CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several...

48
CROWDFUNDING IN DENMARK MAY 2015

Transcript of CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several...

Page 1: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

CROWDFUNDING IN DENMARK

MAY 2015

TABLE OF CONTENTS

1 Summary 4

2 Introduction 9

3 Clarification of underlying concepts 10

4 The extent of crowdfunding 13

5 Regulatory framework for crowdfunding in Denmark 15

51 Donation-based crowdfunding 15

52 Reward-based crowdfunding 18

53 Lending-based crowdfunding 21

54 Equity-based crowdfunding 25

55 Transverse considerations 31

551 Intellectual property rights 31

552 Marketing legislation 33

56 Overall conclusion on the regulatory framework for crowdfunding in

Denmark 35

6 International crowdfunding regulations 37

61 Crowdfunding in an EU perspective 37

62 Crowdfunding regulations in Europe in general 38

63 Regulation of crowdfunding in the US 40

7 Promoting crowdfunding in Denmark 43

4

1 SUMMARY

Crowdfunding is essentially about raising funding through contributions or investments

from a large group of people Crowdfunding is rapidly gaining ground internationally

however in Denmark growth has been limited owing among other things to uncertainties

regarding the regulation of the various forms of crowdfunding together with a lack of

awareness of this comparatively new funding concept

With the Growth Package from June 2014 the government along with the Liberal Party

of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the Red-Green

Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det Konservative

Folkeparti) agreed to initiate investigations regarding possibilities of promoting

crowdfunding in Denmark including clarifying any regulatory challenges existing within

this area

The report is a systematic review of the regulatory framework for crowdfunding in

Denmark

The report is based on the four main types of crowdfunding

1 Donation-based crowdfunding where it is purely a matter of donations Projects

financed in this way are most often for a charitable cause

2 Reward-based crowdfunding where the investor receives some kind of reward for

hisher contribution These rewards may consist of immaterial rewards for instance

the contributorrsquos name is included in the credits of a film or material rewards such

as pre-buys where the contributors purchase products or services that have not

yet been put into production

3 Lending-based crowdfunding where private and professional investors loan money

to companies directly bypassing traditional banks This means that many investors

can jointly finance one single companyrsquos loan

4 Equity-based crowdfunding where private and professional investors invest directly

in companies in return for a stake in the companies

Donation-based crowdfunding

Donation-based crowdfunding is basically regulated on the same terms as other types of

public fundraising campaigns Hence companies that employ campaigns for donation-

based crowdfunding in Denmark shall notify the Danish Fundraising Board of their

campaign and comply with the conditions set up by this board Donations received

through public fundraising campaigns are subject to tax and SKAT (Danish Customs and

Tax Administration) must be notified thereof

Reward-based crowdfunding

With reward-based crowdfunding the investor receives a service or a product in return

for hisher contribution which can then be considered as the purchase of an article

Companies employing reward-based crowdfunding must therefore post the earnings

from these sales in their annual accounts together with the production costs etc for the

purpose of corporate taxation and VAT declaration

If the investmentdonation is considerably larger than the value of the product or service

the surplus value is regarded as a donation and thus tax will be payable in accordance

with the tax rules applying to donationsgifts

5

Lending-based crowdfunding

Regulation and approval of a lending-based crowdfunding platform depends on which

business model the platform employs Platforms wishing to run lending-based

crowdfunding and perform activities which fall within the Danish Payment Services Act

andor the Danish Act on Financial Business must start with obtaining a permit from the

Danish Financial Supervisory Authority as either a money transfer business or a financial

institution Furthermore platforms must comply with the prevailing rules relating to

money laundering Hence it is possible to run a lending-based crowdfunding platform in

Denmark within the prevailing rules and the Danish FSA (Financial Supervisory

Authority) has already approved several lending-based crowdfunding platforms

Equity-based crowdfunding

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding However within the prevailing financial legislation it is possible to run an

equity-based crowdfunding platform in Denmark A company wishing to establish itself

as an equity-based crowdfunding platform must start with obtaining a permit to run a

stockbroker business and can subsequently offer transactions in securities including

equity-based crowdfunding Provided that the platform does not render any actual

consultant services an appropriateness test of the investor must be carried out prior to

completing the transaction The purpose of the appropriateness test is to investigate

whether a retail investor (private investor) has adequate knowledge and experience to

understand the risks involved in equity-based crowdfunding The appropriateness test

can be performed digitally as known from several foreign equity-based crowdfunding

platforms

A company wishing to raise capital through equity-based crowdfunding must either be a

public limited company (AS) or a limited liability partnership (PS) whereas a private

limited company including entrepreneurial businesses may in general not employ this

kind of crowdfunding as these company types are not entitled to offer shares to the

public Businesses that are not registered as public limited companies may however offer

subscriptions for shares on a crowdfunding platform with the aim of employing

crowdfunding to raise the required minimum capital of DKK 500000 for limited

companies1

Transverse considerations

Companies wishing to employ crowdfunding should also consider whether it is necessary

and possible to protect their intellectual property rights including patents and designs

Powerful protection of intellectual rights will in many cases be an efficient tool for the

companies as it will ensure control over the ideainvention and at the same time be an

advantage in connection with both the crowdfunding campaign where the rights over the

product must be proved but also in the event of subsequent financing from business

angels and other investors is sought Companies and platforms engaged in

crowdfunding shall in line with all other businesses comply with all Danish rules and

regulations in force on marketing

International crowdfunding regulations

A review of international regulations in relation to crowdfunding especially with regard to

the EU the UK and the US reveals that overall there are different approaches to

whether regulations should be tightened relaxed or remain unchanged

1

Please refer to the section regarding equity-based crowdfunding for further information on this aspect

6

At EU level the Commission finds that there is a risk that the member states may

introduce hasty regulatory constraints and thus inhibit the development of crowdfunding2

The Commission also points out its concern that introduction of overly-lenient legislation

may lead to weakened investor protection and thus damage the crowdfunding

environment owing to declining consumer confidence Several European countries have

introduced or plan to introduce special legislation for crowdfunding However there is no

broad consensus as to what changes are necessary Common European rules could

contribute to the promotion of crowdfunding across borders

The British market for crowdfunding is considered the most developed in Europe In

March of 2014 new rules for lending-based and equity-based crowdfunding were

introduced In the UK equity-based crowdfunding platforms which provide companies

with the possibility of raising capital rdquoby arranging investments and transactions in not

immediately tangible securitiesrdquo are considered to be ruled by the MiFID directive which

implies that such platforms must be approved by the British FCA (British Financial

Conduct Authority) in accordance with the rules of the directive for security brokers and

that the investor protection rules must be observed

The US has the largest crowdfunding market in terms of number of projects and

investors In April of 2012 the so-called Jumpstart Our Business Startups Act (JOBS

Act) was passed The purpose of the act is to promote growth and employment in the

US In particular two of the sections concern crowdfunding viz Title II and Title III Title

II has already been implemented whereas Title III is still not fully implemented as of yet

The lengthy implementation phase of the sections concerning crowdfunding has caused

several states to start introducing special legislation enabling equity-based crowdfunding

It is still not quite clear when and how the final implementation will be in place However

the JOBS Act defines an overall framework which is described in detail in section 63 of

this report

Conclusion

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

helps to clarify this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework for which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create large public programmes for promoting

crowdfunding in Denmark Instead the market will be able to develop within the existing

framework However the public sector especially may play a role with regard to

increasing businessesrsquo awareness and understanding of crowdfunding If Danish

companies are to make serious use of the growth possibilities that crowdfunding

presents it requires that they are aware of and understand how to exploit it to their best

advantage

Based on the work with the report and the desire to strengthen Danish companiesrsquo

awareness and use of crowdfunding several steps have already been taken to

strengthen the area These include

1 Pilot project with match financing in the Market Development Fund Based on

the work with the report a pilot project in the Market Development Fund has been

established in which companies with consumer-oriented products can employ

reward-based crowdfunding to market validate their projects and achieve match

financing from the fund Companies can apply for support through the fund via a

2 The European Commission (2014) rdquoUnleashing the potential of Crowdfunding in the European Unionrdquo

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 2: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

TABLE OF CONTENTS

1 Summary 4

2 Introduction 9

3 Clarification of underlying concepts 10

4 The extent of crowdfunding 13

5 Regulatory framework for crowdfunding in Denmark 15

51 Donation-based crowdfunding 15

52 Reward-based crowdfunding 18

53 Lending-based crowdfunding 21

54 Equity-based crowdfunding 25

55 Transverse considerations 31

551 Intellectual property rights 31

552 Marketing legislation 33

56 Overall conclusion on the regulatory framework for crowdfunding in

Denmark 35

6 International crowdfunding regulations 37

61 Crowdfunding in an EU perspective 37

62 Crowdfunding regulations in Europe in general 38

63 Regulation of crowdfunding in the US 40

7 Promoting crowdfunding in Denmark 43

4

1 SUMMARY

Crowdfunding is essentially about raising funding through contributions or investments

from a large group of people Crowdfunding is rapidly gaining ground internationally

however in Denmark growth has been limited owing among other things to uncertainties

regarding the regulation of the various forms of crowdfunding together with a lack of

awareness of this comparatively new funding concept

With the Growth Package from June 2014 the government along with the Liberal Party

of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the Red-Green

Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det Konservative

Folkeparti) agreed to initiate investigations regarding possibilities of promoting

crowdfunding in Denmark including clarifying any regulatory challenges existing within

this area

The report is a systematic review of the regulatory framework for crowdfunding in

Denmark

The report is based on the four main types of crowdfunding

1 Donation-based crowdfunding where it is purely a matter of donations Projects

financed in this way are most often for a charitable cause

2 Reward-based crowdfunding where the investor receives some kind of reward for

hisher contribution These rewards may consist of immaterial rewards for instance

the contributorrsquos name is included in the credits of a film or material rewards such

as pre-buys where the contributors purchase products or services that have not

yet been put into production

3 Lending-based crowdfunding where private and professional investors loan money

to companies directly bypassing traditional banks This means that many investors

can jointly finance one single companyrsquos loan

4 Equity-based crowdfunding where private and professional investors invest directly

in companies in return for a stake in the companies

Donation-based crowdfunding

Donation-based crowdfunding is basically regulated on the same terms as other types of

public fundraising campaigns Hence companies that employ campaigns for donation-

based crowdfunding in Denmark shall notify the Danish Fundraising Board of their

campaign and comply with the conditions set up by this board Donations received

through public fundraising campaigns are subject to tax and SKAT (Danish Customs and

