April 04, 2022 15:59 
article by Andreea Carare, Senior Associate, PeliPartners
Crowdfunding is a fast-growing financing alternative, but in order to develop, it needs specific legislation to clarify how investors and interested companies can access this mechanism, warns law firm PeliPartners.
"We are talking about a participatory financing tool that benefits companies in need of capital and investors alike, which is increasingly used in recent years in Romania. However, for it to develop as a viable, widely accessible alternative for the benefit of the economy, specific national legislation is needed. This is all the more so as there is already an European Regulation that is in force and applicable in Romania", explained Andreea Cărare, senior lawyer at PeliPartners.
At the European Union level, Regulation (EU) 2020/1503 of the European Parliament and of the Council has been adopted, which concerns European providers of equity crowdfunding services for businesses. The regulation entered into force on November 10th, 2021. In addition to this, national legislation needs to clarify, among other things, which institution will oversee the smooth running of crowdfunding, as well as to set out the sanctions and the conditions under which they will be applied.
According to PeliPartners, the conditions for the transfer of shares laid down in the articles of association of a limited liability company (LLC) should be as least restrictive as possible so as to allow for crowdfunding. Also, where the shares of the target company would be illiquid or indivisible, the solution is to create a special purpose vehicle (SPV). However, after the entry into force of the Regulation, the use of an SPV in the crowdfunding process, which had been the practice until now, is becoming the exception.
Limited liability company regime in crowdfunding procedures
The Regulation introduces a new concept - "instruments admitted for crowdfunding purposes", defined as shares in a limited liability company which are not subject to restrictions which effectively prevent their transfer, including restrictions on the way in which these shares are offered or presented to the public. The acquisition of qualifying instruments for the purpose of equity financing is a form of investment-based equity financing.
Based on the definition set out in the Regulation, it is unclear to what extent the shares of a limited liability company meet the necessary conditions to qualify as instruments admitted in crowdfunding, given the rules for the transfer of shares under Romanian law.
At present, the Companies Law no. 31/1990 provides that the transfer of shares between shareholders is allowed without any restrictions. However, in terms of transfer to people outside the company, this is only allowed if it has been approved by shareholders representing at least three quarters of the share capital, unless the articles of association provide otherwise.
"We consider that such a condition for transfer is a restriction on trading in equity financings, as it may prevent the effective transfer of shares through the discretionary will of the shareholders. Therefore, in order for the shares of a limited liability company to be eligible instruments for the purpose of equity financing, the articles of association must derogate from the condition of transfer of shares to third parties with the approval of the decision of the general meeting of shareholders", explains Andreea Cărare.
The existence of other restrictions or conditions for transfer (such as pre-emptive rights, drag-along, tag-along) also impacts the qualification of shares as eligible instruments for crowdfunding purposes, and they will not be able to be acquired for crowdfunding purposes.
The draft law on the establishment of implementing measures for the Regulation, put forward for discussion by the Ministry of Finance in the second half of last year, largely repeats the provisions of the Regulation on eligible instruments for equity crowdfunding purposes, without the clarifications that the different regulatory nuances in national company law would require.
"Ideally, the final version of the law should include provisions that correlate the provisions of the Regulation with those of the Companies Act, thus preventing future arbitrary and contradictory interpretations in practice," recommends Andreea Cărare.
Use of an SPV to provide equity financing services
Another important element for crowdfunding is the regulation of the conditions under which it is possible to use an SPV to provide investment-based crowdfunding services.
It follows from the Regulation that the use of a SPV is permitted, as an intermediary between the project developer and investors, only to facilitate the acquisition of rights in connection with an illiquid or indivisible asset, which otherwise could not be offered to investors. The decision to take an exposure to that underlying asset rests solely with the investors.
The European Securities and Markets Authority (ESMA) defines and presents some indicative criteria and examples for the determination of illiquid and indivisible assets. Thus, an asset is illiquid when it cannot be easily converted into cash, and indivisible when it cannot be easily or quickly converted into smaller components with a lower value.
"The solution would be to use an SPV, organised as a limited liability company, as a support asset for acquiring stakes in the target company. Although in the case of both the main asset and the underlying asset, the reference concept is the social part, we believe that there are still cases where the interposition of an SPV between the investors and the project developer is useful and justified," added Andreea Cărare.
Thus, if the subscription price of the shares of the target company is high, it should be allowed to facilitate the investment through an SPV whose shares are subscribed at a more accessible value to investors, as the main asset meets the criteria to qualify as an indivisible asset. At the same time, to the extent that the transfer of the shares of the target company would be subject to restrictive conditions, the asset becomes illiquid and the interposition of an SPV, which fulfils the criteria of an eligible instrument for equity financing purposes, should be allowed.
"The illiquid and indivisible nature of the assets does not have to be intrinsically objective, but may also result from the agreement of the parties, by virtue of their freedom to contract. A contrary interpretation would have absurd economic and legal effects, artificially preventing the provision of equity financing services in respect of companies whose shares have a high subscription value or in respect of which there are transfer restrictions resulting from previous transactions," concludes Andreea Cărare.
