Crowdfunding is a modern and increasingly established method of alternative fundraising, especially for startups and small and medium-sized enterprises. The essence of crowdfunding is to bring together investors (individuals and legal entities) who have free capital with businesses seeking to finance their activities. As the term ‘crowdfunding’ itself implies, crowdfunding generally involves a large number of investors in the financing of individual projects. This type of financing also allows access to finance for a group of entities that find it difficult or almost impossible to obtain bank financing.

The most common forms of crowdfunding

Crowdfunding can most commonly be divided into four basic categories:

• Donor crowdfunding: In this model, investors contribute money without expecting any reward. This type is often used to fund charitable and social projects.
• Reward crowdfunding: contributors receive some form of reward, which can be a physical product, service or other form of compensation. This model is popular among creative projects and startups.
• Investment crowdfunding: investors take a stake in a company or project to which they have contributed. This model is similar to the traditional investment process, where contributors expect a financial return.
• Loan crowdfunding: this model allows contributors to provide loans which are then repaid with interest. It is an alternative to traditional bank loans and microfinance.

Crowdfunding legislation

Crowdfunding legislation is harmonised across the European Union. The basic legislation governing crowdfunding is Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7. October 2020 on European crowdfunding service providers for business and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (the “Crowdfunding Regulation“), which has been applicable in the European Union since 10. November 2021.

Crowdfunding is further regulated by the Commission’s implementing and delegated regulations, which are a set of regulatory and implementing technical rules further regulating certain provisions of the Crowdfunding Regulation.

Finally, the European Securities and Markets Authority (” ESMA “) also provides interpretative opinions on the legal regulation of crowdfunding.ESMA“).

In particular, the Crowdfunding Regulation regulates:

• requirements for the provision of crowdfunding services,
• the organisation of providers of crowdfunding services, and
• the authorisation of providers of crowdfunding services, including the supervision of their activities.

Our partner Tomáš Demo also commented on the topic of crowdfunding regulation in the Investing show on TA3 television:

Crowdfunding actors and crowdfunding platform

In crowdfunding, three types of entities meet:

• crowdfunding service provider – is a legal entity authorised by the relevant regulator to manage or operate a so-called ‘crowdfunding service provider’. A crowdfunding platform through which supply and demand meet between project owners and investors,
• project owner – any legal or natural person seeking to raise capital to finance the performance of its activities through a crowdfunding platform; and
• investor – is any legal or natural person that provides financing to project owners through a crowdfunding platform.

As is also clear from the above, the key concept for the Crowdfunding Regulation is therefore the “crowdfunding platform”, which is defined as a publicly accessible online information system operated or managed by a crowdfunding service provider.1 The provision of crowdfunding is thus defined in the Crowdfunding Regulation exclusively as crowdfunding that is carried out in an online space.

Loan and investment crowdfunding

The Crowdfunding Regulation regulates two types of crowdfunding:

• loan crowdfunding, which facilitates loans from investors as lenders to project owners as borrowers, at an agreed interest rate; and
• investment crowdfunding, whereby transferable securities are placed through a crowdfunding platform and the so-called ” investment crowdfunding“, whereby transferable securities are placed through a crowdfunding platform and the so-called “investment crowdfunding“. The crowdfunding platform involves the placement of accepted instruments for crowdfunding purposes issued by project owners or special purpose vehicles and the acceptance and forwarding of investor instructions to acquire these transferable securities and so-called “securities”. accepted instruments for the purpose of crowdfunding.

Loan crowdfunding and investment crowdfunding are activities through which a crowdfunding platform matches the interests of investors and project owners for funding (crowdfunding services).

A loan under the Crowdfunding Regulation has the following characteristics:

• has a due date,
• the project owner’s commitment to repay the borrowed funds is unconditional,
• the loan is interest-bearing, and
• the project owner is obliged to repay the principal of the loan together with interest in accordance with the repayment schedule.

Investment crowdfunding involves the provision by the crowdfunding service provider of two investment services and activities defined in MiFID II[2]:

• Receiving and forwarding instructions, and
• Placement without firm commitment.

