors, as well as the obligation to simulate their ability to bear losses;
5. the obligation to inform inexperienced investors about the so-called cooling-off period, i.e. the possibility of withdrawing from the investment offer.

It is worth noting that crowdfunding providers are subject to extensive supervision by the Financial Supervision Authority, which may commission an audit firm to check the provider’s financial statements or the correctness of its accounting records if it has doubts as to their correctness, reliability or clarity.

The Financial Supervision Authority will also be granted special supervisory powers, which will allow it, among other things, to suspend the business activities of providers.

Criminal sanctions for violations of the Act on Crowdfunding

In addition to administrative sanctions, the Regulation introduced criminal sanctions for violations of the Act by crowdfunding service providers. The following are subject to sanctions, among others:

1. providing crowdfunding services without the required authorisation, punishable by a fine of up to PLN 5,000,000.00;
2. disclosure or use of information constituting professional secrecy, which is punishable by a fine of up to PLN 1,000,000.00 or imprisonment for up to 3 years;
3. obstructing the Financial Supervision Authority in carrying out its supervisory or control activities, which is punishable by arrest, restriction of liberty or a fine.

Civil liability for violation of the provisions of the Act

The Act also indicates the liability of the project owner (i.e. the entrepreneur seeking financing), the entity preparing the information or participating in the preparation of the information for the accuracy of the information contained in the key investment information sheet. The crowdfunding service provider is responsible for the accuracy of this information at the crowdfunding platform level.

Assessment of the introduced regulation

The Act introduces a number of measures aimed in particular at protecting potential investors. Entrepreneurs seeking additional financial resources for the development of their business are also protected. The solutions provided for in the Act should be considered reasonable and serving to protect participants in crowdfunding from dishonest providers.

Of course, the Act imposes a number of obligations on financing service providers that will not be easy to meet, but they are necessary in the public interest. Until now, crowdfunding platforms for financing business ventures could operate under the freedom of economic activity, i.e. without the need to obtain a licence. This obviously posed a significant risk to investors. The current regulation minimises the loss of funds by investors and, at the same time, allows for more informed business decisions. It is very important that all entities involved in crowdfunding comply with the relevant standards of conduct. According to data from the Polish Financial Supervision Authority, in 2019, over PLN 40 million was invested in crowdfunding campaigns in Poland. These are therefore significant amounts that need to be adequately secured.

Author: Łukasz Laskowski, trainee attorney