Tax Administration) must be notified thereof

Reward-based crowdfunding

With reward-based crowdfunding the investor receives a service or a product in return

for hisher contribution which can then be considered as the purchase of an article

Companies employing reward-based crowdfunding must therefore post the earnings

from these sales in their annual accounts together with the production costs etc for the

purpose of corporate taxation and VAT declaration

If the investmentdonation is considerably larger than the value of the product or service

the surplus value is regarded as a donation and thus tax will be payable in accordance

with the tax rules applying to donationsgifts

5

Lending-based crowdfunding

Regulation and approval of a lending-based crowdfunding platform depends on which

business model the platform employs Platforms wishing to run lending-based

crowdfunding and perform activities which fall within the Danish Payment Services Act

andor the Danish Act on Financial Business must start with obtaining a permit from the

Danish Financial Supervisory Authority as either a money transfer business or a financial

institution Furthermore platforms must comply with the prevailing rules relating to

money laundering Hence it is possible to run a lending-based crowdfunding platform in

Denmark within the prevailing rules and the Danish FSA (Financial Supervisory

Authority) has already approved several lending-based crowdfunding platforms

Equity-based crowdfunding

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding However within the prevailing financial legislation it is possible to run an

equity-based crowdfunding platform in Denmark A company wishing to establish itself

as an equity-based crowdfunding platform must start with obtaining a permit to run a

stockbroker business and can subsequently offer transactions in securities including

equity-based crowdfunding Provided that the platform does not render any actual

consultant services an appropriateness test of the investor must be carried out prior to

completing the transaction The purpose of the appropriateness test is to investigate

whether a retail investor (private investor) has adequate knowledge and experience to

understand the risks involved in equity-based crowdfunding The appropriateness test

can be performed digitally as known from several foreign equity-based crowdfunding

platforms

A company wishing to raise capital through equity-based crowdfunding must either be a

public limited company (AS) or a limited liability partnership (PS) whereas a private

limited company including entrepreneurial businesses may in general not employ this

kind of crowdfunding as these company types are not entitled to offer shares to the

public Businesses that are not registered as public limited companies may however offer

subscriptions for shares on a crowdfunding platform with the aim of employing

crowdfunding to raise the required minimum capital of DKK 500000 for limited

companies1

Transverse considerations

Companies wishing to employ crowdfunding should also consider whether it is necessary

and possible to protect their intellectual property rights including patents and designs

Powerful protection of intellectual rights will in many cases be an efficient tool for the

companies as it will ensure control over the ideainvention and at the same time be an

advantage in connection with both the crowdfunding campaign where the rights over the

product must be proved but also in the event of subsequent financing from business

angels and other investors is sought Companies and platforms engaged in

crowdfunding shall in line with all other businesses comply with all Danish rules and

regulations in force on marketing

International crowdfunding regulations

A review of international regulations in relation to crowdfunding especially with regard to

the EU the UK and the US reveals that overall there are different approaches to

whether regulations should be tightened relaxed or remain unchanged

1

Please refer to the section regarding equity-based crowdfunding for further information on this aspect

6

At EU level the Commission finds that there is a risk that the member states may

introduce hasty regulatory constraints and thus inhibit the development of crowdfunding2

The Commission also points out its concern that introduction of overly-lenient legislation

may lead to weakened investor protection and thus damage the crowdfunding

environment owing to declining consumer confidence Several European countries have

introduced or plan to introduce special legislation for crowdfunding However there is no

broad consensus as to what changes are necessary Common European rules could

contribute to the promotion of crowdfunding across borders

The British market for crowdfunding is considered the most developed in Europe In

March of 2014 new rules for lending-based and equity-based crowdfunding were

introduced In the UK equity-based crowdfunding platforms which provide companies

with the possibility of raising capital rdquoby arranging investments and transactions in not

immediately tangible securitiesrdquo are considered to be ruled by the MiFID directive which

implies that such platforms must be approved by the British FCA (British Financial

Conduct Authority) in accordance with the rules of the directive for security brokers and

that the investor protection rules must be observed

The US has the largest crowdfunding market in terms of number of projects and

investors In April of 2012 the so-called Jumpstart Our Business Startups Act (JOBS

Act) was passed The purpose of the act is to promote growth and employment in the

US In particular two of the sections concern crowdfunding viz Title II and Title III Title

II has already been implemented whereas Title III is still not fully implemented as of yet

The lengthy implementation phase of the sections concerning crowdfunding has caused

several states to start introducing special legislation enabling equity-based crowdfunding

It is still not quite clear when and how the final implementation will be in place However

the JOBS Act defines an overall framework which is described in detail in section 63 of

this report

Conclusion

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

helps to clarify this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework for which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create large public programmes for promoting

crowdfunding in Denmark Instead the market will be able to develop within the existing

framework However the public sector especially may play a role with regard to

increasing businessesrsquo awareness and understanding of crowdfunding If Danish

companies are to make serious use of the growth possibilities that crowdfunding

presents it requires that they are aware of and understand how to exploit it to their best

advantage

Based on the work with the report and the desire to strengthen Danish companiesrsquo

awareness and use of crowdfunding several steps have already been taken to

strengthen the area These include

1 Pilot project with match financing in the Market Development Fund Based on

the work with the report a pilot project in the Market Development Fund has been

established in which companies with consumer-oriented products can employ

reward-based crowdfunding to market validate their projects and achieve match

financing from the fund Companies can apply for support through the fund via a

2 The European Commission (2014) rdquoUnleashing the potential of Crowdfunding in the European Unionrdquo

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 3: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

4

1 SUMMARY

Crowdfunding is essentially about raising funding through contributions or investments

from a large group of people Crowdfunding is rapidly gaining ground internationally

however in Denmark growth has been limited owing among other things to uncertainties

regarding the regulation of the various forms of crowdfunding together with a lack of

awareness of this comparatively new funding concept

With the Growth Package from June 2014 the government along with the Liberal Party

of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the Red-Green

Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det Konservative

Folkeparti) agreed to initiate investigations regarding possibilities of promoting

crowdfunding in Denmark including clarifying any regulatory challenges existing within

this area

The report is a systematic review of the regulatory framework for crowdfunding in

Denmark

The report is based on the four main types of crowdfunding

1 Donation-based crowdfunding where it is purely a matter of donations Projects

financed in this way are most often for a charitable cause

2 Reward-based crowdfunding where the investor receives some kind of reward for

hisher contribution These rewards may consist of immaterial rewards for instance

the contributorrsquos name is included in the credits of a film or material rewards such

as pre-buys where the contributors purchase products or services that have not

yet been put into production

3 Lending-based crowdfunding where private and professional investors loan money

to companies directly bypassing traditional banks This means that many investors

can jointly finance one single companyrsquos loan

4 Equity-based crowdfunding where private and professional investors invest directly

in companies in return for a stake in the companies

Donation-based crowdfunding

Donation-based crowdfunding is basically regulated on the same terms as other types of

public fundraising campaigns Hence companies that employ campaigns for donation-

based crowdfunding in Denmark shall notify the Danish Fundraising Board of their

campaign and comply with the conditions set up by this board Donations received

through public fundraising campaigns are subject to tax and SKAT (Danish Customs and

Tax Administration) must be notified thereof

Reward-based crowdfunding

With reward-based crowdfunding the investor receives a service or a product in return

for hisher contribution which can then be considered as the purchase of an article

Companies employing reward-based crowdfunding must therefore post the earnings

from these sales in their annual accounts together with the production costs etc for the

purpose of corporate taxation and VAT declaration

If the investmentdonation is considerably larger than the value of the product or service

the surplus value is regarded as a donation and thus tax will be payable in accordance

with the tax rules applying to donationsgifts

5

Lending-based crowdfunding

Regulation and approval of a lending-based crowdfunding platform depends on which

business model the platform employs Platforms wishing to run lending-based

crowdfunding and perform activities which fall within the Danish Payment Services Act

andor the Danish Act on Financial Business must start with obtaining a permit from the

Danish Financial Supervisory Authority as either a money transfer business or a financial

institution Furthermore platforms must comply with the prevailing rules relating to

money laundering Hence it is possible to run a lending-based crowdfunding platform in

Denmark within the prevailing rules and the Danish FSA (Financial Supervisory

Authority) has already approved several lending-based crowdfunding platforms

Equity-based crowdfunding

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding However within the prevailing financial legislation it is possible to run an

equity-based crowdfunding platform in Denmark A company wishing to establish itself

as an equity-based crowdfunding platform must start with obtaining a permit to run a

stockbroker business and can subsequently offer transactions in securities including

equity-based crowdfunding Provided that the platform does not render any actual

consultant services an appropriateness test of the investor must be carried out prior to

completing the transaction The purpose of the appropriateness test is to investigate

whether a retail investor (private investor) has adequate knowledge and experience to

understand the risks involved in equity-based crowdfunding The appropriateness test

can be performed digitally as known from several foreign equity-based crowdfunding

platforms

A company wishing to raise capital through equity-based crowdfunding must either be a

public limited company (AS) or a limited liability partnership (PS) whereas a private

limited company including entrepreneurial businesses may in general not employ this

kind of crowdfunding as these company types are not entitled to offer shares to the

public Businesses that are not registered as public limited companies may however offer

subscriptions for shares on a crowdfunding platform with the aim of employing

crowdfunding to raise the required minimum capital of DKK 500000 for limited

companies1

Transverse considerations

Companies wishing to employ crowdfunding should also consider whether it is necessary

and possible to protect their intellectual property rights including patents and designs

Powerful protection of intellectual rights will in many cases be an efficient tool for the

companies as it will ensure control over the ideainvention and at the same time be an

advantage in connection with both the crowdfunding campaign where the rights over the

product must be proved but also in the event of subsequent financing from business

angels and other investors is sought Companies and platforms engaged in

crowdfunding shall in line with all other businesses comply with all Danish rules and

regulations in force on marketing

International crowdfunding regulations

A review of international regulations in relation to crowdfunding especially with regard to

the EU the UK and the US reveals that overall there are different approaches to

whether regulations should be tightened relaxed or remain unchanged

1

Please refer to the section regarding equity-based crowdfunding for further information on this aspect

6

At EU level the Commission finds that there is a risk that the member states may

introduce hasty regulatory constraints and thus inhibit the development of crowdfunding2

The Commission also points out its concern that introduction of overly-lenient legislation

may lead to weakened investor protection and thus damage the crowdfunding

environment owing to declining consumer confidence Several European countries have

introduced or plan to introduce special legislation for crowdfunding However there is no

broad consensus as to what changes are necessary Common European rules could

contribute to the promotion of crowdfunding across borders

The British market for crowdfunding is considered the most developed in Europe In

