Crowdfunding, a quick way to finance projects through internet
What is crowdfunding?
Crowdfunding is an alternative method of financing done through the internet. It is a way to invest in projects that allows any individual or team to present their ideas and obtain funding without convincing a large investor to fund the project.
In Spain, the new Law 5/2015 of promoting business financing regulates crowdfunding. There are three types of crowdfunding, to which this new law affects in different ways:
- Traditional or reward crowdfunding is the classical investment type. An author presents a work and finances it via the financial contribution of different users who will receive some type of reward depending on the amount contributed. This is not affected by the new law.
- Equity crowdfunding or crowdfunding of shares: a company in need of financing resorts to small investors who in exchange receive shareholding or related rights in the company according to the amount of money contributed. This is affected by the new law.
- Crowdfunding or P2P lending: a company or a small entrepreneur in need of funding uses small investors who will lend the necessary amount of money. This is also affected by the new law.
Any citizen can participate in this type of investment with a maximum of 3,000 Euros per year for each project and an annual investment limit of 10,000 Euros. These platforms must meet certain requirements such as having a minimum capital of 60,000 Euros and obtain liability insurance with a minimum coverage of 300,000 Euros to cover any negligence in the development of the professional activity.
What is a participatory financing platform?
Participatory Financing Platforms (PFP) are authorized companies whose business is connecting, via websites or other electronic means, a variety of investors. These investors provide funding in exchange for monetary income to be allocated to a participatory financing project.
Requirements for crowdfunding:
- The law regulates Financing Participatory Platforms that exercise their activities in the Spanish national territory
- A PFP is responsible for the receipt, selection and publication of projects and the development, establishment and operation of the channels of communication between investors and developers. However, the Law prohibits PFPs from pursuing activities reserved for investment services firms or credit institutions.
- In order to operate, a PFP needs prior authorization and registration in a special register by the Spanish Securities & Exchange Commission (CNMV).
- To obtain and maintain authorization, certain requirements must be met through the exercise of their activity: have a registered office and administration office in the country or in another EU Member State, incorporate as a Capital Company and have adequate means to ensure security, confidentiality, reliability and service.
- PFPs must also meet certain financial requirements:
- Have a social capital, paid in cash, of at least 60,000 Euros
- Have professional liability insurance, a guarantee or an equivalent guarantee permitting liability for negligence in the exercise of their professional activity
- A third option would be a combination of initial capital and professional liability insurance, guarantee or equivalent guarantee at a level similar to the coverage of the above categories.
This article is not considered as legal advice