A law on crowdfunding (retail financial services) has been passed in the third reading

Pepeliaev Group advises that a federal law “On attracting investments using investment platforms and amending certain items of Russian legislation” has been adopted.[1]

The law has been developed within the framework of implementing Strategy IV for the Development of Small and Medium-Sized Enterprises in Russia until 2030. The Strategy was approved by the Russian Government. According to the Strategy, solutions must be proposed concerning the development of an alternative source of financing for small and medium-sized businesses, i.e. crowdfunding and crowdinvesting.[2]

The Law introduces new concepts, including an investment platform (crowdfunding platform) which is an online information system designed for concluding investment contracts where information technologies and technical tools of such information system are applied.

Legal entities founded under Russian legislation and individual entrepreneurs will be able to attract investments using such investment platforms; while investments can be made by legal entities, individual entrepreneurs and individuals. Before they start using the platform individual investors should acknowledge that they have been acquainted with the risks associated with such investment, that they realise that investment via the investment project bears high risks and can result in the total loss of the investment, and that they accept such risks. To invest using an investment platform, individuals do not require state registration as individual entrepreneurs.

Access to the platform and attracting crowdfunding will be arranged by an operator, i.e. a business entity established under Russian laws and included by the Central Bank of Russia in the register of operators of investment platforms. The services that such operator supplies involve linking demand for investments from participants in the investment platform who are attracting investments with the supply from those who are investors.[3] The operator will supply its services under contracts of adherence, including contracts for services to attract investments and contracts for services to assist with investments, accordingly. The operator may supply the services either for a fee or at no fee, depending on the rules of the investment platform.

According to Anatoly Aksakov, Head of the State Duma's Financial Market Committee, “This is already happening, and we are simply establishing the rules to regulate the process. Even today, once they are lured by a catchy advertisement people invest in various projects. They invest their money and sometimes earn something, but often lose. This is also due to the lack of statutory regulation of the process.”[4]

An investment with the use of an investment platform can only be performed by wire transfer. The law determines methods of investment via investment platforms:

1. granting a loan;
2. acquiring equity securities that are offered using an investment platform;
3. acquiring utilitarian digital rights.

On investment platforms, it will be impossible to acquire securities of credit institutions, non-credit financial institutions, as well as structural obligations and securities designed for qualified investors.

In addition to all material terms and conditions of an investment contract, the investment proposal of the person who attracts investments must state the validity period of the investment proposal and the minimum volume of investors’ funds which is sufficient to be attained in order to conclude investment contracts.

An investor who has accepted an investment proposal is entitled, within 5 business days from the date of acceptance (but no later than the expiry date of the investment proposal), to withdraw from the investment contract.

If investments are attracted by the issuance of loans, an offering of shares of non-public joint-stock companies or bonds when their issues (additional issues) are not registered by a government authority and when no bond prospectus is registered, the investment proposal ought to be addressed only to one investor or several specific investors (a closed investment proposal). If an investment using the investment platform is carried out by acquiring “securities offered”, such securities can be offered only via a closed subscription.

Persons who raise loans using an investment platform will fulfil their monetary obligations to investors (including obligations to pay interest) also via the platform.

As regards an investment via the acquisition of utilitarian digital rights, the basic concept of a “digital right” is contained in Federal Law No. 34-FZ “On amending Parts I and II and article 1124 of Part III of the Russian Civil Code”[5] dated 18 March 2019 and means rights under an obligation or other rights the content and conditions for the exercise of which are defined according to the rules of an information system corresponding to the statutory criteria. A digital right may be exercised, disposed of, including by being transferred, pledged or encumbered in any other way, or its disposal may be restricted only in the information system without applying to a third party.

Under the new law, the following digital rights (utilitarian digital rights) can be acquired, disposed of, or exercised on the investment platform:

1. the right to demand that an item (items) be transferred;
2. the right to demand that exclusive rights to the results of intellectual activity and/or rights to use the results of intellectual activity be transferred;
3. the right to demand that work be performed and/or services be supplied.

These digital rights are deemed to be utilitarian digital rights if they originated within the framework of the investment platform (under a contract to acquire a utilitarian digital right). Utilitarian digital rights may arise only within the framework of the investment platform. The exercise, disposal, including, among other things, a transfer, pledge or encumbrance in any other way, are also possible only within the framework of the investment platform. Utilitarian digital rights cannot include the right to demand property to which the rights must be registered by a government authority or with which transactions must be registered by a government authority or certified by a notary.