March of 2014 new rules for lending-based and equity-based crowdfunding were

introduced In the UK equity-based crowdfunding platforms which provide companies

with the possibility of raising capital rdquoby arranging investments and transactions in not

immediately tangible securitiesrdquo are considered to be ruled by the MiFID directive which

implies that such platforms must be approved by the British FCA (British Financial

Conduct Authority) in accordance with the rules of the directive for security brokers and

that the investor protection rules must be observed

The US has the largest crowdfunding market in terms of number of projects and

investors In April of 2012 the so-called Jumpstart Our Business Startups Act (JOBS

Act) was passed The purpose of the act is to promote growth and employment in the

US In particular two of the sections concern crowdfunding viz Title II and Title III Title

II has already been implemented whereas Title III is still not fully implemented as of yet

The lengthy implementation phase of the sections concerning crowdfunding has caused

several states to start introducing special legislation enabling equity-based crowdfunding

It is still not quite clear when and how the final implementation will be in place However

the JOBS Act defines an overall framework which is described in detail in section 63 of

this report

Conclusion

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

helps to clarify this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework for which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create large public programmes for promoting

crowdfunding in Denmark Instead the market will be able to develop within the existing

framework However the public sector especially may play a role with regard to

increasing businessesrsquo awareness and understanding of crowdfunding If Danish

companies are to make serious use of the growth possibilities that crowdfunding

presents it requires that they are aware of and understand how to exploit it to their best

advantage

Based on the work with the report and the desire to strengthen Danish companiesrsquo

awareness and use of crowdfunding several steps have already been taken to

strengthen the area These include

1 Pilot project with match financing in the Market Development Fund Based on

the work with the report a pilot project in the Market Development Fund has been

established in which companies with consumer-oriented products can employ

reward-based crowdfunding to market validate their projects and achieve match

financing from the fund Companies can apply for support through the fund via a

2 The European Commission (2014) rdquoUnleashing the potential of Crowdfunding in the European Unionrdquo

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 4: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

5

Lending-based crowdfunding

Regulation and approval of a lending-based crowdfunding platform depends on which

business model the platform employs Platforms wishing to run lending-based

crowdfunding and perform activities which fall within the Danish Payment Services Act

andor the Danish Act on Financial Business must start with obtaining a permit from the

Danish Financial Supervisory Authority as either a money transfer business or a financial

institution Furthermore platforms must comply with the prevailing rules relating to

money laundering Hence it is possible to run a lending-based crowdfunding platform in

Denmark within the prevailing rules and the Danish FSA (Financial Supervisory

Authority) has already approved several lending-based crowdfunding platforms

Equity-based crowdfunding

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding However within the prevailing financial legislation it is possible to run an

equity-based crowdfunding platform in Denmark A company wishing to establish itself

as an equity-based crowdfunding platform must start with obtaining a permit to run a

stockbroker business and can subsequently offer transactions in securities including

equity-based crowdfunding Provided that the platform does not render any actual

consultant services an appropriateness test of the investor must be carried out prior to

completing the transaction The purpose of the appropriateness test is to investigate

whether a retail investor (private investor) has adequate knowledge and experience to

understand the risks involved in equity-based crowdfunding The appropriateness test

can be performed digitally as known from several foreign equity-based crowdfunding

platforms

A company wishing to raise capital through equity-based crowdfunding must either be a

public limited company (AS) or a limited liability partnership (PS) whereas a private

limited company including entrepreneurial businesses may in general not employ this

kind of crowdfunding as these company types are not entitled to offer shares to the

public Businesses that are not registered as public limited companies may however offer

subscriptions for shares on a crowdfunding platform with the aim of employing

crowdfunding to raise the required minimum capital of DKK 500000 for limited

companies1

Transverse considerations

Companies wishing to employ crowdfunding should also consider whether it is necessary

and possible to protect their intellectual property rights including patents and designs

Powerful protection of intellectual rights will in many cases be an efficient tool for the

companies as it will ensure control over the ideainvention and at the same time be an

advantage in connection with both the crowdfunding campaign where the rights over the

product must be proved but also in the event of subsequent financing from business

angels and other investors is sought Companies and platforms engaged in

crowdfunding shall in line with all other businesses comply with all Danish rules and

regulations in force on marketing

International crowdfunding regulations

A review of international regulations in relation to crowdfunding especially with regard to

the EU the UK and the US reveals that overall there are different approaches to

whether regulations should be tightened relaxed or remain unchanged

1

Please refer to the section regarding equity-based crowdfunding for further information on this aspect

6

At EU level the Commission finds that there is a risk that the member states may

introduce hasty regulatory constraints and thus inhibit the development of crowdfunding2

The Commission also points out its concern that introduction of overly-lenient legislation

may lead to weakened investor protection and thus damage the crowdfunding

environment owing to declining consumer confidence Several European countries have

introduced or plan to introduce special legislation for crowdfunding However there is no

broad consensus as to what changes are necessary Common European rules could

contribute to the promotion of crowdfunding across borders

The British market for crowdfunding is considered the most developed in Europe In

March of 2014 new rules for lending-based and equity-based crowdfunding were

introduced In the UK equity-based crowdfunding platforms which provide companies

with the possibility of raising capital rdquoby arranging investments and transactions in not

immediately tangible securitiesrdquo are considered to be ruled by the MiFID directive which

implies that such platforms must be approved by the British FCA (British Financial

Conduct Authority) in accordance with the rules of the directive for security brokers and

that the investor protection rules must be observed

The US has the largest crowdfunding market in terms of number of projects and

investors In April of 2012 the so-called Jumpstart Our Business Startups Act (JOBS

Act) was passed The purpose of the act is to promote growth and employment in the

US In particular two of the sections concern crowdfunding viz Title II and Title III Title

II has already been implemented whereas Title III is still not fully implemented as of yet

The lengthy implementation phase of the sections concerning crowdfunding has caused

several states to start introducing special legislation enabling equity-based crowdfunding

It is still not quite clear when and how the final implementation will be in place However

the JOBS Act defines an overall framework which is described in detail in section 63 of

this report

Conclusion

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

helps to clarify this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework for which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create large public programmes for promoting

crowdfunding in Denmark Instead the market will be able to develop within the existing

framework However the public sector especially may play a role with regard to

increasing businessesrsquo awareness and understanding of crowdfunding If Danish

companies are to make serious use of the growth possibilities that crowdfunding

presents it requires that they are aware of and understand how to exploit it to their best

advantage

Based on the work with the report and the desire to strengthen Danish companiesrsquo

awareness and use of crowdfunding several steps have already been taken to

strengthen the area These include

1 Pilot project with match financing in the Market Development Fund Based on

the work with the report a pilot project in the Market Development Fund has been

established in which companies with consumer-oriented products can employ

reward-based crowdfunding to market validate their projects and achieve match

financing from the fund Companies can apply for support through the fund via a

2 The European Commission (2014) rdquoUnleashing the potential of Crowdfunding in the European Unionrdquo

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 5: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

6

At EU level the Commission finds that there is a risk that the member states may

introduce hasty regulatory constraints and thus inhibit the development of crowdfunding2

The Commission also points out its concern that introduction of overly-lenient legislation

may lead to weakened investor protection and thus damage the crowdfunding

environment owing to declining consumer confidence Several European countries have

introduced or plan to introduce special legislation for crowdfunding However there is no

broad consensus as to what changes are necessary Common European rules could

contribute to the promotion of crowdfunding across borders

The British market for crowdfunding is considered the most developed in Europe In

March of 2014 new rules for lending-based and equity-based crowdfunding were

introduced In the UK equity-based crowdfunding platforms which provide companies

with the possibility of raising capital rdquoby arranging investments and transactions in not

immediately tangible securitiesrdquo are considered to be ruled by the MiFID directive which

implies that such platforms must be approved by the British FCA (British Financial

Conduct Authority) in accordance with the rules of the directive for security brokers and

that the investor protection rules must be observed

The US has the largest crowdfunding market in terms of number of projects and

investors In April of 2012 the so-called Jumpstart Our Business Startups Act (JOBS

Act) was passed The purpose of the act is to promote growth and employment in the

US In particular two of the sections concern crowdfunding viz Title II and Title III Title

II has already been implemented whereas Title III is still not fully implemented as of yet

The lengthy implementation phase of the sections concerning crowdfunding has caused

several states to start introducing special legislation enabling equity-based crowdfunding

It is still not quite clear when and how the final implementation will be in place However

the JOBS Act defines an overall framework which is described in detail in section 63 of

this report

Conclusion

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

helps to clarify this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework for which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create large public programmes for promoting

crowdfunding in Denmark Instead the market will be able to develop within the existing

framework However the public sector especially may play a role with regard to

increasing businessesrsquo awareness and understanding of crowdfunding If Danish

companies are to make serious use of the growth possibilities that crowdfunding

presents it requires that they are aware of and understand how to exploit it to their best

advantage

Based on the work with the report and the desire to strengthen Danish companiesrsquo

awareness and use of crowdfunding several steps have already been taken to

strengthen the area These include

1 Pilot project with match financing in the Market Development Fund Based on

the work with the report a pilot project in the Market Development Fund has been

established in which companies with consumer-oriented products can employ

reward-based crowdfunding to market validate their projects and achieve match

financing from the fund Companies can apply for support through the fund via a

2 The European Commission (2014) rdquoUnleashing the potential of Crowdfunding in the European Unionrdquo

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 6: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

7

specially customized application module If a company receives conditional

approval it will have to rsquoproversquo its market potential on a reward-based crowdfunding

platform Subsequently a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund The crowdfunding module will initially

run as a one year pilot project where the first application round was in March 2015

httpThe Market Development Funddkcrowdfunding

2 Development of user-friendly guidelines for platforms companies and

investors At the same time as the publication of this report guidelines will be

launched for companies investors and platforms who wish to engage in

crowdfunding The guidelines will be available at startvaeligkstdk and describe the

basic rules of which the players must be aware as regards crowdfunding and they

will also contribute to adding clarity and knowledge about the market In relation to

the specific crowdfunding tax rules in April SKAT published a set of guidelines on

their website

To promote Danish companiesrsquo awareness and use of crowdfunding further proposals

have been made concerning the introduction of initiatives that can help strengthen

SMEsrsquo and entrepreneursrsquo access to financing through crowdfunding These include

