Keys to Crowdfunding Success: A Guide for Startups

Applicable Regulations in Spain and the European Union

1 Crowdfunding Law in Spain:

Crowdfunding law in Spain is mainly regulated by Law 5/2015, of 27 April, on the Promotion of Entrepreneurial Financing, which was designed to regulate participatory financing platforms (crowdfunding) and establish a legal framework for the protection of investors. This law has marked a turning point in the way crowdfunding activities are carried out in Spain, providing clarity and security for both project promoters and investors. The main lines of this law include:

1. Definition and Scope: the law defines participatory financing platforms as those which, by means of electronic and telematic procedures, bring into contact, in a professional manner, a plurality of natural or legal persons who offer financing in exchange for a monetary return, called investors, with natural or legal persons who request financing in their own name in order to allocate it to a participatory financing project.
2. Authorisation and Registration: It establishes that crowdfunding platforms must obtain authorisation from the National Securities Market Commission (CNMV) and the Bank of Spain (depending on the type of financing offered) and be registered in a special register. This ensures that they operate under strict transparency and solvency rules.
3. Investor Protection: Introduces measures to protect investors, such as limitations on the amount that non-accredited investors can invest in crowdfunding projects in a given period, and obliges platforms to assess the suitability of products for investors.
4. Limits on Fundraising: For crowdfunding projects, limits are set on fundraising, which cannot exceed EUR 2 million (or EUR 5 million if the investors are all accredited), thus limiting the risk for investors and for the financial system in general.
5. Disclosure Obligations: Platforms must provide investors with detailed and transparent information about crowdfunding projects, including associated risks, costs and charges, as well as information about the project itself and the project promoter.
6. Marketing Communications: Marketing and promotional communications are regulated to ensure that they are not misleading and that they provide clear and unbiased information about the risks and benefits of investment.
7. Operational and Conduct Requirements: Platforms must comply with specific operational and conduct requirements, including managing conflicts of interest and implementing risk policies.

2. European Crowdfunding Regulation (ECSPR):

The European Crowdfunding Regulation, officially known as the European Crowdfunding Service Providers Regulation (ECSPR), is a legal framework designed to regulate crowdfunding platforms within the European Union. This regulation seeks to harmonise crowdfunding practices across member states, thereby facilitating cross-border access to crowdfunding and increasing investor protection. The broad outlines of the ECSPR include:

1. Scope: it applies to crowdfunding platforms offering participatory financing services in the form of loans or equity investments up to a threshold of €5 million raised per project over a 12-month period.
2. Authorisation and Supervision: Crowdfunding platforms must obtain an authorisation from the competent national authority of their member state to operate in the EU. In addition, they are subject to supervision by these authorities to ensure ongoing compliance with the regulation.
3. Cross-border operations: The regulation facilitates cross-border operations by allowing authorised platforms to offer their services throughout the EU without the need for additional authorisations in each member state, using a “European passport”.
4. Investor Protection: Measures are put in place to protect investors, including the obligation for platforms to provide clear and comprehensible information on the risks, costs and charges associated with investments. In addition, platforms are required to assess the suitability of products offered to non-professional investors.
5. Risk Management and Conflicts of Interest: Platforms must implement adequate policies and procedures for risk management and the identification, prevention and management of conflicts of interest.
6. Transparency and Marketing Communications: The regulation requires crowdfunding platforms to ensure transparency in all their operations and marketing communications, including the provision of detailed information on the terms of funding offers and funded projects.
7. Complaints and Dispute Resolution: Platforms should establish effective and accessible procedures for the submission of complaints by clients and, where possible, out-of-court dispute resolution procedures.

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How to get funding for your startup

Financing is one of the main challenges facing entrepreneurs. Without capital, it is difficult to develop a business and achieve success.

Forms of Participatory Finance in Spain.

1. Crowdfunding of Donations: This type does not offer financial return to investors. Contributors donate money to projects with which they sympathise, often for social, cultural or personal purposes, without expecting to receive financial compensation in return.
2. Reward Crowdfunding: In this model, investors provide capital in exchange for products, services or non-financial benefits. It is common in creative, technological or product development projects, where rewards vary according to the amount of the contribution.
3. Crowdlending or Crowdfunding Lending: Here, investors lend money to companies or individuals in exchange for interest. The borrower agrees to repay the capital together with interest within an agreed period of time. This model is especially useful for SMEs and the self-employed who are looking for alternative financing to banks.
4. Investment Crowdfunding or Equity Crowdfunding: Investors provide capital to a company in exchange for a stake in the share capital. This type of financing is attractive for start-ups and growing companies that are looking for capital and, at the same time, want to incorporate their investors as partners.
5. Real Estate Crowdfunding: This is a variant of investment crowdfunding focused specifically on the real estate sector. Investors provide capital to finance real estate development projects, rehabilitation or purchase of properties, expecting to obtain returns from the future rental or sale of these assets.

What requirements or essential elements should a startup’s contract with a crowdfunding platform contain?

• Identification of the Parties: It must include the full identification of the crowdfunding platform and the project or startup promoter, including their contact details and, if applicable, their legal registration information.
• Purpose of the Contract: Clear description of the purpose of the contract, specifying that it is a relationship for the implementation of a crowdfunding campaign, including the specific type (donation, reward, loan, investment, real estate).
• Project Description: Full details of the project or start-up seeking funding, including objectives, business plan, intended use of funds raised and any other details relevant to potential investors.
• Financial Terms: Detailed terms of the funding, including fundraising target, terms, platform fees, interest rates (in case of crowdlending), equity participation (in case of equity crowdfunding), and any other relevant financial aspects.

