Today, the Lithuanian Parliament adopted the Law on Crowdfunding (still to be signed by the president), which will contribute to FinTech industry development in the country.
The Law on Crowdfunding will come into force less than in one month (on 1st of December 2016), allowing business financing through debt and equity crowdfunding platforms.
Financing Cap via Crowdfunding Platforms
The Law on Crowdfunding does not establish limits to amount of finance raised through crowdfunding platforms. Nevertheless, the higher the financing that is sought, the more obligations that apply to project owners and the operator of the crowdfunding platform (“Operator”). For example, if the total sum of 12-month financing raised through a crowdfunding platform is:
(1) between €100,000 and €5 million, an information document about the project owner and the financial transactions must be made available to potential investors;
(2) €5 million or more, the investment can only be raised through a securities issue.
Moreover, the Law on Crowdfunding sets no investment cap, as the initially-proposed cap of €1,000 per investor within a 12-month period was rejected. However, the Operator is required to execute a suitability test before concluding the particular type of financial transaction for the first time to make sure the type of financial transaction is suitable for the investor. In any case the ultimate decision on the investment is to be made by the investor; the Operator only has an obligation to inform the investor about any risks associated with the respective investment. The suitability test requirement will not apply to informed investors.
Requirements Established for the Operator
An entity seeking to operate a crowdfunding platform must:
(1) have a registered office in Lithuania, unless it has a right to provide intermediation services by executing the freedom of establishment (registering a local branch office) or the freedom to provide services;
(2) comply with certain regulatory requirements established for the Operator (including, capital sufficiency, risk management, governance requirements); and
(3) register with the Bank of Lithuania (a process that will take up to 30 business days upon submission of all required documents).
In cases of investment-based financing, the Operator will be considered to be a financial advisory firm that can provide execution-only services and offer investment-only recommendations related to crowdfunding transactions. The crowdfunding platform operators will only be authorised to offer their services in Lithuania (no passporting). In cases when the crowdfunding platform operator wishes to offer investment services, other than those described above, it must apply for the full-investment firm licence, which can then be passported to other EEA member states.
Operator’s Risk Management
As general rule, to limit the business risk of the Operator:
(1) equity capital of the Operator must be not less than €40,000, or the required equity capital ratio must be equal to 0.2% of the outstanding investments raised on the crowdfunding platform (whichever is higher); or
(2) the Operator must have another type of security (civil liability insurance, guarantee or suretyship issued by a financial institution). The minimum amount of the security required is established by the Law on Crowdfunding.
In cases when the Operator provides other financial services, the capital requirements set for such activities must be adhered to.
With a speedy e-money (payment), institutions’ licensing process, and a helpful regulator (the Bank of Lithuania), the Law on Crowdfunding will inevitably foster the establishment of the FinTech companies in Lithuania.