1 Growth guarantees for lending-based platforms To support the establishment

of lending-based crowdfunding it is recommended that the growth guarantee

scheme within the context of the Danish Growth Fund be expanded to also include

approved lending-based crowdfunding platforms in an appropriate way Growth

guarantees are used to cover a part of the risk of financing loans for SMEs The

scheme which at present is being employed by several financial institutions will

thus be expanded to also be employed by lending-based platforms after these have

been approved by the Danish Growth Fund The structure for offering growth

guarantees to lending-based platforms cannot be transferred directly from financial

institutions as lending-based crowdfunding platforms cannot initially absorb any

losses Therefore the scheme will have to de designed in a way that takes this

difference into account

2 Training of the regional innovation office consultants Each year the

innovation offices meet thousands of Danish companies It is recommended that

the innovation office consultants receive training and preparation to also guide and

liaise with the companies regarding crowdfunding

3 Monitoring the market Crowdfunding is an expanding market and thus at

present it is difficult to foresee how the market will develop in years to come It is

therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another analysis of

the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

4 International collaboration The EU Commission has issued a communication on

crowdfunding and is expected to perform a comprehensive survey of approaches

and development within this area To ensure a more stable and transparent market

for crowdfunding it is recommended that efforts be put into removing undesirable

obstacles for crowdfunding and in the long term that clear and simple crowdfunding

regulations in the context of EU be introduced This will ease the upstart of

crowdfunding activities and thus increase the amount of available venture capital

for SMEs and entrepreneurs in all of Europe

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 7: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

8

This report has been prepared by the Danish Ministry of Business and Growth including

the Danish Business Authority the Danish FSA the Danish Patent and Trademark Office

and the Danish Competition and Consumer Authority in collaboration with the Danish

Ministry of Taxation

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 8: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

9

2 INTRODUCTION

The lending survey for the first six months of 2014 indicates that the total lending sum to

business companies is slowly increasing However many small companies are still

experiencing difficulties in obtaining financing3 This is amongst other things due to the

fact that SMEs are relatively expensive to credit rate in relation to the size of the

financing and especially as entrepreneurs often have a limited track-record to prove

their credit worthiness This can mean that sound investments cannot be carried out and

in the long run that the competitive power of Danish companies will deteriorate When

employing crowdfunding for financing other criteria apply for obtaining financing which to

a greater extent accommodates SMEs and entrepreneurs Thus crowdfunding can

contribute to strengthening access to financing for SMEs and entrepreneurs

With an agreement for a growth package from June 2014 the government along with the

Liberal Party of Denmark (Venstre) the Danish Peoplersquos Party (Dansk Folkeparti) the

Red-Green Alliance (Enhedslisten) and the Danish Conservative Peoplersquos Party (Det

Konservative Folkeparti) agreed to initiate investigations regarding possibilities for

promoting crowdfunding in Denmark including clarifying any regulatory challenges

existing within this area

A crowdfunding campaign not only provides the companies with the possibility of raising

capital but the companies can also test the market potential of their product or business

model This is in opposition to more traditional investments from typically only a few

investors

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding is limited The global market for crowdfunding increased by

167 from 2013 to 2014 reaching DKK 111bn The preliminary 2015 forecasts indicate

that the global market this year will double and reach DKK 236bn by year-end4

The Danish crowdfunding market is still considered to be in its early days Indications

suggest that Danish companies are increasing their focus on this type of financing

including support through the efforts of Danish interest groups for the promotion of

crowdfunding Additionally international platforms such as Kickstarter have set up

operations in Denmark and increased the interest for the companiesrsquo business potential

with crowdfunding

3 Cf Lending statement for first six months of 2014 (httpwwwevmdk~mediaoempdf20142014-

publikationer18-12-14-udlaansredegorelseudlnsredegrelse-1-halvr-2014ashx) 4 Massolution (2015) rdquo2015CF The Crowdfunding Industry Reportrdquo

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 9: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

10

3 CLARIFICATION OF UNDERLYING CONCEPTS

Crowdfunding is a financing concept where projects companies and private persons

collect contributions or investments from a large number of people often through digital

platforms

Many small companies experience difficulties in obtaining financing as their possibilities

for providing security are limited and they lack the turnover and earnings proving their

creditworthiness to banks and mortgage banks This may mean their business side and

growth potential cannot be realised

Basically there are four types of crowdfunding Donation-based crowdfunding reward-

based crowdfunding lending-based crowdfunding and equity-based crowdfunding

The various types of crowdfunding are relevant in the various stages of a companyrsquos

need for capital

A company in need of the initial capital for putting a product into production can choose

to raise capital on a reward-based crowdfunding platform such as Kickstarter Indiegogo

or the Danish platform Booomerang Here the company can sell its product or service to

the first customers and thus raise the capital for putting the product into production This

type of crowdfunding is also called pre-buy Reward-based crowdfunding is possibly

the most well-known form of crowdfunding in particular owing to the large international

platforms such as Kickstarter and Indiegogo Companies behind well-known products

such as the Pebble smartwatch the Pono music player the Solar Roadway solar cell

project etc have raised large amounts on reward-based platforms

Lending-based crowdfunding implies that the company obtains its loan from many

different sources via a lending-based platform Alternatively the company can choose

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 10: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

11

equity-based crowdfunding where the company offers ownership shares in return for a

capital investment from a number of small investors

One attribute that applies to all four types of crowdfunding is that crowdfunding provides

more than merely access to capital it also contributes to underlining the market potential

for the company Companies that employ crowdfunding to raise capital also have the

opportunity to make use of a type of collective investment intelligence ndash or rsquowisdom of

the crowdrsquo When a company chooses to place their business idea or product on a

crowdfunding platform they expose themselves to thousands (in some cases millions) of

potential investors who have the opportunity of seeing the project and investing in it If

the company achieves full financing it will also be a test of the companyrsquos business

model or product at a very early stage Thus crowdfunding is also a tool with which

companies relatively quickly can test the market potential for their business

Crowdfunding also contains an element of co-creation or rsquocrowdsourcingrsquo

Crowdsourcing implies that the company gathers knowledge ideas or resources for a

project or product from a large group of people Put simply you could say that while

crowdfunding is about gathering money from a group of people crowdsourcing is about

making use of the competencies and knowledge in a large group

People investing in a crowdfunding campaign have a self-interest in the success of the

campaign and the company Some campaigns run according to a model called rsquofixed

fundingrsquo This means that the company only receives the money from the investors if the

company obtains at least 100 of the asking amount For the investors this means that

they only get something out of their contribution or investment if the campaign reaches

at least 100 of the financing Secondly the investors have a self-interest in the

companyrsquos business or product being as successful as possible This tendency is

especially common in reward-based crowdfunding where the investors often will make

suggestions with regard to how a product can be improved additional functions which

components could be changed with advantage etc The company behind the

crowdfunding campaign can thus use their investors to improve their products and thus

improve their chances for success

Crowdfunding platforms are often global which means that there is a large potential for

the internationalization of a company that employs crowdfunding The company is

exposed to at large group of potential investors from all around the globe just as the

company also potentially can sell their product all over the world This means that the

companies will have an entirely different strategy for entering new markets than

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 11: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

12

normally where companies traditionally establish themselves on the home market for

example Denmark and then start exporting to their neighbouring markets as their initial

export markets With crowdfunding on international platforms the companies are

potentially global from the very beginning

Crowdfunding is also another way of marketing a company or a product The marketing

of crowdfunding campaigns takes place to a great degree via social media such as

Facebook and Twitter and focus is amongst other things on user involvement

transparency creating the right incentive for the investors and letting the investors feel

that they are part of the companyrsquos history As crowdfunding is Internet-based and the

marketing to a great extent takes place on the social media there is also the possibility

that campaigns goes rsquoviralrsquo ie an explosive spread of the campaign via social media

This phenomenon is what happened when the musician Neil Young launched a

campaign on the reward-based platform Kickstarter with the Pono music player 10 hours

after the campaign launched on the platform DKK 48m had been raised and Pono

ended with raising almost DKK 38m from 18220 investors

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 12: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

13

4 THE EXTENT OF CROWDFUNDING

As crowdfunding is a relatively new phenomenon sound knowledge and data concerning

the extent of crowdfunding are limited

The EU Commission estimates that in 2013 approx DKK 75bn was raised through

crowdfunding in Europe and that crowdfunding was an important source for the

financing of approx 500000 European projects Furthermore the Commission believes

that crowdfunding has great potential as a supplementary source of financing for

entrepreneurs and growth businesses5

At global level crowdfunding is also experiencing rapid growth In 2012 there were more

than 450 crowdfunding platforms of which the American based platform Kickstarter was

the biggest Today the number of platforms is estimated to have doubled Kickstarter

launched in the US in 2009 and in April 2015 the platform had reached a total of DKK

11bn in investments In 2014 USD 1000 (approx DKK 6500) on average per minute

was raised on the platform to realize more than 22000 projects

An international survey performed in 20146 of the potential for reward- lending- and

equity-based crowdfunding to support growth includes the following

- Companies that have employed crowdfunding increase their annual turnover

with approx 24 (excluding income from the crowdfunding campaign)

- 39 of the companies hired on average two new employees after a successful

crowdfunding campaign

- Within three months after a successful crowdfunding campaign 28 of the

companies had an investment agreement with a business angel or venture

capital firm

Crowdfunding is a global financing concept where platforms operate across national

borders It is therefore difficult to establish exact figures for the number of Danish

companies that have employed crowdfunding The Crowdfunding Centre attempts to

gather information about campaigns on international crowdfunding platforms and here

246 Danish campaigns were registered of which by far the majority are reward-based7

In addition there are a number of projects which are financed on Danish crowdfunding

platforms

Figures from the UK also indicate an increase in crowdfunding and the British market for

alternative financing is estimated to have reached approx DKK 16bn in 2014 This

corresponds to approx 24 of British bank lending to SMEs The accumulated

crowdfunding market in the UK has risen 150 from 2012-2013 161 from 2013-2014

and is estimated to increase a further 160 in 20158

Some lines of business are more suitable for crowdfunding than others In general

products of personal relevance find it easier to attract investors For instance this is

5 European Commission (2014) rdquo Unleashing the potential of Crowdfunding in the European Unionrdquo 6 OECD (2014) ldquoCase study on crowdfundingrdquo 7 The Crowdfunding Centre (Dec 2014) httpthecrowdfundingcentrecompage=accounthome|pagehome 8 Nesta (2014) rdquoUnderstanding Alternative Financerdquo

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 13: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

14

reflected in campaigns for computer games technology (gadgets) films design and

music which have the most investors9 From a Danish point of view the industrial

distribution within crowdfunding is interesting as several of the industries suitable for

crowdfunding represent Danish core strengths for example within games and the design

industry On the international platforms 42 of the projects lie within films games

music and technology Based on figures available from the Crowdfunding Centre

estimates indicate that Danish projects do not differ greatly from the global distribution

