Crowdfunding in Spain: New Regulations But A Long Way To Go

Crowdfunding, crowdsourcing, micropatronage, microsponsorship; no matter the name, the idea is all the same: small amounts of money from the public are donated or pledged to a project to help raise money.

For all of you who are new to the concept of crowdfunding, based on Investopedia’s definition, it relates to the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and the community through social media websites to get the word out regarding a new business venture or innovative idea and to attract investors. Crowdfunding has been proven to empower entrepreneurs by expanding the potential pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives, angels and venture capitalists. Now anyone can join in the funding process!

Distinguished crowdfunding sites like Kickstarter and GoFundMe provide user-friendly platforms to assist aspiring entrepreneurs and small business owners in raising capital. Typically, there are three outcomes that result from crowdsourcing.

1) The project successfully reaches 100% of the proposed capital, resulting in the co-investors wiring their investments into the account to fund the idea or business. (Very Nice!)

2) The project is unsuccessful and does not reach the 100% of the proposed capital goal, which results in funds being returned to original donors. However, in a positive light, this can be helpful feedback to the entrepreneurs or small business owners in terms of reevaluating the original concept or maybe making adjustments to the branding or marketing of the project.

3) The creator makes a time limit to declare the funding deadline and once that time limit is reached, he/she must take whatever amount has been raised.

In summary, crowdfunding allows anyone to donate money and assist in the growth of a project they wish to support with no restrictions on the amount. Now you might ask, what is the incentive for the donor? Well, it is definitely not for monetary profit because these donations do not typically carry equity in return like traditional investments do, but from the proven success of Kickstarter who recently reached $1 Billion in pledges (check out their homepage…) a lot of people simply enjoy supporting great ideas and new projects.

Ok, so now that we have established the concept of Crowdfunding and it’s successful track record, let’s take a look at the Spanish government’s take on this. The Spanish government has proposed a new law “Ley de Fomento de la Financiación Empresarial” which will try to regulate these platforms that define themselves as entities in charge of websites that connect investors with the projects in need of funds.

If this new law is passed, these crowdfunding platforms will now have to channel their funding process through equity or loans for all projects within Spain’s borders and the funds would then be under the control of CNMV and the Spanish National Bank.

Based on the projected Law, a cap of €1M would be set to each project, with a maximum contribution from each individual of €3.000, or €6.000 in various projects in a 12 month period. Furthermore, any new platforms entering the market must have a minimum share capital of €50.000, and a RC insurance of €150.000.

If the new crowdfunding platform decides to legally act as loans for the project, the investors will need to have their tax residence based in Spain. There will be sanctions up to €200.000 and the ban for the platform for a limit time frame of 5 years.

Based on 2013 data, Crowdfunding project have raised up to €750M in Europe alone and $2.7B worldwide. This is a HUGE market that the Spanish government is effectively blocking from fully evolving in Spain and making it harder for investors to fund Spanish projects.

I’m left to wonder how many projects will end up outside our borders because of these restrictions.

Just to put it in perspective: political parties can receive up to €100.000 from a single person annually. A foundation related to a political party can receive as many donations as they are willing to receive. However, they now want crowdfunding platforms to have a maximum of €6.000. This looks to be a little one-sided right?

My suggestion: let the market be, stop regulating and allow people with ideas get the funds needed to succeed or at least try to. It looks to me the Spanish government is trying to protect the banks from losing money on loans between private individuals. They can’t put taxes on them and they can’t win money out of them… should we do the same on everything? Limit €3.000 to buy stocks in the market, limit €3.000 to invest in start-ups?  That’s nonsense.  The age of crowdfunding is just getting started. There will be pushback, a few corrections and the banks may will have to stay competitive or get left behind, but we have to let the natural market find it’s equilibrium.  Until then we’re just delaying forward progress.

 

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