The Spanish Government prepares first regulation on crowdfunding

On 3 October 2014 the Council of Ministers approved the Draft Bill aimed at improving the financing conditions of SMEs. Its Section V includes the regulation of crowdfunding or collective funding, which constitutes one of the most characteristic examples of collaborative economy, so fashionable in recent times.

Types of crowdfunding regulated by the Draft Bill

The Draft Bill (“DB“) exclusively regulates collective financing activities where the investor aims at obtaining a return on his investment. This means that funding through donations, non-interest loans and other sponsorship activities are excluded from the scope of application of the DB. 

Therefore, the DB exclusively regulates the two aspects of the crowdfunding phenomenon where the financial component prevails:  

• equity crowdfunding, when the investor, in return for his investment, acquires shares of the Company developing the project; and 
• crowdlending, when the investor becomes a lender, expecting to receive certain interest on his investment.

Players taking part in crowdfunding

The DB distinguishes 3 basic playersin crowdfunding activities:

• Investors: individuals or legal entities financing the project; 
• Promoters: in the case of equity crowdfunding, this is the company issuing the participations, shares or securities; and, in the case of crowdlending, it is the individual or legal entity requesting loans to finance a project; and
• Collective finding platforms: companies which bring investors and promoters into contact through a web page or any other electronic means.

Authorisation and registration of collective funding platforms

Platforms should be authorized by the Spanish Securities Exchange Commission (CNMV) and registered with a specific register kept by this organization. Notwithstanding the aforementioned, authorisation and registration of crowdlending platforms additionally requires a preliminary report from the Bank of Spain.  

Moreover, the DB sets out the requirements that platforms should meet to carry out their activity, like having a minimum totally paid-up share capital of €60,000, sufficient equity and civil liability insurance with a minimum coverage of €300,000 per damages claim and €400,000 per year for all claims.  

Additionally, platforms must comply with certain general information obligations to guarantee the transparent performance of their activity and the absence of conflicts of interest. Accordingly, a platform can never directly contribute more than 10% of the funding target of a project, and in any case, it must clearly inform the investors about the amount of their participation in the projects published. 

Types of investors

The DB distinguishes between accredited and non-accredited investors. Accredited investors are generally institutional investors as well as companies and individual investors who exceed certain levels of income or wealth, although, in the case of individuals, they will further have to expressly request being qualified as accredited investors.  

Investment limits in crowdfunding projects

The main consequence of the distinction between accredited and non-accredited investors is that the latter are subject to certain investment limits. Accordingly, non-accredited investors will not be able to invest more than €3,000 per single project or more than a total of €10,000 in several projects during a period of 12 months. Platforms should guarantee compliance with these limits through internal controls and by obtaining statements of compliance from the investors.  

Promoters’ and projects’ requirements

The collective funding platforms should diligently evaluate acceptance of the project and the identity of the promoter. If the promoter is a company, it must be incorporated in Spain or in another EU member state; if it is an individual, he/she must reside in the EU.  

No promoter can simultaneously advertise more than one project on the same platform and the maximum amount of funds raised cannot exceed €2,000,000 per year. The DB also includes a series of information obligations on the project and the status of the financing. 

We think the DB is a measure in the right direction to provide a stable regulatory framework for the unstoppable crowdfunding phenomenon, opening up new alternative financing channels for entrepreneurs and SMEs.