9 The Crowd Data Center (2014) rdquoThe State of The Crowdfunding Nation ndash Quarter two 2014rdquo

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 14: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

15

5 REGULATORY FRAMEWORK FOR CROWDFUNDING IN DENMARK

The debate in the Danish media indicates that among companies platforms and interest

groups clarity does not prevail concerning which regulatory rules and conditions the

various types of crowdfunding are governed by in Denmark This should be seen in the

light of the fact that crowdfunding is a relatively new financing concept which has

experienced vast growth with the spread of the Internet At the same time it is a

financing concept which goes across exiting rules and regulations and where new

business models make it difficult to establish exactly which rules and regulations apply

An account of the regulatory framework for each of the four types of crowdfunding is

given below with special focus on the individual rules that apply for companies platforms

and investors respectively Additionally circumstances applying to all four types of

crowdfunding are discussed such as legislation on marketing practices and

considerations concerning IP rights The report touches upon the most important

regulatory circumstances relevant for companies platforms and investors

51 DONATION-BASED CROWDFUNDING

Donation-based crowdfunding is based on

sheer donations ie the investordonor does not

receive any consideration or product in return

for hisher contribution Globally projects

financed in this way are primarily of a charitable

nature Overall there are two types of projects

1) Projects that traditionally belong under

development aid and NGOs such as support to

refugees aid to survivors of natural disasters

etc and 2) Personal projects such as support

towards a form of medical treatment financial

assistance for participation in sports events etc

Donation-based crowdfunding is regulated by the Danish Fundraising Act which basically

applies to all public fundraising campaigns including donation-based crowdfunding and

for certain forms of reward-based crowdfunding where the reward is not an article or

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 15: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

16

service but a symbolic gesture The Danish Fundraising Act was revised as of 26 May

2014 with an aim of creating more transparency and openness concerning fundraising

for charitable purposes and a more up-to-date regulation

In general two weeks prior to implementation notification of all fundraising campaigns

must be made to the Danish Fundraising Board indicating the purpose of the campaign

A public fundraising campaign must be managed by a legal entity (ie a company an

organisation an association a public or private institution etc) or a committee consisting

of a minimum of three individuals Hence one private person alone cannot be in charge

of a public fundraising campaign For all fundraising campaigns it is necessary that at

least one of the persons responsible is of age

In connection with public fundraising campaigns that fall within the Danish Fundraising

Act DKK 1000 (2014 rate) must be paid when giving notice of the campaign When the

campaign is concluded the person responsible for the campaign will submit detailed

accounts to The Danish Fundraising Board The accounts will be available on the Danish

Fundraising Boardrsquos website In the event that the campaign has its own site the

accounts will also be published there If the raised funds exceed DKK 50000 the

accounts must be audited by a state authorized or registered public accountant If the

raised funds amount to DKK 50000 or less there are no requirements for performing an

audit

In that connection the Danish Fundraising Board oversees that accounts have been duly

kept and that the money has been spent on the stated purpose

A company organisation or committee running a donation-based crowdfunding

campaign is in general liable to pay tax on incomes from donations including

contributions and gifts etc However there are special circumstances that justify

exempting the receiver from paying tax including money given to people who are

sickpersons injured in accidents etc10

An association fund institution or the like can also receive donations An association

with a commercial income is normally liable to pay tax of the donation and must inform

the tax authorities of the amount in compliance with the general tax rules for companies

unless the commercial income is closely connected to a non-profit purpose The

donation is not liable to tax if it is given to a tax-exempt association that is characterized

by solely being non-profit or charitable or if it does not have a commercial income For

an association to be considered non-profit or charitable it is a condition that the

association uses its funds to support a large circle of people or organisations

A platform engaged in donation-based crowdfunding must comply with the general

provisions of the law including the Danish Marketing Practices Act Platforms wishing to

engage in donation-based crowdfunding must also be aware of the fact that at the

moment Nets does not allow their payment solution to be used in connection with

donation-based crowdfunding platforms as donations in general are not permitted

10 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 16: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

17

according to payment card agreements If you wish to receive donations through a

payment card agreement the purpose must be of a non-profit nature However there is

nothing to prevent a Danish based platform from choosing another payment card

solution than Nets

With regard to notifying The Danish Fundraising Board of campaigns in general it should

be the individual company organisation or committee behind the fundraising campaign

who notifies The Danish Fundraising Board of the campaign Thus the platform cannot

merely submit one notification and subsequently carry out several campaigns on the

platform under the same notification

Crowdfunding platforms engaged in donation-based crowdfunding are from a taxation

point of view to be considered as an ordinary company in general This means that the

platform is subject to the general corporate tax rules11

A donorinvestor who gives gifts or donations through a donation-based crowdfunding

campaign is of equal standing as donors who give gifts or donations through more

traditional campaigns or fundraising campaigns

Donorsinvestors must ndash regardless of making a donation via crowdfunding or through a

more traditional campaign be aware of the fact that there are tax-related differences

depending on whether the donation is to an approved or to a non-approved charitable

institution Donorsinvestors giving gifts or donations to an approved charitable institution

etc could in 2014 achieve a maximum tax deduction of DKK 14800 Donorsinvestors

are only eligible for the allowance if the association seeking financing has been

approved by SKAT as a charitable association and the association declares the amount

to SKAT Donations to organisations companies or committees who are not approved

as charitable institutions will in general not be deductible12

If a company has made a donation with the purpose of advertising for the company a

deductible amount can be achieved for the donation However this presupposes that the

business operator can prove that the donation has been made with an advertising

purpose and that the advertising value is adequately customized for the target group of

the business operator

Conclusion

In general donation-based crowdfunding is regulated by the same terms as other types

of public fundraising campaigns Ie campaigns employing donation-based crowdfunding

in Denmark must notify the Danish Fundraising Board of the campaign and comply with

the framework that the Danish Fundraising Board has set up Donations received

through public fundraising campaigns are liable to tax and must be declared to SKAT

11 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087 12 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 17: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

18

52 REWARD-BASED CROWDFUNDING

Reward-based crowdfunding is the most

widespread form of crowdfunding in terms of

number of projects and investors in Denmark

as well as globally In the reward-based

crowdfunding model the investor receives

some kind of reward for hisher investment

For example a film may offer tickets to the

opening night the investorrsquos name in the

credits or download of a copy of the film

whereas in the case of a physical product

access to an early version of the product may

be offered or a version of the product may be

forwarded as soon as it is manufactured (this

last-mentioned model is also called rdquopre-buyrdquo)

Reward-based platforms typically earn money by taking a share of the amount raised by

the campaigns even if the business models may vary from platform to platform

Reward-based crowdfunding not only represents an alternative source of finance but

also a way in which companies quickly can test the market potential of their product and

receive direct feedback from those who have invested in the product during their

crowdfunding campaign Technological products are among those that raise the greatest

amount of money through reward-based crowdfunding13

Examples of this are Danish

Airtame who raised DKK 76m and the GermanDanish company The Dash who raised

DKK 19m

In general reward-based crowdfunding is regulated by the same rules as Internet shops

for instance with regard to right-to-return provided that the reward is a service or a

product In the event of a symbolic gesture it will typically be regarded as a donation

13 Among the 20 most highly financed campaigns on Kickstarter eight of them are within the category rsquoTechnologyrsquo

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 18: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

19

Companies engaged in reward-based crowdfunding must comply with the same rules as

other Danish companies with regard to VAT registration and declaration corporation tax

and marketing

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale

With regard to taxation the company or the person behind the crowdfunding campaign

may experience a deficit for example if the accumulated investments are smaller than

the financial costs for the product or service the investors receive in return for their

investment With a crowdfunding campaign this could happen becaeuse the company

prices and sells the product or service before the production of it has been initiated

During production unforeseen expenses may occur making the product or service more

expensive than estimated If this is the case the company may be granted a tax

allowance

There could be cases where the size of the investment is much greater than the value of

the product or service For example a poster will rarely have a value of DKK 1000 In

such cases the surplus value could be regarded as a pure donation and therefore

taxable in accordance with the tax rules for donations14

VAT liability of reward-based crowdfunding

VAT liability presupposes that a person liable to VAT delivers an article or a service in

return for remuneration When assessing reward-based crowdfunding the assessment

will be based on a number of factors with regard to when VAT is due and must be paid It

is of utmost importance for the VAT assessment what the parties have agreed on in

relation to

a) the remuneration amount to be paid

b) who charges the amount

c) who has the right to dispose of the amount

d) what the remuneration is for

e) when the amount is invoicedcharged

In general a concrete assessment must be made in each case

In general VAT is due with the first instance of one of the following occurrences time of

delivery time of invoice or time of payment In relation to reward-based crowdfunding

the time of payment will most often occur first as the company will receive the money

from the platform when the campaign has completed successfully

With regard to taxation the same tax rules apply for companies using reward-based

crowdfunding as for other companies in Denmark Income from the reward-based

crowdfunding campaign will be included in the companyrsquos annual accounts together with

the manufacturing costs for the product and at fiscal year-end tax will be paid on the

companyrsquos surplus if any15

14 Cf The section on donation-based crowdfunding 15 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 19: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

20

A platform wishing to engage in reward-based crowdfunding is not subject to special

terms and conditions but must comply with the general provisions of the law including

the Danish Marketing Practices Act etc The platforms will most often be considered as

ordinary companies and thus be subject to the corporate tax rules in force Platforms

wishing to engage in reward-based crowdfunding must also be aware of the fact that

Nets does not allow their payment solution to be used in connection with reward-based

crowdfunding platforms In this connection Nets considers reward-based crowdfunding

in line with donations However there is nothing to prevent a Danish based platform from

choosing another payment card solution than Nets

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 20: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

21

With reward-based crowdfunding the investor receives a product or service in return for

hisher contribution From a fiscal point of view this crowdfunding model could

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax for the monetary donation in the same way as for ordinary proceeds from a

sale

If the investor is a company and if the product or service in which investments are made

form part of the company the product or service will then be considered as part of the

operating equipment pursuant to the Danish Act on Depreciation and Amortization This

means that the investor is able to write off the product or service

Conclusion

As such there are no legislative obstacles hindering Danish companies in employing

reward-based crowdfunding on Danish or foreign platforms Regardless of whether

Danish companies employ foreign or Danish platforms they must comply with the

Danish laws on taxation and VAT in force and it is recommended that they take into

account the extent to which it is reward-based or donation-based crowdfunding as this is

of paramount importance with regard to taxation

53 LENDING-BASED CROWDFUNDING

With lending-based crowdfunding private and

professional investors lend money directly to

companies thus bypassing traditional banks

The platforms often function as rsquoguarantorsrsquo ndash

guaranteeing that the borrowers are

creditworthy before putting them on the

platform Lending-based crowdfunding implies

that many investors can finance one single

companyrsquos loan This provides investors with

the possibility of lending money to several

companies thus spreading their risk Lending-

based crowdfunding is legislatively possible in

Denmark but requires that the platform is

approved by the Danish FSA either as a financial institution or a payment service

provider The first platforms have already been approved by the Danish FSA

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 21: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

