I. Introduction
Crowdfunding is a new, alternative form of raising finance for entrepreneurs, involving the mobilization of groups of small investors via online platforms. This financing model spreads risk, enables the implementation of innovative projects, and democratizes investment by enabling individuals to support important initiatives.
The emergence and development of crowdfunding creates the potential to transform the structure and mechanisms of capital raising, primarily for small and medium-sized enterprises, including startups. This is particularly valuable in times of financial crises that hinder access to financing.
Traditional sources of financing, offered primarily by banks, can make financing difficult, especially for small businesses, as such enterprises may lack assets to serve as collateral. This lack of collateral increases the risk for banks in the event of borrower default.
Rapid technological advancements are driving the development of crowdfunding and the digital infrastructure that supports it. Access to capital through crowdfunding allows companies to invest, particularly in research and development, hire qualified personnel, and acquire the necessary resources for innovation.
II. The Nature of Crowdfunding
By leveraging the potential of the internet, crowdfunding allows individuals to connect with potential funders and raise capital for various projects, often in relatively small amounts. This democratization of financing has created new opportunities for economic development.
Crowdfunding differs from traditional financing methods in that it is based on simpler agreements, requires less information and documentation, and, despite involving a larger number of investors, has significantly shortened the fundraising process.
This innovative approach to financing allows individual founders of for-profit projects to raise funds from a wide range of individuals, typically in exchange for future products or shares.
Funding can also take the form of donations or be exchanged for incentives and/or voting rights to support specific social initiatives and projects.
Broadly speaking, crowdfunding can be divided into the following categories: equity (investment) model, loan model, reward model, and donation model.
- In the first (investment) crowdfunding model (also called equity crowdfunding), the investor in a given project receives a return in the form of shares, for example.
- Crowdlending is a type of financing in which an investor provides a loan to the project owner to implement it.
- Rewards-based crowdfunding, also known as reward-based crowdfunding, is a crowdfunding model in which donors contribute funds to a project and receive a reward or non-monetary benefits in return.
- Donation-based crowdfunding is a crowdfunding method in which donors contribute money to a charitable, social, or passion project without expecting a return or financial reward. It is the simplest and fastest-growing form of financing, focusing on support rather than investment.
III. Legal Provisions
1. EU and National Regulations
Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European Crowdfunding Service Providers (“ESCPs”) established a single framework for investment- and lending-based crowdfunding across the European Union from 11 November 2023. Poland adopted the Act on Crowdfunding for Businesses and Assistance to Borrowers on 7 July 2022. Most of the provisions entered into force on 29 July 2022, with some obligations deferred until 10 November 2023. Donation- and premium-based crowdfunding models are not covered by the aforementioned Regulation.
2. Licensing Requirements for Crowdfunding Service Providers
Operating in the form of investment- and lending-based crowdfunding requires obtaining appropriate authorizations. This is regulated by Article 12(1) of the Regulation. 1 of the European Crowdfunding Regulation (ECSP), which requires legal entities wishing to provide crowdfunding services to submit an application for authorization to conduct crowdfunding activities to the competent authority of the EU Member State in which they are established. In Poland, this will be the Polish Financial Supervision Authority, which also supervises crowdfunding platforms, which must meet a number of requirements, including risk management, due diligence, security, etc.
3. Requirements for Project Owners and Financial Limits
Crowdfunding must be dedicated to a specific project, and the project owner is required to prepare a Key Investment Information Sheet (KIIS), which is a simplified version of the prospectus. It must be clear and precise, informing investors, typically entrepreneurs, about the security of the invested capital. The ECSP Regulation specifies the maximum amount that can be raised from a single project within 12 months without the need to publish a full prospectus. This limit is currently €5 million.
IV. Summary
Crowdfunding offers an alternative to traditional financing, particularly for companies that struggle to meet stringent credit requirements. This can foster innovation and entrepreneurship.
By mobilizing a large group of donors investing smaller amounts, crowdfunding effectively spreads financial risk. This risk-sharing approach makes it more profitable to pursue innovative projects that might otherwise be deemed too risky for individual investors or lenders. Furthermore, crowdfunding can enable individuals to invest in projects they believe in, potentially leading to greater diversity in funding sources and more equitable access to capital. Crowdfunding can also support the development of innovative solutions to social and environmental challenges.
