The new law regulating crowdfunding in Russia will enter into force on January 1, 2020. Existing platforms must comply by July 1, 2020.
Federal Law No. 259-FZ “On Investments Through Investment Platforms and Certain Amendments to Other Laws of the Russian Federation” dated August 2, 2019
Platform operators
The new law introduces a number of requirements for operators of investment platforms. Below we describe the principal requirements.
Minimum capital
An investment platform must have at least RUB 5 million in capital (own funds), regardless of the type of investment instruments offered and volume of deals.
Management team
The operators of investment platforms, persons controlling them and members of the executive or supervisory bodies cannot be individuals:
- included in the list of persons with respect to whom there is information about their involvement in extremist activities, terrorism or the dissemination of weapons of mass destruction;
- with a criminal record for crimes in the field of economics, against state power, against the interests of public service, against service in local government; or
- against whom administrative punishment in the form of disqualification has been imposed.
Additionally, an individual holding the positions of general director or member of a collegial executive or supervisory authority must have a higher education degree. Powers of the sole executive body may not be delegated to management companies (corporate directors).
Combination with other activities
Platform operators may not concurrently engage in other regulated financial activities, except for those specifically provided in the law:
- settlement of trade;
- certain clearing activities;
- brokerage;
- dealer activities;
- management of securities, as well as maintaining a register of securities owners; and
custody business.
Restrictions on owners
The following persons may not control 10% or more of votes in the operator of the investment platform:
- legal entities registered in offshore zones; or
- legal entities deprived of a license to operate as a credit institution or non-credit financial institution;
Internal documentation
The operator of the investment platform must develop and publish its rules. The law sets an exhaustive list of mandatory provisions to be incorporated into such rules. Any amendments to the rules become effective 5 days after their announcement.
Further, the operator of the investment platform is required to develop and approve policies on managing conflicts of interest in accordance with the mandatory recommendations set by the Central Bank.
Investors
As a general rule, an individual can invest no more than RUB 600,000 (USD 9,000) within one calendar year using one or more investment platforms. This limitation does not apply to:
- individual entrepreneurs;
- legal entities;
- qualified investors; and
- individuals acquiring utility rights from a public joint stock company under an investment agreement.
The operator must continuously confirm whether a particular individual stays within the set limit when investing through the platform maintained by that operator. If the limit is exceeded, the operator has an obligation to repurchase the investments at the request of the specified individual.
The operator may rely on representations made by an individual in respect of investments made by that individual on other platforms. Thus, if the investor provides false representation, the operator is not responsible.
The law provides a helpful clarification that investing by means of investment platforms is not an entrepreneurial activity and, thus, does not require registration of an individual as an individual entrepreneur.
Investment instruments
The law sets a list of investment methods:
- loans;
- equity securities; and
- utilitarian digital rights.
Missing are participation shares in LLCs that are the primary vehicle for small and medium-sized businesses in Russia.
Restrictions on attracting investments
Within one calendar year the same legal entity or individual entrepreneur may attract investments using the investment platform for an amount not exceeding that for which it is necessary to compile and register a securities prospectus. At the moment, this amount is 1 billion rubles.
The rule does not apply to joint-stock companies attracting investments through utilitarian digital rights. Monitoring compliance with investment attraction limits is assigned to the operators of the investment platform. The amount of attracted investments must be counted cumulatively from all investment offers of one legal entity or individual entrepreneur.
Investment disclosure requirements
The law requires platform operators to disclose a broad scope of information on their websites with respect to both the platform’s governance and operations and investment proposals.
With respect to investment proposals, the following information must be disclosed:
- project goals, main risks (including those associated with the loss of investment, the inability to sell property acquired during investment);
- all information contained in a securities prospectus;
- the presence or absence of the obligation of the person controlling the organization raising investments to redeem the property rights of the investor if such person ceases to control the company raising investments;
- the presence or absence of the investor’s right of first refusal of the additional shares;
content of utilitarian rights (if any); - information on experts involved in monitoring and evaluating the activities of the person raising investments, as well as expert reports; and
- current rating of the investment proposal (if any).
Platform operators must publish annual reports with the results of their activities. Such reports must include:
- information on the structure and composition of the management bodies;
- number of investment proposals for which investments have already been raised and the average investment size per offer;
- total investments made through the platform;
- total number of investors that have executed investment contracts and the average amount of funds invested by each investor; and
- information about investment contracts where a default has occurred.
Liability standards
Platform operators are not liable for debts and obligations of companies raising investments with the use of their platforms. The law sets three distinct cases where platform operators are liable for damages:
- disclosure of inaccurate, incomplete or misleading information about the investment platform and the operator of the investment platform;
- violation by the operator of the investment platform of the rules of the investment platform; or
- violation of mandatory requirements for an investment platform.
Conclusion
The legal framework for crowdfunding in Russia was long-awaited. The new law, however, focuses mainly on protecting retail investors rather than simplifying the investment process and eliminating barriers. In our view, this may limit the potential for crowdfunding as an alternative to traditional sources of capital for businesses.
Unlike the US, where investment under Regulation Crowdfunding has reached impressive figures in just three years, we expect that crowdfunding will take more time to mature.
Roman Buzko and Mariam Gordiashvili are lawyers at Buzko Legal where they advise on all legal issues related to Fintech in Russia.