22

Lending-based crowdfunding is a way of raising capital where the contributors provide

capital in the form of a loan Projects and persons who raise money through lending-

based crowdfunding undertake to repay the funds pursuant to certain terms and

conditions

From a fiscal point of view lending-based crowdfunding is considered as an ordinary

loan relationship where the lender provides the borrower with a sum of money in return

for payment of interest The interest of the loan is liable to tax for the lender and

deductible for the borrower

For the borrower the loan sum is not a taxable income and likewise the repayments do

not trigger a tax deduction However the interest on the loan triggers a tax allowance if

it is regarded as interest from the fiscal point of view

In the event if the borrower wishes to claim a tax allowance for the interest costs the

borrower shall in addition to stating the interest costs in the annual statement also

report the identity of the lender to SKAT16

Furthermore the companies must be aware of the fact that lending-based platforms may

make various requirements of the companies These requirements may differ from

platform to platform

Lending-based crowdfunding platforms must start with obtaining a permit from the

Danish FSA to carry out their business The required permit will depend on the platformrsquos

business model and how it facilitates the loans between the company in need of a loan

(borrower) and the persons willing to lend money to the company (lenders)

Overall there are two types of permits The first type of permit is as a financial institution

The platform must have this type of permit if it is the platform which actually grants the

16 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 22: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

23

company the loan The other type of permit is as a payment service provider including

money transfer companies The platform must have this type of permit if the platform

merely transfers the loans to the company Additionally if the platform only transfers

limited amounts the platform can make do with a limited permit

Finally the platform must comply with a number of requirements regarding money

laundering the purpose of which is to prevent monetary transactions including monetary

transactions in connection with crowdfunding being used to launder money

As a rule the platforms will often ndash depending on their business model ndash be considered

as an ordinary company and thus subject to the general corporate tax rules in force

Permission as a financial institution

Companies that receive deposits or other funds from the public which are to be repaid

and provide loans at their own expense must have a permit as a financial institution17

It

is the Danish FSA that assesses the kind of permit a company will be granted based on

four factors Only if the company fulfils all four will it be granted the permit

The four factors are as follows

1) Does the company receive deposits or other funds which are to be repaid

2) The deposits or other funds to be repaid ndash are they received from the public

3) Does the company provide loans at its own expense

4) If there are other funds from the public which are to be repaid do these funds or the

lending business constitute a substantial part of the companyrsquos operations

In the event that a lending-based crowdfunding platform does not require a permit as a

financial institution the platform will in general require approval as a money transfer

company

Permission as a money transfer company

If a crowdfunding platform offers to transfer funds from the depositors to specific

appointed persons or companies seeking capital through crowdfunding these activities

may fall within the Danish Payment Services and Electronic Money Act which require a

permit from the Danish FSA

It would be a matter of a money transfer company if a specific amount is received and

this is offered to be transferred to one specific receiver appointed by the payerdepositor

Permission as a money transfer company implies that the company alone shall receive

funds of which the purpose is to transfer a corresponding amount to a recipient

If the platform wishes to run a money transfer company it must start with obtaining a

permit as a payment institution It is also possible to obtain a limited permit on easier

terms if the average of all payment transactions for the previous 12 months do not

exceed 3m euro (almost DKK 23m) The easier terms imply that there are no capital

requirements However a number of organisational requirements and requirements

pursuant to the money laundering legislation must be complied with

Money laundering

The Danish Money Laundering Act sets requirements with regard to companies which

fall within the Money Laundering Act that they shall have internal rules for amongst other

things risk management including risk assessment management control and

17 Danish Financial Business Act section 7(1)

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 23: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

24

communication proof of identity of customer duty to be alert investigate record and

report and to store registrations

The requirement that a company must know its customer and that these must prove their

identity towards the company is a fundamental element in the measures to prevent

money laundering and financing of terrorism

From a fiscal point of view lending-based crowdfunding is considered to be an ordinary

loan where the lender provides the borrower with an amount of money in return for

payment of interest For the lender the interest of the loan is liable to tax and deductible

for the borrower

For the lender it applies that the actual loan amount does not trigger a tax allowance On

the other hand the repayments from the borrower are not liable to tax either The lender

is only liable to tax for the received interest In the event the borrower cannot repay the

loan the borrower may be granted a tax allowance for the loss However in certain cases

no tax allowance for the loss will be granted if the loaner and borrower are closely

connected for example they are related or have ownershipinfluence inon the

business18

Conclusion

From the above and from the practice of the Danish FSA it can be concluded that if a

lending-based crowdfunding platform does not promise the investors that they may claim

repayment of their investment from the platform and if in the capacity of an investor

18 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 24: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

25

you virtually grant a loan to the project(s) seeking financing through crowdfunding it is

not a matter of financial-institution business

If the platform itself is in charge of transferring funds from the lender to the borrower it

will need a permit as a money transfer company But if the companyrsquos scope is limited it

can make do with a limited permit pursuant to the Danish Payment Services Act

In the event that a lending-based crowdfunding platform has been approved as a money

transfer company it is important that the platform explains to the lender that the platform

solely facilitates the loan and that in the capacity of lender heshe cannot be certain to be

repaid hisher deposit It is also important that it is the lender himherself who selects the

project(s) to which heshe wishes to grant a loan and that the lender has remedies

towards the borrower should heshe not observe his duty to repay the loan

With regard to the fiscal matters lending-based crowdfunding is considered to be an

ordinary loan relationship between lender and borrower in return for payment of interest

This means that the general rules for allowances and taxation within the area also apply

to lending-based crowdfunding

54 EQUITY-BASED CROWDFUNDING

With equity-based crowdfunding private and

professional investors can invest directly in

companies in return for a share of the coming

profits (profit sharing) or a security Contrary to

an initial public offering these securities are

typically not traded on a secondary market and

no underwriting of capital is given In other

words it is a matter of investment in unlisted

shares

Equity-based crowdfunding platforms will most

often review and approve all campaigns

before putting them on the platform Some

platforms run a pre-round where the companies have the possibility of customizing their

presentations and testing their concept on the investors before the opening of the actual

investment round (open round) Investors who have invested in the pre-round will

automatically participate in the open round Other platforms enter the investment round

as soon as the campaign has been approved With equity-based crowdfunding the

companies have the possibility of raising a large amount of money from many investors

at the same time This financing concept will therefore be less resource-intensive for the

company which at the same time is exposed to a larger investor panel than would be the

case with traditional capital raising methods19

19 Crowdcube who brands itself as the worldrsquos leading equity-based crowdfunding platform has at present approx 64000 registered investors

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 25: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

26

From a regulatory point of view equity-based crowdfunding is the most complex type for

companies platforms and investors alike Companies wishing to employ equity-based

crowdfunding fall within company law amongst others and there are restrictions as to

the type of companies that may employ this type of crowdfunding Platforms are mainly

regulated within financial law as are investors who are protected and regulated within

the part of financial law that concerns investor protection

A company considering employing equity-based crowdfunding for raising capital should

be aware of several factors In general equity-based crowdfunding is considered as an

offer of shares to the public and it must be ensured that the companyrsquos structure permits

this For instance limited companies and limited partnerships are permitted to offer

shares to the public

Additionally companies that wish to employ equity-based crowdfunding must comply

with the tax rules in force In this case the rules do not deviate from the general rules on

capital investments in companies20

Finally in the event that the securities on offer amount to more than 1m euro (approx

DKK 75m) a prospectus must be prepared

Company form

In general companies wishing to employ equity-based crowdfunding must be registered

as a public limited company (AS) or a limited liability partnership (PS) When founding a

public limited company it is required that the founders subscribe for the shares It is

therefore determined that there is nothing to prevent the founders of a limited company

from offering subscription to shares via a crowdfunding platform with a view to crowdfund

for the minimum capital requirement of DKK 500000 for public limited companies This

applies as long as the existing rules are observed including the 2 week period of

notification

Companies that are registered as private limited companies (ApS) including

entrepreneurial companies (IVS) cannot employ equity-based crowdfunding to raise

capital This is due to the fact that private limited companies may not pursuant to

20 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 26: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

27

corporate law21

offer shares to the public This restriction does not apply to other

company forms The fact that the subscription of shares cannot be offered to rsquothe publicrsquo

is to be understood in such a way that the offer must be made to a more specific defined

group which would not be the case if the shares were offered through a website A

private limited company is characterised as a company which is owned by a known and

closed circle of shareholders which has the effect that private limited companies do not

fall within the scope of a number of the company directives including the capital

requirements directive If it were to be made possible for private limited companies to

offer shares to the public it would be necessary in order to continue compliance with the

obligations according to EU law to implement the capital requirements directive for

private limited companies amongst others This would lead to a much tougher regulation

of private limited companies than at present with significantly increased administrative

burdens for all private limited companies in Denmark

Fiscal matters

For companies it applies that with equity-based crowdfunding it is run in company form

and the company is therefore liable to tax for revenue at a corporation tax rate of 245

(22 from 2016) If capital investments take place through subscription for shares in the

form of the received investments this is not considered as revenue however but as a

tax deductible capital investment The received investments are therefore not liable to

tax regardless of whether they have been sold at a price above par or not22

The person or persons who own(s) the company and receive(s) the investments will still

own the company and be shareholders in it As individual and shareholder the owner is

treated in the same way as the other shareholders with regard to tax

Prospectus rules

It the crowdfunding model is structured in such a way that the capital investors receive

securities in return for their investment this could be a matter of a public securities

offering

If such a securities offering exceeds 1m euro a prospectus must in general be prepared

and then approved by the Danish FSA However there is no duty to prepare a

prospectus if the public securitiesrsquo offering falls short of 1m euro in Denmark Securities

traded on a regular market must always have a prospectus that fulfils the requirements

for offers of more than 5m euro

A company wishing to raise less than 1m euro and wishing solely to do so via a

crowdfunding platform will therefore not have to prepare and register a prospectus The

prospectus rules in Denmark are stated in two executive orders ndash one for small and one

for large prospectuses relatively Small prospectuses cover public security offerings

between 1 and 5m euro whereas large prospectuses are for public offerings of more

than 5m euro The most obvious difference between the two executive orders is that the

contents requirement for a prospectus according to the rdquolarge prospectus orderrdquo is far

more extensive that those that fall within the rdquosmall prospectus orderrdquo which is national

law

There are a number of exceptions to the prospectus duty which are more or less the

same for both prospectus directives There is no prospectus duty if the

1) Securities offering is solely directed towards rdquoqualified investorsrdquo

21 Section 1(3) of the Danish Companies Act 22 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 27: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

