Posted on Categories changes in law, crowdfunding

Amendment to the Public Offering Act: Removal of prospectus requirement an opportunity for crowdfunding

The high costs of preparing a prospectus and the required intermediation of an investment firm have discouraged many companies from raising financing through a public offering. Given the low threshold (EUR 100,000) for the value of a public offering requiring publication of a prospectus, the obligations connected with public offerings have also had a negative impact on other methods of financing such as crowdfunding. The new regulations are aimed at relaxing the national requirements by raising the threshold to EUR 1 million and adjusting other regulations to this change.

The amendment to Poland’s Public Offering Act entered into force on 21 April 2018. For crowdfunding, the key change is in Art. 7(4)(5) of the act, which now provides: “Publication of a prospectus is not required for a public offering as a result of which the anticipated gross proceeds of the issuer or seller in the territory of the European Union, based on the issue price or sale price of the securities from the date of determination of the price, are less than EUR 1,000,000, and together with the proceeds the issuer or seller intended to obtain under such public offerings of such securities carried out in the preceding 12 months do not reach or exceed that amount.”

Crowdfunding and public offerings

Crowdfunding is a varied phenomenon, defying a steadily growing number of attempted definitions. But it can at least be said with some certainty that crowdfunding is a method for financing a defined goal via a certain community (“crowd”) either directly or via a crowdfunding platform (more on crowdfunding here). There are many different models of crowdfunding, but the one most relevant for the Public Offering Act is the model based on equity crowdfunding.

Equity crowdfunding consists of investing in a venture, in exchange for which the investor receives units in the beneficiary company’s share capital.

Under Art. 3(1) of the Public Offering Act, if an offer to acquire securities is directed to at least 150 addressees, or to indeterminate addressees, it is a public offering. This means that for a company to raise financing through equity crowdfunding, it should first prepare a prospectus, obtain approval of the prospectus by the Polish Financial Supervision Authority, and retain a brokerage to act as an intermediary in conducting the offering. This is a particularly burdensome requirement for small issuers. The Public Offering Act previously exempted from this requirement only public offerings of low value, where the total proceeds did not exceed EUR 100,000. With entry into force of the new regulations, this threshold has been raised tenfold, which will undoubtedly increase the popularity of alternative methods of raising capital such as equity crowdfunding.

European Commission’s FinTech Action Plan

Apart from the changes in Polish law discussed above, regulations at the European level are also approaching which should have an equally beneficial impact on crowdfunding. On 8 March 2018 the Commission presented its FinTech Action Plan, as we reported here. One of the major elements of the strategy is to establish a friendly legal environment for creation of crowdfunding platforms bringing together small companies and amateur investors. This is to be achieved by the EU Regulation on investment-based and lending-based crowdfunding service providers (ECSP) for business, a draft of which is presented as an integral part of the FinTech Action Plan. Realisation of the plan should not only facilitate such activity by limiting certain rigorous requirements of European law (MiFID II), but also enable equity crowdfunding to be conducted across the EU on the basis of a special European passport.

Maciej Zalewski