Both of the above services relate to transferable securities[3] and the so called. accepted instruments for the purposes of crowdfunding which are specific instruments defined and defined in the Crowdfunding Regulation. This defines them as ‘shares in a private company limited by guarantee which are not subject to restrictions which would effectively prevent their transfer, including restrictions on the manner in which such shares are offered or advertised to the public’. The National Bank of Slovakia (hereinafter referred to as “NBS“) states that it “does not consider shares in limited liability companies, limited partnerships, public partnerships or cooperatives to be such instruments.”[4] The list published by ESMA[5] also shows that there are no instruments that would qualify as accepted instruments for the purposes of crowdfunding in the Slovak Republic.

Authorisation to provide crowdfunding services

Only the following may provide crowdfunding services (i) legal persons which (ii) are established in the Union; and (iii) have been authorised to carry on activities under the Crowdfunding Regulation . Povolenie podľa prechádzajúcej vety udeľuje v Slovenskej republike NBS, a to po splnení podmienok stanovených v Nariadení o crowdfundingu.

A provider of crowdfunding services with an authorisation granted by the NBS may subsequently, after submitting the relevant notification, also provide crowdfunding services in other Member States of the European Union.

The basic conditions for obtaining a licence to provide crowdfunding services are that the following requirements are met in particular:

• Prudential (capital) requirements. Crowdfunding service providers must continuously comply with financial guarantees, which must amount to at least EUR 25 000 and to one quarter of the fixed overheads for the previous year, if the crowdfunding service provider also facilitates loans. The crowdfunding service provider may meet these requirements through its own resources, an insurance policy or a combination thereof.
• Staffing requirements. Persons responsible for the management of a crowdfunding service provider must demonstrate that they are of good repute and have sufficient knowledge, skills and experience to manage a crowdfunding service provider.
• Organizačno-technické požiadavky. Poskytovatelia služieb hromadného financovania musia vypracovať postupy a opisy systémov, ktorými sa bude riadiť ich činnosť, ako napríklad:
  • opis mechanizmov riadenia a vnútornej kontroly poskytovateľa služieb hromadného financovania na zabezpečenie súladu s Nariadením o crowdfundingu, vrátane riadenia rizík a účtovných postupov;    
  • a description of the systems, resources and procedures of the crowdfunding service provider to control and protect the data processing systems;
  • a description of the crowdfunding service provider’s internal rules to avoid conflicts of interest; and other.

Obligations of the provider of crowdfunding services

In accordance with the Crowdfunding Regulation, a crowdfunding service provider is obliged, inter alia, to:

• make an assessment in relation to the non-professional (retail) investor, in particular to assess whether the investment is suitable for them. To this end, the crowdfunding service provider shall assess the investor’s investment experience, investment objectives and understanding of the risks associated with the investment,
• provide potential investors with a Key Investment Information Document prepared by the project owner,
• publish annually the failure rate of projects offered through the crowdfunding platform; and
• advise investors that their investments are not covered by the Deposit Protection Fund or the Investment Guarantee Fund.

How long does it take to get a crowdfunding license?

Before actually applying for a licence (authorisation to provide crowdfunding services), the entire application must be thoroughly prepared. Depending on the specific business model and the range of services to be applied for, this pre-licensing process can take a couple of months.

In the case of an application for authorisation to provide crowdfunding services, the NBS is obliged to assess whether the application is complete within 25 working days of receipt of such an application. If the application is not complete, the NBS shall set a deadline by which the application must be completed.

Only upon receipt of a complete application is there a time limit of 3 months to assess whether the applicant meets the conditions set out in the Crowdfunding Regulation and to decide whether to grant or refuse the application.

For whom does it make sense to apply for a crowdfunding license?

The crowdfunding platform’s revenue comes from the fees of its users. The crowdfunding service provider does not directly lend its funds or act as an issuer of securities. Therefore, when considering setting up a crowdfunding platform, it is necessary to consider, among other things:

• Whether the entrepreneur wants to manage the funds himself on his own behalf and on behalf of investors,
• Whether the entrepreneur is interested in collective or individual portfolio management,
• Whether the entrepreneur wants to enter directly into the investment or is content to act as an intermediary, and
• What resources does the entrepreneur have and how is their financial plan built.

At the same time, it is always necessary to comprehensively compare and assess other available regulated structures, not only from a legal but also from a tax perspective, with the relevant adviser dealing with the issue. Only after such an assessment (feasibility study) can it be evaluated whether a crowdfunding licence is a suitable solution for a particular business model.