28

2) Securities offering is directed to less than 150 individuals or juristic persons

per country within the EU or per country with which EU has entered into an

agreement for the financial area and who are not rdquoqualified investorsrdquo

3) Securities offering directed towards investors who in total purchase

securities for at least 100000 euro per investor for each individual offering

4) Securities offering of which the nominal value of each security amounts to

at least 100000 euro

In relation to exception 2) it must be noted that the condition is not fulfilled by advertising

on a crowdfunding platform or the issuerrsquos web site and subsequently limiting the offer to

for example the first 149 persons who contact them The same applies if advertisements

are made via social media or daily newspapers In other words it is the general

advertising of the project ndash and not the number of investors ndash that determines whether

the offer is considered to reach 150 or more persons

Companies running an equity-based crowdfunding platform must start with obtaining a

permit to act as a securities dealer if the companyrsquos websiteplatform makes it possible

for investors to get in touch with capital-seeking limited companies or companies that

can be placed on the same footing as limited companies and thus making a transaction

concerning shares or the like possible

This means that an equity-based crowdfunding platform that facilitates capital shares to

investors typically must have a permit to act as securities dealer if the platform for

instance receives facilitates and executes orders concerning financial instruments on

behalf of investors23

However this only applies if the transactions concern securities

ie financial instruments24

for example shares in limited liability companies and

securities that can be placed on the same footing as shares including shares in limited

partnerships with more than 10 participants25

There is no trifle limit in relation to the above rules concerning the requirement for a

permit to act as a securities dealer Therefore companies that run a crowdfunding

platform will be covered regardless of the size of the individual transactions

The platforms will most often ndash depending on their business model ndash be considered as a

regular company and thus also subject to the corporation tax legislation in force

Permission as securities dealer

A crowdfunding platform that sticks to receiving mediating and executing orders but

does not trade for its own account must obtain a rdquosmallrdquo stockbroker permit from the

Danish FSA

Permission as stockbroker implies amongst other things a capital requirement of

300000 euro (approx DKK 22m) that the management of the company fulfils the fit amp

proper requirements and that it can live up to a series of organisational requirements and

requirements that ensure investor protection When applying for a permit from the

23 Section 9(1) of the Financial Business Act 24 Covered by annex 5 of the Financial Business Act 25

Permission will also be required if capital seeking companies on the platform offer corporate bonds or other debt instruments covered by annex 5 of the Financial Business Act

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 28: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

29

Danish FSA it will be taken into account that the knowledge and experience relevant in

relation to running an Internet platform for equity-based crowdfunding is not necessarily

the same as for running a traditional investment company

In connection with applying for a stockbroker permit you must be able to present a plan

of operations for the projected company so the FSA can assess the justifiability and

durability of the company In addition the company will also have to prepare business

procedures to ensure that the company adheres to a series of organizational

requirements including requirements concerning documentation and record keeping

The rules are to ensure satisfactory investor protection

Money laundering

The money laundering act requires that a stockbroker in line with other companies who

fall within this act shall have internal rules for among others risk management

(including risk assessment management control and communication) proof of identity of

customer duty to be alert investigate record and report and to store registrations

The requirement that a company must know its customers and that these must prove

their identity towards the company is a fundamental element in the measures towards

preventing money laundering and financing terrorism

The rules concerning investor protection can be found in rdquoThe Danish Executive Order

on investor protection in connection with securities tradingrdquo According to these rules a

securities dealer shall carry out a so-called suitability test of a retail investor before the

person in question completes a transaction The test consists of an assessment as to

whether the customer has sufficient knowledge and experience to understand the risks

involved with the transaction and an assessment of whether the transaction is

rdquoappropriaterdquo for the customer in light of the customerrsquos investment profile

(venturousness investment purpose and investment horizon) and sufficient financial

resources to bear a possible loss arising from the investment This test will be performed

based on information provided by the customer

The duty to prepare a suitability test does not apply in the following cases

If it concerns a transaction that solely consists of executing an order (execution-

only) Execution-only implies that the customer on hisher own initiative places a

specific order and the securities dealer only stands for carrying out the

customerrsquos transaction Furthermore the transaction must consist of the trading

of a rdquosimple instrumentrdquo such as shares that are traded on a regulated market

If it concerns carrying out an order for a complex financial instrument without

providing investment advice and where the securities dealer has assessed that

the customer has knowledge of and experience in this type of investment to

understand the risks involved in the transaction (a so-called rdquoappropriateness

testrdquo)

As equity-based crowdfunding typically consists of offering unlisted shares which are

regarded as rdquocomplex instrumentsrdquo the transactions cannot be carried out as rdquoexecution-

onlyrdquo On the other hand there will be no obligation to provide any investment advice

based on a suitability test

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 29: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

30

If the platform is designed in a way that it is the investor himherself without receiving

advice from the platform who decides whom heshe wishes to invest in and how much

then the platform is only obliged to perform an rdquo appropriateness testrdquo of the investor

Such a test can be performed electronically by the investor answering a number of

questions and on the background of this information a matrix will assess the investorrsquos

knowledge and experience

Fiscal matters

The investor receives the shares in return for hisher contribution and the value of the

shares thus corresponds to the contribution The actual contribution is not deductible for

the investor However in general the receipt of the shares is not taxable either It is a

prerequisite that the investor is an individual

For the investor the contribution forms the basis of the acquisition price if the investor at

a later date surrenders hisher shares or if the company ceases to exist Here any gains

or losses arising from sale of the received shares will be taxable according to the rules in

the Danish Capital Gains Tax Act Correspondingly any distributed dividends will be

subject to tax according to the rules of the Tax Assessment Act Thus the contributor will

be subject to tax of any gains from a sale and likewise a loss will be deductible from

ldquoOther incomerdquo with the taxable value of the loss Any gain will as is the case with

distributed dividends be regarded as a taxable equity income for which the tax rate is 27

up to the progression limit of DKK 49200 (2014 figures) and with 42 above this

limit26

Conclusion

In Denmark it is possible to establish and run an equity-based crowdfunding platform in

accordance with the fiscal legislation in force The platform would then require a rdquosmallrdquo

stockbroker permit The platform can then offer to perform security transactions without

providing any actual advisory services but it must perform an appropriateness test This

means that the platform must assess prior to carrying out the transaction whether a

retail investor has sufficient knowledge and experience to understand the risks involved

in the transaction

The projects offered via the platform will typically have prepared a prospectus in

compliance with the rules in the rdquosmallrdquo executive order on prospectus unless they stay

under 1m euro If that is the case they are not obliged to prepare a prospectus

In general companies wishing to employ equity-based crowdfunding must be registered

as a limited company or a limited partnership When founding a limited company it is

required that the founders subscribe for the shares It is therefore determined that there

is nothing to prevent the founders of a limited company from offering subscription to

shares via a crowdfunding platform with a view to crowdfund for the minimum capital

amount of DKK 500000 for limited companies This applies as long as the existing rules

are observed including the 2 week period of notification

26 SKAT (March 2015) httpwwwskatdkSKATaspxoId=2172087

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 30: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

31

55 TRANSVERSE CONSIDERATIONS

Companies investors and platforms employed with crowdfunding must be aware of the

specific rules that apply to the different types of crowdfunding which are described in the

sections above Apart from the specific rules certain considerations applying to all types

of crowdfunding require attention such as intellectual property rights and marketing

legislation

551 INTELLECTUAL PROPERTY RIGHTS

Companies wishing to employ crowdfunding for

raising capital will often have to determine whether it

is necessary to protect their intellectual property

rights Basically there are three things companies are

recommended to be aware of before launching a

crowdfunding campaign IP protection of own

inventionidea identification of potential IP rights and

infringements of the rights of others

Protection of own IPR

Prior to embarking on a crowdfunding campaign it is recommended to consider

what is necessary to prevent others from copying the idea There is a risk that a

third party may copy the published idea The risk of it being copied is increased

in connection with crowdfunding because the basic principle behind

crowdfunding is that the idea will be spread at an early stage

Identification of IPR

When identifying its potential IP rights accruing to the company it is important

to be aware of the different types of rights what they do and do not protect and

how to achieve protection Copyright is the only right that applies automatically

ie it does not need to be registered first contrary to a trademark a design and

a patent which must be registeredapproved before the protection is in force It

would also be advisable to register the rights before the inventionidea is made

public

In relation to patent protection a novelty requirement applies viz if the

invention has been published it is regarded as rsquoknown technologyrsquo and can

therefore not subsequently be protected Here it is important to note that the

applicant receives provisional protection which is in force from the time of

application In other words it is possible to launch a product for which a patent

application has been made and it will still be protected even though the patent

has not yet been issued (provided that the patent finally is acceptedissued) It

also has the advantage that if the crowdfunding campaign is not successful the

company can withdraw its patent application

Infringement of the IP rights of others

It is recommended that companies pay special attention to the IP rights of

others prior to initiating a crowdfunding campaign Due to the fact that the

exposure in crowdfunding is so large the risk of a rights holder becoming aware

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 31: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

32

of a potential infringement is correspondingly large There are several examples

of companies that subsequently have been targeted with legal action27

Even though crowdfunding takes place via an external crowdfunding platform

the provider will typically exclude all liability for the content put up on the site by

others Ie it is the responsibility of the company to ensure that the idea or

invention does not infringe the rights of others

Companies employing crowdfunding will often be faced with a kind of rdquopublication

dilemmardquo The more details they use to describe the elements of their invention or idea

the more attractive it will typically be to support or invest in the project At the same time

exposing the details of the idea or invention will increase the risk of others stealing the

idea

If the company has not protected its idea another company will in many cases be able to

copy large parts of the idea within the limits of the law (only copyright provides automatic

protection to the originator) As the copying company has had no costs for developing

and preparing the idea this company will typically be able to market the product at a

much lower price than the originator There exist several foreign examples of exactly

this28

IP protection may intuitively be considered in conflict with the principles of crowdfunding

about sharing the idea but the business model behind crowdfunding lies in many ways

in continuation of the principles behind the IP system A premise of IP protection is that

when the right has been registered it is published so that everybody can see the

invention in detail For example an application for a patent is made publicly available 18

months after the patent application has been submitted

A company that has protected its idea through IPR can put out its idea for crowdfunding

without others legally being able to copy it

IPR and financing

The principle purpose of companies who take out IP rights is to protect the companyrsquos

idea regardless of whether it is a technology design or a brand

For small and newly established companies the IP rights serve an additional purpose

