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Soon the crowdfunding industry in Russia will become regulated.

In late April, the Cabinet supported the relevant bill, sending it, however, for revision. What to expect from the future law?

The first half of 2018 was marked by significant legislative initiatives, including the draft law “On alternative ways of raising funds (crowd funding)”.

The industry has long discussed the need for a regulatory act that would control the activities of platforms that raise funds. At present, each platform, when designing a contract, applies existing structures adapting the norms of the Civil Code.

Someone acts as an agent between the investor and the project, and someone provides only a platform, entering into a license agreement with the participants. But the main problems are not even in choosing the form of the agreement, but in taxing each of the participants, minimizing risks for investors (after all, they are the driving force, they invest their money).

Did the bill offer a solution to cover the main risks of investors? We talked to investors of the existing sites in order to understand their issues and analyze exactly how the bill solves these problems.

Site Status

Dmitry Krivorotov, an investor on one of the crowd lending platforms, believes that the law should introduce requirements to the site operators in order to secure investments. At present, any legal entity that can become a platform operator, and face having their settlement account blocked, a lawsuit with a huge claim initiated against them, money stolen from them and so on

Most platforms move all cash flows through their settlement account, which makes them vulnerable.

Some platforms manage to use a nominal account. This option is safer, since the money there belongs not to the platform itself, but to investors.

However, there are many technical issues that require additional regulation and clarification, ranging from opening a nominal account (banks open it extremely reluctantly) and ending with the reporting of transactions carried out within a nominal account.

The bill introduces a number of requirements to the platform operator:

  • registration in the form of a business partnership;

  • inclusion in the register controlled by the Bank of Russia;

  • a ban on combining the activities of crowd funding and the activities of a credit institution or the activities of a non-credit financial institution, with the exception of the trade organizer, broker, manager, depository or registrar activities;

  • availability of own funds (capital) in the amount of not less than 5 million rubles;

  • settlements can be made exclusively through a nominal account, while there is a prohibition both on the use of investors' funds for the needs of the platform and on the crediting of such funds to the settlement account.

There are also requirements to affiliates and the sole executive body. At that, the powers of the investment platform operator sole executive body cannot be transferred to a legal entity.

The inclusion of a platform operator in the registry will provide control and streamline the market. At present, the operator can really be anyone (even an individual entrepreneur), and there is no control over the financial status of such companies.

It should be noted that there are no high-profile court cases related to bringing platforms to responsibility, and this is an indicator of the state of the market. In such a situation, increased requirements will allow only strong players to remain on the market.

Project Requirements

The new bill also defines the requirements that the crowd funding project must meet. It happens that individuals act as a project. But even if the project is registered as a legal entity, this does not exclude the possibility of fraud.

In many ways, the situation is solved individually by each specific platform which defines the requirements to projects. The more prudent the platform, the more requirements. Many platforms additionally analyze documents (including bank statements) or conduct additional interviews with the project founders.

The investors have repeatedly noted the presence of risks of unfair behavior on the part of projects.

The draft law introduces the basic requirements to a person who raises money through platforms:

  • the status of the individual entrepreneur or a registered legal entity (commercial organization);

  • no bankruptcy claim filed against the platform;

  • there are no persons in the management bodies who do not meet the requirements for business reputation established in the rules of the investment platform.

And here lies one of the project riddles: What such rules mean and, most importantly, how to evaluate compliance? There's no answer to that.

Taxation

The investor puts up funds, expecting to receive profit, which means that when it is received, he must pay personal income tax. Investors' survey shows that taxation causes most of their concerns.

The way it works now is the following:

  • the investor, having received income, must pay personal income tax in the amount of 13%;

  • the project is the tax agent for the payment of personal income tax, which causes a lot of difficulties both at the stage of tax calculation and at the stage of payment. Many platforms would prefer to act as a tax agent, but the law does not provide such an option.

Many investors believe that personal income tax should be reduced to at least 1-2% or canceled altogether for such operations. Thus, private investor Ruslan Dudov notes that provided that bank lending for small businesses is inaccessible, crowd funding can become a real engine for the development of classical and innovative entrepreneurship, which means that the tax burden on the investor should be significantly lifted.

And if there are no prerequisites to reduce the tax burden, then the possibility of transferring the duties of a tax agent to the platforms calls for an immediate solution. Unfortunately, the authors of the bill left this issue unattended. Whereas such changes could not only simplify the work of all participants in the relationship, but also increase tax revenues.

Funds recovery

Funds recovery from the project in case it violates the obligation to return them is perhaps weakest link from the point of view of investors.

The difficulty lies in several aspects.

Firstly, all contractual relations are executed on the platform and investors hold no paper documents.

Secondly, even with a court judgment at hand, it is still necessary to actually implement it, which in practice can cause many problems.

In March this year, great news for market participants came from the Moscow Arbitration Court, where a case was raised regarding the recovery of funds in favor of investors of one of the crowd lending services.

The case is quite simple: The project defaulted and violated the terms of investors' funds return. This made it possible to verify in practice the working capacity of the model, since the court assessed the concluding contracts through the platform and, following the results of the review, upheld the claim in full, collecting both the principal amount and interest.

It would be helpful if investors could count on an expedited dispute resolution procedure. Now it can take at least several months, and if the project appeals the court’s judgment, it can take even longer.

That being said, there are some investors who don't see any urgent need in the law. Private investor Alexander Bakhirev notes that, in general, there is already enough regulation in the Civil Code that can be used to structure such projects' scheme.

In his opinion, strengthening control over this area will most likely become a negative factor, since this will increase the platform costs. It will be another useless mechanism, which, in turn, will open up additional corruption opportunities and will give nothing to the economy.

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