Crowdfunding Act to provide new financing options for business growth

Businesses will receive more options to finance their growth when the acquisition of loan- and investment-based crowdfunding is made easier. The new Act will particularly ease the regulation of investment-based crowdfunding and correspondingly clarify the ground rules for loan-based crowdfunding. The Government submitted its proposal for a Crowdfunding Act on Thursday, 7 April.

The objective of the Crowdfunding Act is to clarify the responsibilities of various authorities in the supervision of crowdfunding, to improve investor protection and to diversify the financial markets.

– The goal is to support the creation of new sources of financing, particularly for innovative growth companies that experience difficulties in obtaining financing through traditional funding channels. Crowdfunding will improve access to financing, particularly for SMEs and start-ups. Through this, it will be possible for them to boost their growth opportunities, investment options, commercialisation of innovations and thereby, hopefully, employment, says Minister of Finance Alexander Stubb.

Regulation eased

The Crowdfunding Act will particularly ease the regulation of investment-based crowdfunding. Nowadays, investment-based crowdfunding is regulated by the  Investment Services Act and the Finnish Financial Supervisory Authority’s interpretation of the content of the Act.

Regulation will be eased as follows:

• For crowdfunding intermediaries, the administratively onerous and time-consuming operating licence process will be replaced by a registration process that is less expensive, simpler and faster.
• Crowdfunding intermediaries will no longer need to join the Investors’ Compensation Fund.
• A crowdfunding intermediary’s minimum capital requirement will be reduced from the present EUR 125,000 to EUR 50,000.
• An alternative to the capital requirement will be proposed, such as professional liability insurance, a bank guarantee or other corresponding guarantee that the Financial Supervisory Authority deems to be sufficient.

The easing of regulation will apply to mediation and acquisition of crowdfunding in Finland. With respect to operating in other EU countries, it is recommended that an intermediary still apply for an investment service company operating licence, which will facilitate simple access to European markets.

Ground rules clarified

Loan-based crowdfunding will receive clear legislative-level ground rules. Currently, loan-based crowdfunding is considered to be financial mediation that is not in all cases regulated in law. This applies particularly to loan intermediation to businesses.

In the future, loan-based crowdfunding will be regulated just like investment-based crowdfunding. The new Act

• specifies a disclosure obligation for both the crowdfunding intermediary and the business entity seeking funding
• regulates the crowdfunding intermediary’s procedures and its obligations towards the investor
• includes provisions on the supervision of crowdfunding intermediaries as well as appropriate sanctions.

These provisions will apply to both investment-based and loan-based crowdfunding.

Investor protection improves

For investors, crowdfunding may be a way to invest in a project that has higher return expectations and higher risk than traditional investments. When the sector receives clear legislative-level ground rules, investor protection will also improve.

Under the new Act, crowdfunding may be mediated only by business entities that are entered in a special register of crowdfunding intermediaries. The register will be open to business entities that have reliable management and adequate knowledge of  the financial markets.

The Finnish Financial Supervisory Authority will be responsible for the register and the supervision of the intermediaries. For example, credit institutions may also mediate crowdfunding via their own existing operating licence.

In addition, investor protection will be specified in a separate decree of the Ministry of Finance relating to the disclosure obligation of an entity acquiring financing through crowdfunding. The decree will include provisions on risk warning, among other things.

Crowdfunding Act will apply to business activity

The Crowdfunding Act will apply only to loan- and investment-based crowdfunding utilised in financing business activity. It will not apply to mediation of peer-to-peer loans or to money collection.

– The Crowdfunding Act will improve new financing options, particularly in bottleneck situations affecting the growth of SMEs. I hope that this will give Finnish companies new courage to innovate and grow,” says Minister Stubb.

The Government submitted its proposal for a Crowdfunding Act on Thursday, 7 April. The Act is scheduled to come into force on 1 July 2016. The Crowdfunding Act is part of the key Government projects.

Why is the Crowdfunding Act needed? Questions and answers

Inquiries:

Aki Kallio, Ministerial Adviser, tel. +358 2955 30477, aki.kallio (at) vm.fi

Suvi Aherto, Special Adviser, tel. +358 50 349 6121, suvi.aherto (at) vm.fi