On 10 November 2023, Article 48 of the Crowdfunding for Business Ventures and Borrowers Assistance Act will come into force. From then on, limited liability companies will no longer be able to use equity crowdfunding, which was previously available without restrictions. Let’s look at what changes businesses can expect in the Commercial Companies Code (KSH) with regard to crowdfunding.
Equity crowdfunding in limited liability companies
One form of crowdfunding is equity crowdfunding. An entrepreneur, in exchange for shares in the limited company they run, raises a certain amount of money from private investors in a public offering. This allows them to carry out specific projects and the backers become owners of a certain number of shares in the company they are backing.
Typically, these funds are raised through online crowdfunding platforms that are open to an unlimited number of private investors.
Prohibitions on equity crowdfunding in the amendments to the Commercial Companies Code
The amendments to the KSH prohibit shareholders of limited liability companies from offering:
- the acquisition of existing shares (Article 1821 of the KSH)
- subscriptions of newly created shares (Article 2571 of the KSH)
Most importantly, the regulations also prohibit the promotion of the acquisition and subscription of shares in a limited liability company.
Entrepreneurs are therefore not permitted to actively advertise or carry out other activities aimed at encouraging investors to financially support the planned project, such as organising events to promote start-ups or business breakfasts.
Investment crowdfunding – criminal consequences for offering to acquire both new and existing shares in a limited liability company and for violating the advertising ban
In accordance with the new Articles 5951 and 5952 of the KSH, anyone failing to comply with the above prohibitions is liable to a fine, a community sentence or imprisonment for up to six months. It is clear that the legislator has adopted a rather strict approach in this respect. Indeed, the list of sanctions includes not only fines but also community sentences and imprisonment.
Limited liability companies still able to issue bonds and borrow money
It’s worth noting that despite the introduction of the bans, entrepreneurs operating as limited liability companies will still be able to raise funds for projects by issuing bonds or taking out loans using crowdfunding.
No provision of the Commercial Companies Code prohibits such activities, nor will it do so in the near future. The legislator deliberately left a certain loophole in this respect in order not to deprive entrepreneurs of the possibility of obtaining external financing.
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