What is crowdfunding?

Crowdfunding is one way of obtaining external funding. The legal act regulating crowdfunding modalities is the Regulation of the European Parliament and of the Council on European providers of crowdfunding services for businesses, which entered into force on 10 November 2021. According to indents 1 and 2 of the Regulation, crowdfunding is an increasingly recognised form of alternative funding for startups and small and medium-sized enterprises (SMEs) and is typically based on small investments. Crowdfunding is an increasingly important type of intermediation whereby a crowdfunding service provider, without assuming risk, operates a publicly accessible digital platform to match or facilitate the matching of potential investors or lenders with business ventures seeking funding. The provision of

crowdfunding

services generally involves three types of actors: a project owner who presents a project for funding, investors who fund the presented project, and an intermediary organisation in the form of a

crowdfunding

provider that connects project owners and investors through an online platform[1]

What is the importance of equity crowdfunding?

A popular type of crowdfunding to date has been so-called equity crowdfunding. It was an excellent alternative to traditional funding for startups, i.e. the entry of an industry or financial investor or even a loan. At the same time, it was also an important way for established players to obtain financing in order to recapitalise a planned investment or to reach new target groups with existing or new products.

Prohibition of crowdfunding in limited liability companies

The amendment of the Act of 7 July 2022 on crowdfunding for business ventures and borrower assistance (i.e. Journal of Laws of 2023, item 414, as amended), introduced an amendment to the Commercial Companies Code, inter alia, regarding the prohibition of offering shares of limited liability companies to the public and the restriction of the possibility of promoting their acquisition (Articles 182(1) and 257(1) of the Commercial Companies Code).

The effect of the above amendment is a prohibition on making an offer to acquire or take up shares in a limited liability company to an unspecified addressee and on directing to an unspecified addressee advertising or otherwise promoting the acquisition or taking up. This means that entrepreneurs who have used this type of financing must change the formula for building business relations and direct their activities towards acquiring contacts with specific entities, i.e. professional or financial investors.

So, the entities that are eligible for crowdfunding are:

1. Partnerships,
2. Simple Public Limited Companies (PSAs),
3. Joint Stock Companies (SAs), and
4. Sole Proprietorships.

It should also be noted that companies providing crowdfunding services, as of the date the amendment came into force, are required to obtain a permit from the Financial Supervision Commission.

The new regulation has been subject to restrictive sanctions – pursuant to Articles 595(1) and 595(2) of the Companies Act, the legislator has provided for a fine, restriction of freedom or imprisonment of up to six months for non-compliance with the aforementioned prohibitions.

Assessment of the regulation

The introduced prohibition on disposing of shares in a limited liability company is a significant practical limitation of the possibility to obtain financing, especially for entities in the initial stage of development or in the case of financing projects of a local nature. The above method of crowdfunding was an attractive form of obtaining funding, bypassing traditional and often unattainable sources.

In doing so, it should be taken into account that the limited liability company is one of the most common forms of business. Due to its uncomplicated legal and organisational structure and the lack of exorbitant financial requirements, it is a very attractive form of business, especially for new market entrants. Restricting the ways of obtaining financing for this legal form may have a negative impact on its attractiveness. Restricting entrepreneurs’ choice of legal form of the entity under which the project will be implemented may result in postponing its implementation or causing other practical obstacles.

In the part limiting access of limited liability companies to obtaining social funding, we consider this amendment to be unfavourable.

Introducing this type of restriction may stop the development of interesting and necessary business ventures. Indeed, this type of financing was also the first step towards obtaining professional financing, as such announcements indirectly provided a marketing foundation and allowed entities or their products to gain wider publicity.

In addition, the amendment raised a number of controversies in its application, if only from the perspective of listed companies, which were able to publicly offer the sale of shares they held in limited liability companies.

Solution The

amendment introduced another set of regulations to be taken into account when setting up a new entity. Nonetheless, those who have decided to set up a limited liability company may further adapt their activity to the new legal environment, for example by transforming the company into another organisational and legal form making it possible to raise crowdfunding or by merging it by acquisition with such a company.

Authors:

apl. adwokat Emilia Mierzejewska

[1] 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 and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (OJ EU. L. 2020 No. 347, p. 1 as amended).