Update on crowdfunding in Latvia.

While crowdfunding is nothing new in Latvia and crowdfunding platforms are already widely used for fundraising in Baltics, in September of 2017 Latvia started work on a local Crowdfunding Law to ensure consumer and investor protection. The limits set in the local law draft are EUR 10,000 if an investor lends money to an individual, and EUR  100,000 if an investor lends money to an individual for the implementation of an announced project. This means that the draft of Crowdfunding Law does not set any funding limits for companies.

However Latvian Crowdfunding Law draft will most likely will be amended to be harmonized with European Law.

In March the European Commission (EC) released a Financial Technology (FinTech) action plan. One of the EC’s priorities is clear and consistent licensing requirements for new financial services – among them crowd and peer-to-peer activities for start-ups and scale-up companies.

Alongside the action plan the EC proposed a Regulation on European Crowdfunding Service Providers (Crowdfunding Regulation) which was open for feedback until 11 May 2018. A common issue detected from the received feedback was that the Crowdfunding Regulation does not apply to crowdfunding offers that exceed EUR 1 million in a 12-month period. This matter could be crucial to success, or failure, of the regime proposed in the Crowdfunding Regulation.

In order to succeed the regulation should take into account the value of projects that currently use crowdfunding as a fund-raising tool. As stated in the feedback, project owners would not be able to raise sufficient capital in order to move from a start-up into the expansion phase if the currently proposed threshold of EUR 1 million remained in the Crowdfunding Regulation. Also platforms which opt into the regime would be at a competitive disadvantage to platforms operating outside the regime. Therefore, a new regulation in the form it is now could discourage both investors and project owners from choosing crowdfunding as an alternative fund-raising option and this threshold could become the main reason for the Crowdfunding Regulation failure. A solution could be following the feedback suggesting to raise the threshold to EUR 8 million, which is the maximum threshold a Member State can set under Article 3(2)(b) of Regulation 2017/1129/EU.

Success of crowdfunding as a start-up financing tool in Latvia therefore will very much depend on the rules defined by the EU. If the limit is set to EUR 1 million, then most likely it will be used by start-ups. If the limit is set to more than EUR 1 million – then it will also be popular among companies looking for expansion that would otherwise need to fill out a lot of paperwork.

Another exciting aspect of the new regulation is the possibility that initial coin offerings (ICOs) that at the moment are not regulated in the EU could fall under this regulation. If that is the plan of the EC, then it is even more important to increase the threshold.

by

Team

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