The legislative situation of crowdfunding in Spain: the “Promotion of Corporate Financing” law

Now that I’ve finally had some time, and after reading several posts and news about the subject (some more apocalyptic than others), I have read carefully the draft of the “Promotion of Corporate Financing” law, in which we can find, in section five, the regulation of the equity-based and lending-based crowdfunding. The truth is that it is easy to read, so I recommend anyone interested in the topic to read it to know things first hand.

First I must say that this regulation is a good new. Other thing is if the regulation is being done in the right direction. The fact that the government recognizes that crowdfunding is a reality that must be regulated is something that I was waiting for months. I believe this is a first step.

Why is good the new regulation of crowdfunding

First, and as many people have already mentioned, the draft has as positive point  the protection of the investors:

• They should be informed of the risks associated with their investments (Art. 51.B, Art. 71). Do not forget that “crowdfunding” is the new buzzword and there is always people who thinks it’s the goose that lays golden eggs.
• They should be informed about the associated taxes, fees, etc. (Art. 51.f, Art. 65.2, Art. 68.2-d,…)

Moreover, the regulation of crowdfunding platforms is also a good new:

• Any platform have a number of requirements to be met in order to be constituted ​​(Art. 55 and 56). Thus the creation of low quality platforms, with 2-3 projects impossible to finance in the markup term is avoided. This will alleviate, almost a little, the saturated offer of equity-based crowdfunding platforms (in the case of crowdlending platforms there is no saturation).
• The platforms have a number of obligations with the investors (as noted above)

I’m not saying that crowdfunding platforms do not meet the foregoing (no doubt many do), but it is good these features not to be an option but an obligation.

Where crowdfunding regulation fails

Most criticism received are about the economic limits imposed:

• € 3,000 is the amount that a person can, at most, invest in a project (Art. 70th)
• € 6,000 is the amount that a person can, over a year, invest in projects of a particular platform (assuming the previous limit) (Art. 70.b)
• € 1,000,000 is the maximum amount that a project of this type can get from the crowd (Art. 45.2)

The limit of the contributions is clearly too low. One thing is the reward-based crowdfunding, where these limits would be adjusted smoothly. Most projects allow contributions of up to 1000 €. These are the projects in which almost anyone can participate (even giving 5€).

But another thing is the equity-based crowdfunding. Engaging in this type of crowdfunding is to play in a different league. This type of crowdfunding is oriented to a less numerous crowd: it’s oriented to potential investors, with or without experience, that have funds that allow high level inputs.

In this case, to fund a company using participations of 3,000 € has two problems: it is much more difficult to get the money needed and, if the amount required is achieved, it would imply regular communication with really big number of new “shareholders.”

A curious fact: these limits of 3,000 € and 6,000 € are within a heading entitled “Investor Protection”.

Here we must ask a question: why government has imposed these limits? What is the reason? I assume it’s not because ignorance. And personally, I do not think a conspiracy in favor of banks and other credit institutions to be the correct answer. In this aspect, some communication from the government would be needed.

Furthermore, it has been strange to me that few people have commented on the sanctions of up to 200,000 € which can be imposed on the platforms for advertising projects (Art. 77.1-a). This practice is done routinely by the equity and lending platforms and it’s a little help for those seeking funding.

Finally: this draft does not regulate all crowdfunding

It’s important to highlight that the draft prepared by the government only affects to equity-based and lending-based crowdfunding, but not to the other two crowdfunding types (Art. 47). From my point of view, it is desirable to have a global perspective of the crowdfunding legislative situation in Spain.

Donation-based and rewards-based crowdfunding are legislated by laws which were developed a long time ago, when the crowdfunding was unthinkable. These types of crowdfunding work, and work relatively well, but they could be improved. From my point of view, it would be advisable to study in depth how these laws affect to these types of crowdfunding in order to propose modifications to streamline and enhance crowdfunding (the reward-based and donation-based types).