Crowdfunding in Russia
The new way of investments in the digital economy.
On January 1, 2020, a new Federal Law No. 259-FZ (dated August 2, 2019) 'On the attraction of investments with the use of the investment platforms...' has come into force in Russia. This legislative act has already been named as 'the Law on crowdfunding' (hereinafter – the Law).
Enactment of the Law has been one of the most expected legislative acts in 2019 in Russia, along with the law 'On digital financial assets' which has not been finally adopted (and which is supposed to provide a legal framework for the use of cryptocurrency in Russia).
Here are the key provisions of the new Law:
Investment (crowdfunding) platform
The Law regulates the new method of investments by means of the electronic investment platforms – internet platforms connecting the investors and the investees – people or companies willing to invest or attract investments.
Before 2020, there have already been such investment platforms in Russia. However, until January 1, 2020, their activity has not been regulated by any special legislative rules.
With the new Law, the investment platforms and their operators will be subject to a number of mandatory requirements, namely:
- only a Russian company (limited liability company or a joint-stock company) may be the operator of an investment platform;
- in order to become an operator of the investment platform, a company needs to be registered in a special register of the Central Bank of Russia;
- the terms of service of the investment platform are to be visibly placed at the internet site of the investment platform, as well as certain information about the platform's operator (such as a company name, list of the beneficial owners, financial reports and other information (Art. 15 of the Law);
- beneficial owners, controlling persons and management bodies of the operator company of the investment platform are to comply with a number of requirements. There are few of those, for instance, only an individual having higher education (a university degree) may be the sole executive body of the platform's operator (Art. 10 of the Law).
Investors and investees
The Law enables only B2B and C2B investments through the investment platforms. In other words, only Russian companies and sole proprietors may be investees, i.e. attract investments with the use of the investment platforms; although investors may be both companies and private individuals.
The investees are also subject to some additional requirements. For example, companies and individuals which appear in a federal list of persons involved in extremism or terrorism (Art. 14 of the Law) may not be investees under the Law.
Means of investment
The Law provides for the following three methods of investment through the investment platform:
- granting of a loan (P2P lending, see below);
- acquisition of issued securities (including equity securities, i.e., equity crowdfunding);
- acquisition of utility digital rights (utility tokens).
Unfortunately, the Law does not enable investment by means of the purchase of participation in limited liability companies (through acquiring a certain percentage of ownership in the company), which puts a very tangible limit on the range of companies attracting investments in exchange to the share in business (the so-called crowdinvesting or equity crowdfunding). Moreover, the investment by means of acquisition of issued securities is available only through the private placement.
Investment in utility digital rights entails the purchase of the following digital rights by the investor (digital right is defined in Art. 141.1 of the Civil Code of the Russian Federation):
- right to claim the transfer of property;
- right to claim the transfer of intellectual property rights or licenses in the intellectual property;
- right to claim the provision of certain service or work.
Utility digital rights may be considered as an analogue of utility tokens which are commonly used by companies around the world to attract investments without providing a share in a business. However, the notion of 'token' is not used in the Law and is expected yet to be adopted by the law 'On digital financial assets'.
The Law also does not provide for investments by way of the cryptocurrency purchase. The legal status of the cryptocurrencies in Russia is still uncertain since the law 'On digital financial assets' is still pending in the State Duma.
Investment through a crowdfunding platform involves several stages:
1. The platform operator and the investor enter into a service contract for the attraction of investments, and the operator and the investee enter into a service contract for the assistance in investment. Both contracts are concluded in electronic form, with the use of the internet site of the platform (by means of acceptance of the terms of service of the platform or in other similar form).
2. The investee places an investment offer at the platform containing all the relevant terms of investment and the following mandatory information:
- validity period of offer;
- minimum amount of investments for the investment contract to be concluded;
- maximum amount of investments, at which level the investment offer seizes to be effective.
3. The investor accepts the investment offer with the use of the technical means of the platform and transfers funds to the investee (with the use of the special escrow account of the platform operator).
The platform operator shall keep a register of contracts entered into at the platform and ensure the safekeeping of the data in the register and provision of the data from the register upon the requests of the parties.
Limitations on the amount of investments
As a general rule, the maximum amount of investments that may be attracted by one investee within one calendar year is RUB 1 billion (Art.6(1) of the Law). That is the total maximum amount of investments to be attracted by one person at any investment platforms within a year.
There is also a limitation for investors who are private individuals. In general, individuals may invest no more than RUB 600,000 within one calendar year (this amount includes investments made at any investment platforms within a year). This rule does not apply to the individuals who are the qualified investors and the individuals officially registered as entrepreneurs.
The platform operator ensures compliance with the aforementioned rules. However, it is quite unclear how the operator is to control the investors' and investees' compliance with the provisions, considering that the maximum amounts include the investments made or raised with the use of all investment platforms within a year. According to Art.7(4) of the Law, with respect to the individuals the operator is supposed to performs such control through collection of declarations from the investors regarding their compliance with the limitation.
The new Law came into force from January 1, 2020. As of that date, the new companies starting crowdfunding business must comply with the Law.
As for the crowdfunding platforms which are already active, the operators have an extra period to get aligned with the new rules – till July 1, 2020.
We believe that the adoption of the new Law will be useful to encourage further growth of the digital financial institutions and technologies in Russia. However, the Law would have been much more effective and have a wider practical sphere of application if it chose less conservative approach to the means of investments. It would also be more helpful if the Law were not an isolated piece of legislation, but if it were adopted in a set of other expected legislative regulations regarding cryptocurrency and general rules for ICOs. Hopefully, these relevant additional laws are soon to come as well.