Small-scale commercial and non-commercial projects are finding it increasingly difficult to raise financing. The reason for this is that banks are required to maintain more equity and subsidies are drying up in many places. An alternative form of financing has been found for this group: crowdfunding. What is crowdfunding and what statutory regulations must be observed?
Supervision on banks has been tightened up since the credit crisis. Europe has imposed more onerous capital requirements for banks to ensure that financial stability is safeguarded. As a result, fewer and fewer loans for up to EUR 250,000 are on offer for start-ups and small and medium-sized enterprises. Some alternative means of funding must be brought out for this group. The coalition agreement recognised this need: ‘Businesses need room to grow. This room can be obtained through innovation via IT and the reduction in regulatory pressure and compliance costs, but especially through better access to credit and capital. New alternative forms of financing such as credit unions, crowdfunding and SME bonds will be supported through promotion, the elimination of obstacles in regulation and by the use of knowledge and existing instruments.’
Crowdfunding as an alternative form of financing is relatively new in the Netherlands. This form of financing is already anchored in legislation in the US, specifically in the ‘Jumpstart Our Business Startups Act’, the aim of which is: ‘To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies’.
Crowdfunding is a means of getting projects financed by the ‘crowd’, a large group of people, each of whom invests a relatively small sum. The projects involved can be very diverse, from the financing of a windmill farm, for instance, to the purchase of a work of art, the publishing of a book or, as recently seen in the media, fund raising to keep the Amsterdam legal advice centre operating. The aims for which financing is sought via crowdfunding are usually small in scale and of a commercial or non-commercial nature. Crowdfunding can take place in four ways: (i) through donations, (ii) through sponsoring, whereby a project is supported in exchange for minor consideration, (iii) through loans to a company or private individual, or (iv) through investment in a company.
There are generally three players in the crowdfunding process: (i) the borrower who needs the financing, (ii) the lenders who want to invest in the project for their own reasons, and (iii) the online platform that brings the borrower and lenders together.
It is primarily the platform that deserves discussion. After all, there is nothing new about bringing financial resources together for the financing of a project. The VOC (Dutch East India Company) was already financed in this way. What is new is that the traditional middleman has disappeared and made way for an online platform. The legal framework for these platforms has not yet been fully worked out. The Minister of Economic Affairs also stated earlier that: ‘Legally there are no insurmountable obstacles: the regulators have taken a cooperative attitude. This does not change the fact that the initiatives can quite easily fall within the scope of the regulatory legislation.’
The step-by-step plan
The AFM asks two questions in order to determine whether the platforms must apply for permits or exemptions for loans to private individuals and/or businesses:
1. Is the platform used to provide financing in the form of loans?
If the answer to the first question is yes, then the platform must apply for an exemption from the AFM. Section 3:5 of the Financial Supervision Act (hereinafter: Wft) states that:
‘In the Netherlands it is prohibited for any party, in the course of operating a business, outside a closed circle, to raise, secure disposal of or have at its disposal exigible funds from parties other than professional market parties.’
Exigible funds here are funds that must be repaid at any given moment, for any reason whatsoever, and for which it is clear in advance what nominal amount must be repaid.
2. Is the platform used to provide loans to consumers (as well)?
If the answer to the second question is yes, then the platform must apply for a permit from the AFM. This situation involves credit (according to the Wft, credit is defined as providing a consumer with a monetary amount in relation to which the consumer is required to make one or more payments). The platform brokers credit and that requires a permit on grounds of Section 2:80 of the Wft.
Another three questions are also asked in order to determine whether exemptions or permits are required in relation to investments in businesses. These questions will be left out of consideration here.
Crowdfunding can be an excellent alternative for the regular forms of financing. In particular, crowdfunding could be very useful for projects where the focus is not only on the return to be achieved. For instance, a number of projects in the sustainable energy sector have already been successfully financed via crowdfunding. There is no fully fledged instrument as of yet however. The AFM and DNB have only published step-by-step plans for the platform. The question is whether a borrower also falls under Section 3:5 of the Wft under certain circumstances. We will still have to wait for clarity in the form of regulation.