On 1 March 2024, a new law will enter into force (Law 181/2023 on Participatory Financing, published in Official Gazette 272-273 of 27 July 2023), providing new financing opportunities, particularly for small and medium-sized enterprises (SMEs), property developers and consumers.
Activities of providers of equity financing services do not include banking or other lending activities, activities of savings and loans institutions, payment service providers and investment companies.
It is worth noting that in Article 2 of the Bill, in its original wording (as of January 2023), the term "supervisory authority" - the National Financial Market Commission, the competent authority for licensing, regulating and supervising providers of investment services, a formulation that remained in the adopted and published Act, although as of 1 July 2023, by Act No. 178/2020, the National Bank of Moldova became the supervisory authority for the areas of non-banking credit, insurance, savings and loan institutions, areas in which the National Financial Market Commission (NCFM) was previously the supervisory authority.
The explanation why in the final version of Law No. 181/2002 the supervisor - the "National Financial Market Commission" - was not replaced by the "National Bank of Moldova" (Article 2 of the Law) would be that initially consumers were excluded from the potential beneficiaries of these services (the draft law in its original version explicitly contained the provision that "it does not apply to consumer relations") and in the final version debtor-consumers were introduced (in our opinion uninspired). And the CNPF is responsible for supervising financial services provided to consumers (the National Bank is responsible for supervising the areas mentioned above).
Despite the fact that the preamble to the law states that:
"This law partially implements the provisions of Regulation (EU) No. 2018/1503 of the European Parliament and of the Council of 7 October 2020 on European providers of business equity finance services and amending Regulation (EU) No. 2017/1129 and Regulation (EU) No. 2019/1937, published in the Official Journal of the European Union L 347/1 of 20 October 2020.
Regulation (EU) 2020/2013 of the European Parliament and of the Council of 7 October 2020 on European providers of business equity finance services and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 provides in paragraph (8) of the preamble that:
"By removing obstacles to the functioning of the internal market for equity financing services, this Regulation aims to promote the cross-border provision of business equity financing services. Therefore, equity financing services related to the provision of credit to consumers, as defined in Article 3(a) of Directive 2008/48/EC of the European Parliament and of the Council, should not be covered by this Regulation".
And in Chapter I, General Provisions, Article 1, Subject matter, scope and exemptions, para. (2) states that:
"This Regulation shall not apply to
(a) equity financing services provided to project developers who are consumers within the meaning of Article 3(a) of Directive 2008/48/EC".
Therefore, relying on the transposition of the European regulations concerned when adopting the law concerned does not fully correspond to reality. Since these services are conceived as a tool to support businesses, there should have been no reference to consumer relations, which contain numerous pre-contractual, contractual and post-contractual provisions that will minimise the application of the law in question for the purpose envisaged in the preamble (consumers are not even mentioned):
"to support and provide an alternative source of finance for start-ups, small and medium-sized enterprises and local public authorities by means of participatory financial platforms".
The motivation for the law was also the fact that founders' investments from personal savings, remittances and loans from relatives and/or friends are usually not sufficient for the financing of a serious business or real estate development. As a result, access to finance through the traditional financial instruments offered by banks or NCBs (loans, non-bank loans) is limited and difficult, especially in the early stages of development.
Alternative financing instruments have emerged and developed in response to financing needs and the development of information technologies and social networks. These services have developed rapidly over the last decade in the European Union. Crowdfunding is one of the most dynamic alternative financial instruments.
This tool is a process of financial intermediation through electronic platforms, through which developers of business or real estate projects, as well as any other client in need of financing, can access the services and accumulate the necessary financial resources from several investors (individuals or companies). That is, it is a way of widening access to available capital from professional investors, including the diaspora, but also the general public, by attracting investors interested in investing in products or services of interest to them, with prospects for development and growth, by concluding investment contracts on providers' platforms.
