Lithuania’s Crowdfunding Law: How Will It Work and What Does It Mean?
Some time ago, the Lithuanian Parliament passed the Law on Crowdfunding. Vytautas Šenavičius, Chairman of the Board at Lithuanian P2P and Crowdfunding Association and Partner at TVINS Law firm, says it is another step towards a startup-friendly jurisdiction. He has shared his insights on this legislation and explained its practical implications to Startup Lithuania’s readers.
According to the Bank of Lithuania, approximately 40 percent of SME loan applications are rejected in Lithuania, and 50 percent of Lithuanian residents hold their savings in cash. The number of rejected loans is even higher for the startups. Therefore during the last year the necessity for alternative financing and alternative investment opportunities in Lithuania was one of the top priorities of the Ministry of Finance and the Bank of Lithuania. With the ambition to become one of the most attractive FinTech destinations in Europe, this autumn Lithuania approved a number of regulatory changes: amended KYC regulation (enables non face-to-face identification), amended consumer credit rules related to peer to peer regulation. Finally last week the Parliament of the Republic of Lithuania passed the Law on Crowdfunding. The Law on Crowdfunding eliminates obstacles in Lithuania related to the crowdfunding business in Lithuania.
The Law on Crowdfunding entails the startups to raise funding in a new way. For the startup market alternative funding opportunity is extremely important given the funding from the credit institutions is not always possible and angel investors’ funding procedure could take a couple of months. Through the crowdfunding platform, the startup may get funding in a few weeks. Moreover, the opportunity to publish a startup’s business idea on a crowdfunding platform allows receiving prompt feedback on whether the crowd believes in your project. Startups who will decide to raise funding through crowdfunding platforms will, in general, have free marketing campaign in case their project will be funded – the knowledge about the startup and it’s idea will spread between investors, their friends, colleagues, media, etc.
In this article, we will briefly go through the key features of the Law on Crowdfunding which will come into force as of 1 December 2016 (the bank of Lithuania will draft implementing acts by 30 November 2016).
General requirements for crowdfunding
The law does not apply to crowdfunding based on non-financial considerations/incentives (donation and reward crowdfunding). A legal entity (though sometimes without such status) may be an operator of a crowdfunding platform. The operator of a crowdfunding platform must be domiciled in the Republic of Lithuania, save for the cases where entities established in the other Member States in accordance with the legal acts are entitled to act as intermediaries in forming transactions for financing without having registered their domicile in the Republic of Lithuania or with their branches established in the Republic of Lithuania. Funds can be granted through equity, non-equity, loan, other credit arrangements.
Requirements for the start of crowdfunding activities
The operator has the right to engage in crowdfunding activities after the operator is included by the Bank of Lithuania in the public list of crowdfunding platform operators. When applying to the supervisory authority for inclusion in the public list of crowdfunding platform operators, the operator must submit information related to members and managers (heads) of the platform operator, information on prudential requirements of the platform, a plan in case ongoing concern and other documents. In general, the supervisory authority makes a decision regarding inclusion in the list within 30 business days. Operators included in the list will in general be considered to be financial advisory firms.
The operator must also prepare the following information and documents:
- the information on investment-related risks by providing their descriptions;
- the information on organisational and administrative measures in place to prevent conflicts of interest;
- a description of the procedure for using the crowdfunding platform;
- rules for secondary trading in the crowdfunding platform provided the platform operator intends to engage in secondary trading;
- the method of calculating the remuneration for the operator of crowdfunding platform paid by project owners and project investors;
- the information on taxes applicable to a financing transaction and types of such taxes;
- the terms and procedure of funds repayment to investors in the event the project owner does not raise a sufficient amount to develop the project;
- the information on risk mitigation measures, if any;
- rules for handling complaints of customers;
- the procedure for implementing the rights of a personal data subject.
Restrictions and limitations
In the final draft, there are some amendments that boost competition for Lithuanian regulation. The project owner is not obligated to allocate its own funds to finance the project. Restrictions for the maximum amount to be invested do not apply to investors. Before providing an opportunity for an investor to enter into a financing transaction of a specific type (investment or lending) for the first time, the platform operator must carry out an assessment of the appropriateness of the specific type of financing transaction for that investor. When assessing the acceptability of the financing transaction for the investor, the platform operator must request from the investor to provide information on his knowledge and experience in the area of investments related to the type of anticipated financing transaction.
If the assessment of the appropriateness of the type of financing transaction to the investor reveals that a certain type of financing transaction is not acceptable to the investor, or if the investor refuses to provide information about his knowledge and experience in the area of investments or provides insufficient information, the platform operator may allow the investor entering into the financing transaction but must:
- inform the investor that the type of financing transaction is not acceptable to the investor, or that non-provision of the required information prevents from determining whether the type of financing transaction is suitable to the investor;
- provide the investor with information on investment-related risks.
The requirements listed above do not apply in the event the investor is an informed investor.
Conditions of raising funds through crowdfunding
No additional requirements related to raising funds apply to a financing transaction that is intended to raise an amount of less than EUR 100,000 in 12 months. The project owner wishing to enter into one or more financing transactions for the total amount ranging from EUR 100,000 up to 5 million euros in 12 months must draft a document specifying the information about the project owner and the proposed project, and submit it to the platform operator. The project owner wishing to enter into one or more financing transactions for the total amount of 5 million euros or more in 12 months can do so only by issuing securities in the manner established by the Law on Securities, i.e. by preparing a prospectus, and after obtaining approval of the supervisory authority.
The information provided herein is meant for information only in order to present future regulation in the Republic of Lithuania. The information contained in this document is not legal advice, and cannot be relied on as such; also it may be changed at any time without notice. Law firm TVINS does not accept liability for any losses incurred by a person acting in reliance on the information specified in this document.