According to the authors of the law, the structure must become an alternative to what are referred to as “utility tokens” of an investment project which mean “specific property rights that are recorded in the names of investors in a distributed database”.[6] The law, however, does not define the concept. It is expected that the concept will be introduced by a separate legal instrument regulating relationships pertaining to digital property.

A person who attracts investments will determine the content and conditions on which utilitarian digital rights will be exercised, including the essence of the right (claim), the number of utilitarian digital rights that are offered and the procedure for exercising them.

To mitigate the risks pertaining to recording digital rights, the law provides for a possibility of a depositary recording such rights. In this case the depositary will issue a digital certificate to the holder of the utilitarian digital right, i.e. a special non-equity registered security which does not have a nominal value but certifies that it belongs to the holder of the utilitarian digital right. A digital certificate has a unique designation and is not subject to state registration. Further to a depositor’s instruction, the depositary will exercise utilitarian digital rights on the investment platform and will dispose of such rights accordingly. The recording and transfer of rights to digital certificates, their pledge or their being encumbered in other ways will be carried out in accordance with the rules established for non-equity securities.

The investment platform must maintain a register of contracts concluded via the platform, such as contracts for services to attract investments, contracts for services to assist with investment, and investment contracts themselves. That an investment contract has been concluded is confirmed with an extract from the register of contracts, issued by the operator of the investment platform. The fact of an investment contract being concluded under which utilitarian digital rights are acquired can be also confirmed directly with information from the register of contracts.

The platform can provide for a rating to be assigned to persons who raise investments, or to specific investment proposals. In addition to the extensive list of information, investors will be able to learn about the amounts of investments raised by a specific person on the investment platform in current calendar year, or about persons entitled to dispose of at least 10% of the votes in the supreme management body of legal entities, as well as about the structure and membership of such management bodies.

Restrictions introduced on attracting investments. A legal entity or an individual entrepreneur may raise a maximum of 1 billion roubles during a year.

The restriction is in line with article 22(1)(4) of the Law on the securities market, which requires that a registration of the issuance of equity securities that are offered via subscription must be accompanied by the registration of a prospectus of the securities, except for when the amount of funds the issuer raises during a calendar year does not  exceed 1 billion roubles. The consistency of such requirements will not allow borrowers to circumvent the Law on the securities market.

The restriction does not apply to public joint-stock companies that raise investments when investors acquire utilitarian digital rights.

A limit of 600,000 roubles per year has been established for investments of individuals, including investments via other investment platforms as well. The purpose of the restriction is to minimise risks for individuals who do not possess special knowledge and skills but are willing to invest using crowdfunding platforms. The restriction does not apply to individual entrepreneurs who have been recognised as qualified investors by the platform’s operator, or individuals when they acquire utilitarian digital rights under investment contracts with public joint-stock companies.

The federal law will come into effect starting from 1 January 2020. Persons who already supply services that involve raising investments via crowdfunding platforms have to bring their operations into line with the new requirements by 1 July 2020.

What to think about and what to do

This law does not establish a legal framework for investment platforms that are essentially new, but is aimed at toughening existing legal relationships that arise within the framework of functioning financial structures. In the opinion of the authors, new regulation should, on the one hand, encourage individuals and legal entities to invest in small and medium-sized businesses, and should mitigate the risks for individual investors arising during investment activities, on the other.

However, the limits that the legislature has stipulated to attain the above goal are excessive and do not contribute to investments being raised via crowdfunding platforms. According to the estimates of the Central Bank of Russia, which are based on information willingly provided by platforms, the total volume of the crowdfunding market for 2017 was 11.2 billion roubles, which is almost double as compared with 2016. The average amount invested by an individual was almost 300,000 roubles, while the average loan issued to a legal entity was slightly over 900,000 roubles. Moreover, the P2B sector (the issuance of loans to a legal entity or an individual entrepreneur by an individual) grew more than 200% as compared with 2016.[7]

The above statistics show an extremely aggressive growth of the volume of funds invested via investment platforms. In the environment we have described, the restrictions imposed by the law at hand could have a restraining rather than a stimulating effect.

Owners of crowdfunding platforms are recommended to start bringing their operations into line with the new requirements even now.

Individuals who invest via crowdfunding platforms and are willing to increase the volume of investments are recommended to acquire, where possible, the status of a qualified investor.

Help from your adviser

Pepeliaev Group’s cross-sectoral Digital Economy Support Group comprises experts in the legal regulation of IT, IP and personal data use. The Group will be happy to provide the full range of legal services concerning any aspects of how information technologies might be applied.

Our experts are members of working groups involving business representatives and sectoral agencies which develop proposals for how the regulatory and legal framework can be improved taking account of the technological changes that are occurring.