Crowdfunding vs. peer-to-peer (P2P) lending

Crowdfunding and peer-to-peer (P2P) lending share a similar goal – financing projects or needs of individuals and businesses through online platforms. However, there are important differences between them in terms of the legal framework.

In P2P lending, individuals most often borrow funds from other individuals, while such a model is not legally regulated in Slovakia, neither by the Regulation on Crowdfunding, nor is it subject to consumer credit regulation. However, the regulation of P2P lending may be different in other Member States.

A common feature of P2P lending and crowdfunding is the existence of a platform that, in the role of intermediary, links the interests of investors (lenders) on the one hand and borrowers on the other, with these two groups entering into direct contractual relationships.

How can Highgate help you with crowdfunding?

If you are interested in providing crowdfunding services under the Crowdfunding Regulation, we at Highgate can help:

• assess your business plan and its compliance with relevant legislation, including tax analysis,
• prepare an application for authorisation to provide crowdfunding services, including the necessary by-laws and other annexes,
• to provide comprehensive representation throughout the licensing procedure before the NBS, up to the actual granting of the licence.

Highgate has a long-standing interest in financial regulation and capital markets, an area in which crowdfunding regulation clearly falls. Our expertise in this area is evidenced by our recent success in the prestigious Law Firm of the Year 2024 competition, in which Highgate, in addition to winning the Tax Law category, also won the Capital Markets category.

If you have any questions about the legal regulation of crowdfunding, please do not hesitate to contact our experts:

• Peter Varga, e-mail: peter.varga@hg.amcef.com
• Roman Baranec, e-mail: roman.baranec@hg.amcef.com

Alternatively, you can discuss your specific questions with our partner Peter Varga, who specialises in financial regulation and tax law. Book a consultation here:

[1] Art. 2 par. 1 lit. (d) Crowdfunding Regulations.

[2] Directive 2014/65/EU of the European Parliament and of the Council of 15. 2014 on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II“).

[3] Transferable securities as defined in Article 4(1)(a) of Directive 2009/65/EC shall not be transferable securities as defined in Article 4(2) of Directive 2009/65/EC. 1(44) of MiFID II.

[4] Cited on the NBS website here: https://nbs.sk/dohlad-nad-financnym-trhom/dohlad/trh-cennych-papierov/crowdfunding/ (cited on 13.7.2024).

[5] Available online here: https://www.esma.europa.eu/sites/default/files/library/esma35-42-1305_crowdfunding_tables.pdf (cited on 13.7.2024).

Článok Crowdfunding or crowd funding je zobrazený ako prvý na Highgate.

In addition, Highgate Law & Tax is also celebrating its win in the “Capital Markets” category, proving itself to be a comprehensive law firm with an extensive portfolio of expertise and the ability to successfully navigate diverse legal challenges.

The awards gala evening, which was organized by the media and educational group EPRAVO Group and the weekly TREND, was held at the Double Tree by Hilton hotel in Bratislava. For Highgate Law & Tax it was not only an opportunity to celebrate its success, but also to thank its clients and partners for their trust and support, without which this milestone would not have been possible.

This double triumph confirms Highgate Law & Tax’s excellent reputation for legal and tax services and reinforces its position as a leading player in the legal services market in Slovakia.

Článok Highgate Law & Tax and its double triumph in the prestigious Law Firm of the Year competition je zobrazený ako prvý na Highgate.

Several such digital platforms have been operating in Slovakia for a long time. Some of them operate on a charitable basis (donations), others on a reward and pre-sale basis (priority access to the product) and others on an investment (share or loan) basis. In our consulting practice, we mainly deal with crowdinvesting – a type of collective financing (crowdfunding), which enables startups and smaller start-up companies, for which bank financing is not yet available, to obtain external financing.

Until recently, the area of collective financing lacked systematic regulation. However, as of November 2023, the so-called “collective collective bargaining scheme” has ended. The transitional period for the provision of crowdfunding services under national law has now ended. From 11. 11. 2023, the provision of crowdfunding services in Slovakia is now also subject to authorisation by the National Bank of Slovakia. At Highgate Law & Tax, we provide comprehensive advice to clients on crowdfunding, including representing our clients in licensing proceedings before the National Bank of Slovakia.

Our partner Tomáš Demo commented on the topic of crowdfunding regulation in more detail in the Investing show on TA3 television. You can watch the full video here: https://www.ta3.com/relacia/929027/crowdfundingove-poziciavanie-penazi

Článok Tomáš Demo on regulation of crowdfunding in Investujeme on TA3 je zobrazený ako prvý na Highgate.