Law No. 181/2023 excludes, from 01/03/2024, the definition of "crowdfunding" in Article 3 of Law No. 179/2016 on SMEs, which defined it as "a method of financing projects using online resources (forums, social media platforms, etc.) that replaces the classic donation system with a rewards methodology. Project initiators create a network whose members offer money in exchange for services or products generated by the project". Law No. 1792016 also contains a further reference to this participatory funding instrument, namely in Art. 14 (1) letter j), which stipulates (until 01.03.2024) that:
"The competent authorities shall encourage the creation of online participatory financing platforms in order to facilitate access to finance for small and medium-sized enterprises".
The new law (No. 181/2023) also incorporated the definition of "business angel" from Law No. 179/2016 ("natural and legal persons who invest their own capital in the development of a business, with the aim of acquiring or subscribing to shares or parts of the share capital of the supported business"). According to the new law, they become "investors" - "natural or legal persons who, through an equity financing platform, grant loans or acquire securities or instruments admitted for the purpose of equity financing or grant consumer loans". Moreover, in comparison to "business angels", who could not invest their own capital in the following areas, virtually all restrictions on investors have been excluded (art. 14 para. (1) of law no. 179/2016), inter alia:
- Banking;
- Financial: insurance and reinsurance, capital market, financial intermediation, any other activity in this field;
- Real Estate: real estate transactions, rental of real estate assets, brokerage, development;
- Consultancy in any field.
The funds raised by the equity providers from the investors will be kept separate from the smoker's funds by placing them in an escrow account used only for the accumulation of investor/borrowers' funds and the repayment of developer/borrowers' loans.
Providers will not guarantee investors the success of the projects developed on the platforms, the realisation of a profit or the recovery of the investment. However, they will be obliged to carry out due diligence on the projects proposed by the developers and to provide adequate information and warnings to investors about the risks of the investment, including the risk of losing the entire investment, cooling-off and withdrawal periods (for consumer borrowers), knowledge tests and loss capacity simulation (for non-sophisticated investors), mandatory annual audit, record keeping of transactions, disclosure requirements and compliance with conflict of interest and personal data rules.
From the date of registration in the Register of Equity Providers, service providers will be authorised to operate by the supervisory authority (CNPF). The CNPF will regulate, supervise and sanction any non-compliance by equity providers.
Equity funding is either investment-based (purchase or subscription of shares or equity by investors through an investment vehicle) or loan-based (provision of loans by one or more investors in return for interest).
Some of the investors will be sophisticated investors, as defined in the legislation, which (subject to the maximum limit per project) will not be subject to the investment limits for unsophisticated investors (which may invest in one year a maximum of the equivalent in Moldovan leiof 200 euro for an individual consumer borrower or 5,000 euro in an individual equity project; or a maximum of 10,000 euro in one year for the total investment in equity, of which a maximum of 35% may be in consumer credit). Sophisticated investors are those who understand the risks of investing in capital markets and have sufficient resources to bear these risks without excessive financial exposure.
The provider must have a permanent regulatory guarantee of at least RON 500 000 (or 25% of the previous year's fixed costs, which must cover at least the cost of administering the loan for a period of three months for the provider of credit-based services).
The allocation of funds that may be granted to a consumer borrower may not exceed the amount that corresponds to 7500 euro in Moldovan lei, calculated at the official exchange rate of the Moldovan lei set by the National Bank of Moldova on the day of placing the offer of equity financing.
To sum up, expectations of this law are quite high, but it is feared that this instrument, which is also granted to consumer borrowers, could undermine the main purpose, namely to provide access to capital for SMEs and real estate developers. We would like to reiterate that this mechanism in the European Union, where it has already proven its effectiveness, was and is specifically designed for other categories of investors/borrowers than the individual consumer. Including consumers as beneficiaries of participatory finance services will pose new challenges (not yet fully understood) for service providers, who will obviously have to invest more time, human resources and technology to provide services to consumers.