Until now, many doubts have arisen about the lawfulness and the regulation of crowdfunding in Denmark. Especially regulation of the platforms, which contribute and assist the companies in raising capital towards a funding target, have raised many unanswered questions. However, the Danish Ministry of Business and Growth’s report from May 2015, concludes that crowdfunding in general is considered a legal form of financing.

Crowdfunding is usually divided into 4 different types of funding; donation, reward, lending and equity. Each type of crowdfunding is regulated differently and these differences must be considered, when contemplating on which type of crowdfunding will be most appropriate, or if crowdfunding even is the right way to finance a particular project or business.

Fundamental to all 4 types of crowdfunding is the elimination of the banking middleman, making way for direct financing of one or multiple projects.

The 4 types of funding are:

  • Donation-based crowdfunding – clean donations
    With this type of crowdfunding a project is presented. Under donation crowdfunding, contributors ask for no money or rewards in return. Rather, contributions are, as the name suggests, a donation. Generally, this type of crowdfunding is regulated in the same manner as other types of charitable fund-raising. The donations must be notified to the Danish Fundraising Board and are subjected to the conditions of the Danish Fundraising Act. A fee of DKK 1000 must be paid to the Danish Fundraising Board in case of notifications and applications, if the fundraising campaign falls within the scope of the act. Any donations received are liable for tax, unless an exception is granted. The investors’ tax benefit entitlement is depending on whether the receiving charitable institution is certified or not. If donations are given to an uncertified institution, the donations will not be tax-deductible. Any platform that engages in donation-based crowdfunding is governed by general regulations under company law. No other requirements are imposed.
  • Reward-based crowdfunding – the investors are rewarded
    This type is similar to donation-based crowdfunding. However, the two types differentiate as the investor who engages in reward-based crowdfunding gets something in return. It can be compared to advance payment of a product.
    When this type of crowdfunding is chosen, the company has to pay special attention to the rules on corporate taxation and VAT declaration. The company must consider to what extent they engage in donation- or reward-based crowdfunding, as the difference between the two is essential, from a fiscal point of view. In reward-based crowdfunding, the investors receive different rewards, often depending on the amount of funding they commit – fiscally, this can be compared to selling a product. However, parts of the funding can be viewed as donations, if the investment exceeds the value of the service.
    Reward-based platforms usually profit by taking a share of the amount, raised by the campaigns, even though the business concept might differentiate from platform to platform. Neither in reward-based crowdfunding is the platforms subjected to any particular regulations aside from what is required by company law.
  • Lending-based crowdfunding – a barrier to platforms?
    This type of crowdfunding invite subscriptions for a series of loans repaid with fixed interest, often referred to as a series of micro-loans or lending-associations. However, it is in the nature of crowdfunding that the investors are not acquainted with each other. Faith in the idea is exclusively what unites the investors.
    In relation to lending-based crowdfunding, doubts have been raised about rather platforms must be certified as financial institutions or not. Whether or not a platform must be certified as a financial institution or subscription service provider/fund transfer company depends on the choice of business concept. The Danish Financial Supervisory Authority has approved certain platforms in Denmark. Such platforms must comply with the requirements for money laundering.
    Fiscally, this type of financing is considered to be under general lending conditions. As normally under these conditions, the interest rates of the “loan” are chargeable with tax for the lender and tax-deductible for the debtor.
    In similar fashion, any company that wish to obtain a loan through crowdfunding must, provided that the process is well-structured, gather information about the company’s lenders to ensure that no money laundering occurs. Otherwise, the general provisions, in relation to contractual- and reasonable agreements, apply.
  • Equity-based crowdfunding – ranking alongside share trading
    The final type of crowdfunding – equity-based – entails investment in over-the-counter shares. In most cases, the platforms will examine and approve all campaigns prior to release. With the current legislation, that requires authorization as an investing company, it is possible to establish and run an equity-based platform in Denmark. A suitability test must be carried out to ensure the investor is adequately informed about the risks involved with the transaction prior to its completion, but there are no requirements for actual consultancy. In this type of crowdfunding, the platform act as a company subjected to the legislation on money laundering and the Executive Order on Investor Protection in connection with Securities Trading. Any company that wish to engage in this type of crowdfunding must be registered as a public limited company or a partnership company. Thus, it is not possible for a private limited- or entrepreneur company to take part in equity-based crowdfunding, as equity-based crowdfunding is considered to be an offering of shares to the public. If the value of the listed securities exceeds EUR 1 mill., and are structured similar to public offerings, a requirement is set that approval by the Danish Financial Supervisory Authority is necessary. It must be emphasized that nothing hinders the founders of a public limited company from offering subscription of shares through a crowdfunding platform, for the purpose of realizing the minimum capital through crowdfunding.
    Fiscally, the contributed capital is exempt from tax. Thus, the received investments are not taxed, no matter if the shares are subscribed at a premium or not. Any gain or loss by selling the shares will be taxable in compliance with the Danish Capital Gains Tax Act to the investor, and profits will be taxable in compliance with the Danish Tax Assessment Act.
    Aside from the functional shape of the platform and name of business concept, equity-based crowdfunding is very similar to classic share offering.

Requirements and regulation
As evident from the above explanation, the choice of crowdfunding-type is of paramount importance, in relation to requirements and profits for the platforms, the investors and the company who wish to seek financing through crowdfunding. Crowdfunding is regulated by the existing legislation, which, in some cases, set specific- and high demands to the digital platform, utilized for the purpose. However, existing lending-based platforms, as for instance Lendino, have been approved by the Danish Financial Supervisory Authority. In Denmark, a number of other platforms exist, who offers different approaches and ways of crowdfunding. One of these platforms is Boomerang. Additionally, the large international reward-based platform Kickstarter, has come to Denmark.

Some initiatives have recently been taken to support the many possibilities that crowdfunding offers. The Market Development Fund co-finances the development of products, if certain demands are met and if at least DKK 250.000 has been crowdfunded on a reward-based platform.

If you want to know more about crowdfunding and find out whether you, your company or your projects could benefit from crowdfunding – or if you are contemplating on investing in a project yourself – you are more than welcome to contact Lund Elmer Sandager or David Frølich himself.

You are most welcome to contact us for any further queries and you may contact our attorney at law Mr. David Frølich by e-mail or attorney at law Mr. Niels Christian Døcker by e-mail.

By David Frølich