We perceived that this conference can help many entrepreneurs to navigate through the challenging tangle of Slovak and foreign tax and legal issues. A number of interesting findings and insights were also provided by Highgate Group’s internal surveys, which were presented at the Real Estate Conference, but were also further published through Hospodárske noviny.

If you are interested in this topic, please do not hesitate to contact us.

Článok Conference on Real Estate – Taxes and Financing je zobrazený ako prvý na Highgate.

For those who did not attend the conference, this article provides a brief overview of the topics we covered. At the same time, if you would like to watch the whole conference, or just some parts of it, we have video recordings of the conference available for you, which can be found at this link.

What types of investment funds do we know in Slovakia?

We opened the conference with a comprehensive discussion of different types of investment funds. When setting up a structure through investment funds, a number of factors have to be taken into account, hence their division mainly according to:

• investment policy;
• legal form;
• passport options;
• taxability of income;
• application of VAT on management fees;
• the type of investor to whom the investment fund may be distributed;
• the type of offer; or
• whether a permit is required for its establishment and operation.

At the same time, not all types of investment funds are suitable or possible to use for real estate financing, and those that may have real estate in their portfolio consequently differ significantly in their specific parameters. Therefore, an initial comprehensive regulatory, legal and tax assessment of the above factors is crucial in the creation and establishment of investment funds.

What are the rules for distributing a retail investment fund? Slovak SICAV?

The first panel was devoted to the so-called. Small investment funds. These are investment funds whose managers are limited by the maximum amount of assets they can manage. On the other hand, these investment funds are subject to very limited application of collective investment legislation, do not have a statutory investment policy (so they can invest in real estate) and are primarily aimed at professional investors and, to a limited extent, qualified investors.

The following factors play a key role in the distribution of small investment funds that invest in real estate:

• identification and assessment of the professional investor;
• taking into account the criteria of a professional investor with regard to the investment policy of the fund;
• limits for qualified investors in terms of their number, their share of the fund’s assets and their share of the assets managed by the manager;
• the distribution channels through which qualified investors may be approached; and
• restrictions on the promotion of such funds.

Small investment funds can be set up as a variety of companies or cooperatives. At the same time, only an investment fund can take the legal form of a company limited by shares with a variable share capital (SICAV). This is a flexible legal form which is adapted to the needs of collective investment. Only a small investment fund set up as a SICAV can create sub-funds as accountably separate parts of the assets with different investment strategies.

Where is the collective investment frontier? When do I need the fund?

The second panel focused on various alternative forms of raising capital from investors and investing in foreign real estate. The first topic was defining the boundaries of collective investment, i.e. answering when a particular business model constitutes a fund and when it is a legal structure without any permission from the NBS. When analysing a particular business model from a collective investment perspective, it is necessary to assess whether this business model:

• cumulatively fulfils all the statutory characteristics of collective investment;
• meets the characteristics of one of the collective investment exemptions, e.g. it is a joint venture (JV) or a holding entity;
• there are other indications that are a prerequisite for a business model to be a fund or not.

Crowdfunding and bond financing

Crowdunfing is a relatively still new regulation that makes it possible to connect investors on the one hand and entrepreneurs seeking funding for their projects on the other. The Crowdfunding Regulation aims to facilitate financing, especially for small and medium-sized enterprises, for which, for example, bond financing with a prospectus may be too costly. At the same time, crowdfunding platforms, as online platforms, are widely accessible to a large range of investors, including retail, and thus allow project owners to find funding, either through loans or by placing the securities they issue on that platform.

Thus, for example, a crowdfunding platform allows a developer to issue bonds (only up to a certain amount) in order to build a specific development project. Bonds can of course also be offered outside the crowdfunding platform, while the issuance of bonds represents a standard traditional method of financing, which is widely used in Slovakia and by developers. The legal regulation of bond issues is very flexible, which gives issuers a lot of room to set the individual parameters of the bonds according to their needs, starting with the way of calculating the yield, setting the rules for early maturity of the issue, the period during which the bonds will be issued, or their subordination to bank financing. At the same time, when financing real estate through bonds, an interesting institute is the security agent, in whose favour, as an agent of the bondholders, the bonds can be secured by the real estate.