• • Financial conditions to be regulated:
    • Funding Target: Clearly define how much capital you need to raise and make sure that the target is realistic and achievable. Consider project costs, future operating expenses, and any other related expenses.
    • Platform Fees: Crowdfunding platforms typically charge a fee on funds raised. These fees vary between platforms and can have a significant impact on the net amount received by the startup. Make sure you fully understand the fee structure before launching the campaign.
    • Funding Model: Evaluate which crowdfunding model best suits your startup (donations, rewards, loan, equity, or real estate). Each model has different financial implications, from repayment of loans with interest to dilution of ownership for founders.
    • Funding and Payment Timelines: Understand the timelines of the campaign and when you can expect to receive funds upon completion. Some platforms may withhold funds until certain conditions are met, or may release funds in tranches.
    • Rewards and Obligations: If you choose the rewards model, carefully consider the cost of producing and shipping the rewards. These costs should be taken into account when setting your funding target.
    • Terms of Use of Funds: Some crowdfunding platforms or models may require you to specify how the funds raised will be used. It is important that these terms align with your business plans and are clearly communicated to investors.
    • Tax implications: Consult with a tax advisor to understand the tax implications of funding received through crowdfunding. This includes taxes on funds raised, the tax treatment of rewards, and any tax deductions related to campaign costs.
    • Investor Agreements: In the case of equity crowdfunding, it is vital to understand and negotiate the terms of the investment agreement, including voting rights, liquidation preferences, and any dilution or protection clauses.
    • Legal and Regulatory Requirements: Ensure that you comply with all legal and regulatory requirements associated with equity crowdfunding, including applicable regulation in your jurisdiction and any reporting obligations.
    • Risk of Not Reaching Target: Consider the consequences of not reaching your funding target. Some platforms operate on an “all-or-nothing” model, where you will not receive any funds if you do not reach your target, while others allow you to keep the proceeds, but may charge higher fees.
• Obligations of the Parties: Specification of the obligations of the platform (e.g. promoting the project, handling payments, technical support) and of the promoter (e.g. providing truthful and complete information, delivering promised rewards, using the funds raised as agreed).
• Rights of the Parties: Inclusion of the rights of each party, such as the platform’s right to receive its commission and the promoter’s right to receive the funds raised (provided the conditions of the contract are met).
• Data Protection and Privacy: Clauses setting out how investors’ personal data will be handled and protected, in compliance with applicable data protection legislation.
• Intellectual Property: Agreement on the ownership and use of intellectual property related to the project and the crowdfunding campaign.
• Dispute Resolution: Dispute resolution mechanisms between the platform, the project promoter and/or investors, including jurisdiction and applicable law.
• Termination: Conditions under which the contract may be terminated by either party, including breaches and their respective consequences.
• Confidentiality: Confidentiality commitments regarding information shared during the funding campaign.
• Hold Harmless Clauses: Limitations on the platform’s liability for the success of the project and the promoter’s compliance with its obligations to investors.

What obligations does a crowdfunding platform have with regard to the CNMV?

1. Authorisation and Registration: Before starting operations, platforms must obtain authorisation from the CNMV and be registered in the Registry of Participatory Financing Platforms. This process involves demonstrating compliance with the solvency, organisational and operational requirements established by law.
2. Corporate Governance Policies: They must establish and maintain adequate corporate governance policies, including risk management, internal control, and adequate segregation of duties.
3. Investor Protection: Implement measures to protect investors, such as providing clear and accessible information on the risks associated with each investment, and verifying the suitability of products for non-professional investors.
4. Transparency: Obligation to provide the CNMV and the general public with transparent information on transactions, including the terms and conditions of funding campaigns, applicable fees and charges, and the rights and obligations of the parties involved.
5. Incident Reporting: Platforms must report to the CNMV any incident that may have a significant impact on their ability to continue to operate effectively or that may adversely affect investor protection.
6. Prevention of Money Laundering: Comply with current legislation on the prevention of money laundering and terrorist financing, including the identification and verification of the identity of their clients.
7. Record Keeping: Maintain detailed records of all transactions carried out, which must be available for inspection by the CNMV.
8. Financial Audits and Reports: Submit annual audited financial reports to the CNMV, as well as such other periodic reports as may be required by applicable regulations.
9. Security and Confidentiality: To ensure the security of transactions and the protection of users’ personal data, in accordance with personal data protection regulations.
10. Investor Education: Promote financial education among investors, providing resources to help them better understand the risks and characteristics of investing in crowdfunding projects.

Intellectual Property Protection: Secure your ideas, products or services before making them public.

Intellectual property in Spain and the European Union:

• Patents: protect new and useful inventions.
• Trademarks: protect distinctive signs that identify products or services.
• Copyrights: protect literary, artistic and scientific works.
• Industrial designs: protect the appearance of products.

Hire a lawyer specialised in startups

The success of your crowdfunding campaign depends on careful planning and execution. A startup lawyer will help you:

• Comply with legal regulations.
• Protect your intellectual property.
• Draft clear and specific contracts and agreements.
• Negotiate with investors and sponsors.
• Solve any legal problems that may arise.

Law is not a commodity. It should not be hired for price, but for the experience and value that a specialised service brings. At ILP Abogados, our team of lawyers, experts in startups, will accompany you throughout the crowdfunding process, from the planning to the execution of your campaign.

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Legal aspects of crowdfunding for startups

Contact us and we will advise you on the best strategies to make your crowdfunding project a success.