Investment-Based Crowdfunding
Crowdfunding is a means for innovators and start-up companies to finance their projects and businesses by collecting funds from a large number of persons via a crowdfunding platform. The introduction of the European Crowdfunding Service Providers Regulation[1] (“ECSPR”) provides a uniform regulatory regime throughout the European Union (“EU”), facilitating cross-border offering of crowdfunding services. Due to this, the crowdfunding sector is set to grow throughout the EU in the coming future, offering opportunistic ways for business owners to finance their innovations.
There are different means of crowdfunding, ranging from Donation-Based Crowdfunding, Investment-Based Crowdfunding, and Lending-Based Crowdfunding[2]. The main difference between these methods of crowdfunding is not only how the business/project owners receive funds from investors, but what the investors receive back for the funds given. With Investment-Based Crowdfunding, the business/project owner offers the chance for investors to invest in their particular project by buying the shares of the project company and therefore becoming shareholders of the said company.
The ECSPR regulates Lending-Based and Investment-Based types of crowdfunding, whereas other types of crowdfunding remain, as of yet, unregulated. In the following article we will outline possible legal implementations of a multi-investor crowdfunding projects, with a special focus on investment- and business-friendly Maltese jurisdiction.
Nominee Structure
Several Crowdfunding Service Providers make use of a nominee structure when providing equity-based crowdfunding[3], proving to be necessary to both enable projects to raise funding and to ensure that the investors’ rights are protected.
The use of a nominee structure is very common, whereby the nominee holds a legal title over the shares of the investor on his/her behalf. The Crowdfunding Service Provider’s nominee structure would thus be the legal holder of the shares in the project company’s shareholder register. However, in reality it will be the holder of the shares on behalf of several investors who have invested in a project through the crowdfunding platform operated by the Crowdfunding Service Provider. Therefore, although the nominee structure is holding the shares, the economic benefits of those shares are passed through to the underlying investors.
When a project company is seeking funding from the public through Investment-Based Crowdfunding, multitude of investors will fund and invest in such project to the extent that the project company will have many shareholders, each with a small ownership. This can cause several managerial and administrative issues. Using a nominee structure to hold such shares on behalf of all the shareholders is a practical means to do away with the bureaucratic hassle of matters relating to consents and votes, since for these purposes the company will only have to deal with the nominee structure.
Fiduciary Shareholding
The concept of a nominee structure is foreign to Maltese law since it was removed from the Maltese legal regime. However, under the civil law institute of mandate, a trust and fiduciary company[4] authorised by the Malta Financial Services Authority (the “MFSA”) can hold shares on behalf of a beneficiary, that is, the investor, thereby achieving a similar effect to the above. This means that a legal contract is created between the investor and the entrusted party, the ‘fiduciary agreement’. Legally, the entrusted party is the full owner of the shares in the external relationship to third parties and can dispose of it, but in the internal relationship he is bound by the constraints of the fiduciary agreement. This is proving to be very useful to crowdfunding platforms, to ensure to have a balance between the interests of the investors on the one hand and a smooth running of the crowdfunding project on the other hand.
Under Maltese civil law, anyone who holds property for another is subject to fiduciary obligations, stemming from the Roman law concept of fiducia which is rooted in it the notion of good faith and a high level of diligence. Our trust and fiduciary company, Zerafa Trustees Ltd., can offer fiduciary shareholding services to the investors, meaning that it will be holding shares on behalf of the investors who invest and acquire shares in a crowdfunded project company.
Feel free to contact us for assistance or more information on the above.
[1] Regulation giving the legal framework commercial crowdfunding service providers.
[2] Get an overview of the terms and how we can assist you in crowdfunding service provider compliance.
[3] Other types of Investment-Based Crowdfunding are profit/revenue sharing, debt-securities crowdfunding.
[4] Our associated company is furthermore authorized in terms of Art. 43 of the Maltese Trust and Trustees Act to provide trust and trustee services, as well as establishing trusts.
