Crowdfunding operations
in the light of legal requirements
of the Prospectus Law

Crowdfunding is considered as a form of public offering.
In a nutshell, a crowdfunding operation offers to
entrepreneurs owning a promising idea a way to
address to unrelated investors.

Thus, this form of public offering is likely to fall within the scope of the public offering protection’s legislation; the Belgian flagship legislation in that matter being “the law of 16th June 2006 concerning public offerings’’ (hereafter ‘’Prospectus Law’’).

This legislation contains a particular structure with two main ideas.

Firstly, the idea that any public offering requests the publication of a prospectus in order for investors to take their own investment decisions.

Secondly, the idea that the prospectus has to be approved by a supervisory authority: the FSMA for public offerings subjected to Belgian law, or other supervisory authorities located in EEA countries, or eventually other supervisory authorities in the world when neither the FSMA nor other EEA supervisory authorities are responsible for adjudication of the prospectus.

Besides, the Prospectus Law, as many other financial laws, sets up a ‘closed-loop’ system of prior definitions that restrict strictly the scope of the law. Consequently, practitioners will have to determine if yes or not a specific operation is caught by the scope of the Propectus Law so that the redaction of a prospectus is required.

The Belgian legal definition of a public offering is: “A public offering is a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities” (free translation).

Then, the regulation stipulates many exceptions. In consequence, although they fall within the scope of the Prospectus Law, a range of operations will legally not be considered as public offerings so that they will not be caught by the scope of the Prospectus Law.

Amongst exceptions that are exhaustively described in the Prospectus Law, one is linked to the volume of a specific public offering’s operation. It is said that an operation of less than 100.000 euros will not be considered as a public offering and therefore will not deserve the protection of the regulation.

This limit of 100.000 euros fast appeared as too restrictive by crowdfuning’s practitioners who have obtained a legislative modification.

In consequence, the “law of 25 April 2014 concerning collective investment funds” sets up a new exception to the prospectus obligation that is nowadays integrated into the Prospectus Law. Cumulative conditions have to be satisfied in order to benefit from this exemption. Amongst others the fact that:

•  the total amount of the public offering has to be lower than 300.000 Euro;
•  the individual amount that each investor can invest is being limited to 1.000 Euro.
Based on this legislative modification three scenarios are possible:

•   the total amount of the operation is lower than 100.000 Euro so that the Prospectus regulation does not apply and thus the redaction of a prospectus is not required;
•   the total amount of the operation is included between 100.000 Euro and 300.000 Euro so that the Prospectus regulation does not apply under the condition that each investor does not invest more than 1000 Euro and thus the redaction of a prospectus is not required;
•   the total amount of the operation is superior to 300.000 Euro so that the prospectus regulation applies and thus the redaction of a prospectus is required.

In fact, this new legislative modification reveals itself as unsatisfactory on a number of counts.

Firstly, although the limit of 300.000 Euro seems to be enough for a first financing round, what will the company do if it succeeds to grow and therefore needs a second financing round? Will it be required to write a prospectus?

Secondly, it seems that the limit of 1000 Euro for each investor in case of operations included between 100.000 Euro and 300.000 Euro is inadequate with the specificities of the sector. As a matter of fact, it is known that the average investment for two of the biggest players of the sector in Belgium is 1000 Euro and 3000 Euro for each investor.

Eventually, the arbitrary character of this new legislative modification has to be underlined. It is not consistent that, on the one hand up to 99.999 Euro an investor may be exposed to the risk of its investment without any limitation, and on the other hand as soon as an investor goes over the limit of 100.000 Euro he would have to limit its investment to 1000 Euro.

In any event, so far, almost all crowdfunding platforms have used the exceptions to avoid the redaction of a prospectus.

As far as future prospects are concerned, a draft law was filed on 3 February 2014 to increase the maximal amount beyond which the redaction of a prospectus is compulsory. This new proposed regime is based on the one taking place currently in USA with the so-called Jobs-Act. This Jobs-Act (Jumpstart Our Business Startups) was signed by President Obama in 2012 in order to open the capital markets tot small companies. It allows amongst others a fund-raising in equity going up to 1.000.000 dollars.

01 December 2014

Ionathan Ventura -
Leo Peeters -