How is it possible to invest in foreign real estate?

Acquiring real estate outside the Slovak Republic can be an interesting investment opportunity. For investment structures that allow Slovak investors to make such investments, taxes are one of the most crucial parameters. Setting up the structure in such a way that it can be competitive for investors with other “domestic” investment products is a very complex matter, taking into account in particular the existing risk of double taxation.

European Investment Funds EuVECA and ELTIF

The third panel, which also included two panelists from Slovak asset management companies, was devoted to larger investment funds, i.e. funds whose establishment and operation in Slovakia requires the permission of the NBS. The venture capital fund or “EuVECA” is primarily intended for investments in the so-called “EuVECA”. However, with a relatively broadly defined investment policy, it is possible under certain circumstances for such a fund to invest, for example, in companies owning real estate. While such a fund can also be established by a registered manager, in order to use the EuVECA designation, a number of requirements that are normally required (of course to a greater extent) for licensed management companies must be met, such as qualification requirements for persons managing venture capital funds, prudential requirements for the manager, and a number of internal policies. Not forgetting the correct tax set-up.

EuVECA and ELTIFs have the advantage that they can be distributed across the EU to a wider range of investors than other AIFMD alternative investment funds. ELTIF is also the only alternative investment fund that can be offered to retailers across the European Union. The investment policy of this fund is primarily focused on investments in long-term assets (including real estate). Although ELTIF is a closed-end fund, under certain conditions investors may be allowed to redemption before the life of the fund expires.

Qualified investor fund, real estate fund and alternative investment fund

Typical investment funds used by Slovak asset management companies to invest in real estate (and which they also refer to as “real estate funds“) are qualified investor funds, which do not have a statutory investment policy, and then public special real estate funds, which can invest directly in real estate or in so-called “real estate funds”. They can also invest in real estate, in particular in real estate companies, and have to follow rules for limiting and spreading the risk in their portfolio. If certain criteria are met, it is also possible to acquire a commercial company that may own real estate as part of the assets of a public special alternative investment fund. Both real estate funds and alternative investment funds can be offered in Slovakia and to the retail sector without a minimum investment amount limitation.

Why investment funds are set up abroad?

The fourth panel was devoted to foreign funds whose securities or holdings can be offered to Slovak investors. There are various motivations for the decision not to set up an investment fund that will be offered (to a large extent) to Slovak investors, ranging from the stability of the legal environment, the variability of structures that do not exist in Slovakia, for example, but also for reasons of a more robust infrastructure (many Slovak entrepreneurs set up, for example, SICAVs in the Czech Republic, which are managed by “external” management companies).

A big challenge for Slovak investors in setting up investment funds abroad (also) is their tax structuring. Adding to the complexity of this issue are the various legal and tax-transparent structures that need to be dealt with when disbursing income to Slovakia.

In terms of distribution, foreign alternative investment funds (including non-European alternative investment funds) can be offered in Slovakia to all types of investors, but the individual conditions for achieving such distribution will vary depending primarily on:

• where the management company that wants to distribute the fund is based;
• where the Fund is established;
• whether the securities or holdings of such a fund should be offered only to professional investors or also to retail investors.

Acquisition financing

In the fifth and final panel, we addressed the topic of acquisition financing. In a broader sense, financing includes not only bank financing, but also the use of own funds, which have several specificities and limitations, and, for example, various alternative forms of foreign financing.

At the same time, different types of financing can be combined, in which case the potential regulatory aspects of such combinations also need to be considered.

Slovak law brings several specifics, resp. Legal restrictions related to the provision and subsequent repayment of own financing. This not only implies high demands for creative structuring of acquisition transactions using own funds, but also places on the statutory bodies the burden of responsibility for compliance with these rules and a common obligation to compensate for damages in the event of their breach. In particular, the following institutes serve to protect the company’s capital and its shareholders and creditors against transactions between the company and its related parties which are not market-standard:

• prohibition on the return of deposits;
• a society in crisis;
• financial assistance.

If you are interested in the above topics and would like to learn more about them, you can find video recordings of the individual conference panels right here:

If you are interested in this topic, please do not hesitate to contact us.

Článok Real Estate – Taxes and Financing Conference (Unique conference on fund and tax structures, crowdfunding, bonds, bank financing, etc.) je zobrazený ako prvý na Highgate.