Such schemes in Portugal continue to expand. Country’s regulator has registered six management companies operating crowdfunding resources, predominantly in area of lending. As industry develops and the number of participants grows, changes are possible due to the adoption of the Regulation on European agents providing crowdfunding services for business-projects. There may also be a move towards securitization of loan portfolios arising from these platforms in the medium to long term.
The concept of crowdfunding realized in Portuguese jurisdiction
Legislative basis establishes certain rules and conditions for legal entities managing such firms that are under the control of the CMVM if their operation is related to the collective use of shares or loans. These organizations require pre-registration and regulatory approval. In addition, various documents must be provided, such as corporate information, structure and beneficial ownership, identification of management, adequate statements, business plan and model, and evidence of meeting minimum financial requirements. Clarity is also required on whether they should be treated as a financial intermediary or its agent. Minimum financial standards include:
- mandatory authorized capital of 50 thousand euros;
- an insurance policy covering at least €1 million per event and at least €1.5 million in annual claims;
- or a combination of providing appropriate adequate coverage.
In accordance with the active rules on securitization (Law No. 453/99 as further amended), the state and public legal entities such as credit institutions, financial firms, insurance organizations, pension funds and pension fund management companies have the exclusive right to act as sources of receivables for securitization purposes. However, it is possible to transfer loans for securitization by firms whose accounts have been properly certified by registered auditors for the last three years.
This opportunity opens up new prospects for crowdfunding firms in the area of structured finance transactions that were previously only open to banking institutions. However, given the specifics of the organizations involved in crowd lending and their management composition, it may take some time for this trend to be fully realized.
In June 2019, legislation passed by the EU Parliament came into effect to improve fairness and transparency for business users using online intermediary services. This regulation was created for providers of Internet intermediary services who simultaneously:
- provide information society services;
- allow business users to offer goods or services to consumers;
- operate on the basis of contractual relationships, such as the terms of platforms’ usage.
Obligations and regulatory rules for crowdfunding in Portugal
Obligations include:
- requirements for transparency of conditions;
- mandatory informing business clients about changes, restrictions or suspension of services;
- fair treatment of different business approaches;
- protecting personal data and creating an effective complaints system accessible to all customers, without impeding similar resolution mechanisms as mediation.
Such practice is becoming increasingly popular in this jurisdiction, giving possibilities to raise funds through financial investments from many clients, most often carried out using Internet platforms. This method of collective financing covers a variety of forms such as donations, rewards, loans and investments.
The basis of the legal parameters for crowdfunding in this country is defined in Law No. 102/2015, which details the permitted types of this practice in the state:
- donations: in this case, funds are collected in the form of voluntary contributions for specific projects and initiatives, without prior expectation of financial reward for donors;
- rewards: participants invest money and in return get rewards in non-monetary forms such as goods, services or exclusive experiences related to the funded project;
- credit: this method involves investors providing loans to projects or companies with a subsequent return of the invested funds and payment of interest over a certain period of time;
- investments: in this form, participants acquire shares in companies or projects with the possibility of receiving financial rewards depending on the success of the enterprise.
Legislative parameters
- Mandatory registration with regulatory authorities. Any crowdfunding platform in Portugal is in charge of passing a registration process with local Securities Commission (CMVM), the body responsible for supervision of industry in the country. Registration requires compliance with specific rules and conditions established by the regulator.
- Principles of transparency and information. Such companies are required to provide clear, accurate and open information about projects or firms seeking funding. This includes disclosing the project’s objectives, use of funds, investment risks and refund policies.
- Limitation of the amount of funds raised. The legislation sets maximum limits for fund-raising in each category. Maximum investments’ limit is 2.5 million euros. These restrictions are aimed at protecting the interests of investors and preventing excessive concentration of funds in individual business-projects.
- Protection of investors’ rights. Law includes measures to protect capital-holders participating in crowdfunding, including establishing security standards and making transparency higher. For example, such spaces must assess the suitability of investments for each investor’s profile, ensuring that they’re informed and understand the risks involved. In certain situations, capital-holders might be given the right to cancel their investments and receive a refund.
Advantages and challenges of crowdfunding in Portugal
Privileges are next-mentioned:
- ensuring access to finance. Crowdfunding offers unique opportunities to raise funds for innovatively-set and socially significant mechanisms that might otherwise face financial difficulties using traditional methods;
- entrepreneurship support. This method of financing promotes the development of entrepreneurial activity, giving start-up organizations and individual entrepreneurs possibilities to realize their ideas, bypassing traditional financial structures;
- active community participation. Crowdfunding encourages community participation by giving possibilities to influence which projects receive support and by fostering the formation of strong communities around shared ideas and goals.
The challenges of operating such a company are that there is a risk of fraud in crowdfunding industry, so appropriate measures are important to protect capital-holders. Crowdfunding spaces must maintain a high level of transparency and responsible operations to avoid misunderstandings and conflicts between participants.
Legislative framework for crowdfunding in Portugal therefore sets the necessary framework for the balanced development of this form of finance, stimulating creativity and innovation, while also ensuring the security of capital-holders.
It is important that platforms, project-organizers and capital-holders are aware of these rules and strictly comply with their legal obligations. If you are interested in this area, check out the ready-made businesses for sale that we offer. We will help you become familiar with the latest changes in legislation and provide general advice for more detailed information.