When business angels and other investors decide on which companies to invest in this

is often done under much uncertainty because the newly established companies have

no track-record as such on which they can be assessed and likewise the company is

typically several years from making a profit from their inventionidea Here IP rights

constitute in general and patents especially a strong signal that the company has

invented something new which is legally protected an ideainvention a competitor cannot

27 httpwwwipwatchdogcom20130629getting-your-invention-off-of-the-ground-with-crowdfundingid=42567 28 See for example httpventurebeatcom20131008crowdfunding-101-dont-forget-to-protect-your-idea

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 32: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

33

just run off with Strong IP protection is thus a sign of a sustainable business model and

thus an important criterion for investors29

Companies with an IP protected idea or invention will thus have a relatively strong point

of departure with regard to crowdfunding campaigns Partly because the IP rights enable

the company to publish the ideainvention in detail without other companies being able to

copy it legally and partly because the IP rights increase the credibility of the campaign

towards the contributors because the chances of the idea resulting in an actual product

is definitely larger when the company has exclusive rights to the idea It will especially

have an impact on investors in connection with lending-based and equity-based

crowdfunding

Conclusion

Companies considering putting their idea out for crowdfunding are recommended to start

with considering how they subsequently will secure the rights to the invention or idea for

which they seek financing The alternatives to choose between will typically be IP

protection and concealment A concealment strategy will however often be difficult to

combine with a crowdfunding campaign which by nature is public

Strong IP protection will in many cases be an efficient supplement to crowdfunding as a

tool for the companies as it ensures the control over the ideainvention and at the same

time be a general advantage with regard to achieving financing

552 MARKETING LEGISLATION

In general the same rules with regard to marketing apply

to companies employing crowdfunding as for other Danish

companies When crowdfunding companies and platforms

market themselves on the Internet and social media the

marketing must comply with the general rules in force ie

the provisions of the Marketing Practices Act and the e-

Commerce Act

In that connection companies should pay special attention to the following

1) Wording and design of marketing

The marketing may in no way be inadequate or misleading and all

specifications must be correct and no important information may be omitted

The consumer must be able to assess the marketed product or service and

offers if any etc30

2) Marketing must be identifiable as marketing

There must never be any doubt that it is marketing In their marketing the

companies must pay special attention to the fact that it at all times must be

apparent when users of for example social media are being exposed to

marketing This also implies that if a person in a company running a

crowdfunding campaign for instance uses hisher private Facebook profile to

29 For example studies from the US show that among 5000 upstart companies in 2004 the share of companies that received venture capital was 14 times higher among companies with a patent Correspondingly studies made in Germany and the UK in 2009 show that among the companies seeking venture capital companies with patent protection met their financing need 75 faster than companies without patent protection 30 Cf Section 1 of the Marketing Practices Act

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 33: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

34

market the crowdfunding campaign the person shall state that it is marketing

(advertisement)

3) Submission of electronic marketing

The company may not make unsolicited approaches to certain consumers using

electronic mail31

with the purpose of direct marketing32

Companies running a

crowdfunding campaign and crowdfunding platforms may not approach for

example a profile on social media for the purpose of marketing by using

electronic mail unless the company in advance has received the recipientrsquos

express consent to receive marketing via electronic mail

The consumerrsquos consent must be made actively voluntarily expressly

concretely and be informed

- Consent can for example not be achieved via the standard terms of

social media

- To enter into an agreement a condition may not be that the consumer

must accept to receive marketing

- The consent must be made in advance ndash ie the company cannot obtain

consent for marketing by contacting the recipient via electronic mail

Companies that send electronic marketing to for example a user of a social

media platform after having obtained consent from the user shall in all

communication make it possible for the user to retract hisher consent and stop

all future communication

Possibility for an advance approval

It is the consumer ombudsman who supervises compliance with the Danish marketing

law In the capacity of a company platform association or advisorsolicitor for a

businessman etc it may be necessary to get the lawfulness of a concrete marketing

assessed Advance approval is a statement from the consumer ombudsman as to

whether an intended marketing measure in hisher opinion is legal It could be any form

of marketing as long as it concerns something concrete that the businessman wishes to

initiate It is only possible to obtain an advance approval for marketing that has not yet

been initiated at the time of application for the advance approval

31 By electronic mail is meant rdquoany message in the form of text voice audio or image which is sent via a public communications network and which is stored on the networkInternet or on the recipientrsquos terminal equipment until the messages is retrieved by the recipientrdquo A message which is only displayed to users who are online and disappears when the users no longer are online will not be stored on the networkInternet nor in the recipientrsquos terminal equipment and is therefore not electronic mail 32 Cf Section 6 of the Danish Marketing Practices Act

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 34: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

35

56 OVERALL CONCLUSION ON THE REGULATORY

FRAMEWORK FOR CROWDFUNDING IN DENMARK

There are different conclusions in play for all four types of crowdfunding This report

does however reveal that investors companies and platforms employed in crowdfunding

are to a great extent covered by existing regulations but because crowdfunding is a

relatively new financial instrument there have been uncertainties as to which rules apply

In relation to the more specific conclusions concerning the four types of crowdfunding

this report has not identified any actual obstacles for crowdfunding in Denmark The

greatest obstacle has been the uncertainty concerning which rules that are applicable for

the platforms investors and companies respectively who wish to employ one or several

types of crowdfunding

Donation-based crowdfunding is regulated according to the same terms as other types of

public fundraising campaigns Ie campaigns employing donation-based crowdfunding in

Denmark must notify the Danish Fundraising Board of their campaign and comply with

the rules set up by the Danish Fundraising Board Donations received through public

fundraising campaigns are taxable and must be reported to the Danish Tax Authorities

(SKAT)

Companies employing reward-based crowdfunding must pay special attention to the

rules in force for corporate taxation and VAT declaration and post the earnings from

these sales made through a reward-based campaign in their annual accounts together

with the production costs etc It is recommended that companies take into account the

extent to which it is reward-based or donation-based crowdfunding as this is of

paramount importance with regard to taxation

With reward-based crowdfunding the investor receives a product or service in return for

hisher investment From a taxation point of view this crowdfunding model may

correspond to an ordinary sale of a product or service If this is the case the company is

liable to tax from the investment in the same way as from the proceeds of a sale If the

investmentdonation is considerably larger than the value of the product or service the

surplus value could be regarded as a donation and thus tax will be payable in

accordance with the tax rules applying to donations

With regard to donation- and reward-based platforms the report has not identified any

specific obstacles for the existence of donation- or reward-based platforms

In relation to lending-based crowdfunding special focus has been directed towards any

obstacles for platforms Uncertainty concerning this area has previously consisted of

whether a lending-based platform should be approved as a financial institution or not

Here the report concludes that the Danish FSArsquos approval of a platform depends on the

business model the platform has chosen However the report also concludes that it is

possible to run a lending-based crowdfunding platform in Denmark within the prevailing

rules Furthermore it should be noted that there already exist lending-based platforms in

Denmark that have been approved by the Danish FSA

From a regulatory point of view equity-based crowdfunding is the most complex type of

crowdfunding The report concludes that it is possible to establish and run an equity-

based crowdfunding platform in Denmark within the present legislation A company

wishing to establish itself as an equity-based crowdfunding platform must obtain the

rdquosmallrdquo stockbroker permit and then it will be able to offer transactions in securities

without providing any actual advice The platform will have to carry out an

appropriateness test prior to making the transaction The purpose of the appropriateness

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 35: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

36

test is to investigate whether a retail investor has sufficient knowledge and experience to

understand the risks involved in equity-based crowdfunding

In addition the report concludes that companies wishing to employ equity-based

crowdfunding must initially be registered as a limited company or a limited partnership In

this connection it should be noted that within present legislation it is not possible for

private limited companies including entrepreneurial businesses to employ equity-based

crowdfunding

The report also identifies considerations applying to all four types of crowdfunding

including matters concerning intellectual rights and marketing legislation

Companies employing crowdfunding are always recommended to consider the

rdquopublication dilemmardquo ie the balance between exposing their idea or product in as

much detail as possible to attract investors and at the same time protecting the idea or

product from being copied by others Companies wishing to employ crowdfunding are

therefore recommended to always consider whether they should protect their idea

product or company

All companies and platforms are in line with other Danish companies subject to the

Danish Marketing Practices Act and the general rules that apply for marketing on the

Internet Due to the fact that the marketing of crowdfunding campaigns to a great extent

takes place through social media companies and platforms are recommended to pay

special attention to the rules that concern wording design and identification of marketing

as well as submission of electronic marketing

All in all the report has not identified any actual obstacles for the crowdfunding

ecosystem in Denmark Instead the report has clarified which overall rules investors

companies and platforms wishing to employ crowdfunding are recommended to

consider before embarking on crowdfunding

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 36: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

37

6 INTERNATIONAL CROWDFUNDING REGULATIONS

In continuation of the debate concerning regulation of crowdfunding in other countries

including the UK and the US the following sections attempt to give an account of the

precise regulations prevailing in various other countries The sections below focus

primarily on equity-based and lending-based crowdfunding as it is within these areas

some countries have chosen to implement or propose special legislation

61 CROWDFUNDING IN AN EU PERSPECTIVE

Several European member states have already taken

steps to address the regulatory framework for

crowdfunding in their own country and some countries

have introduced law reforms including Italy the UK

France and Spain The European Commission33

finds

that there is a risk that Member States may introduce

overly-strict and premature regulatory constraints and

thus inhibit the development of crowdfunding as an alternative financial tool The

Commission also points out its concern that the introduction of overly-lenient legislation

may lead to loss of investor protection and thus damage the crowdfunding environment

owing to declining consumer confidence

Member states that are already looking at the crowdfunding area have varying

approaches to the area Some countries have tightened their legislation whereas others

have taken different routes Based on the member statesrsquo varying approaches the

Commission has taken the following two initiatives

1 Setting up the European Crowdfunding Stakeholder Forum the purpose of which is

to

- Assist the Commission with raising awareness to crowdfunding procuring

information and designing training modules for companies

- Assist the Commission with promoting transparency and exchanging rsquobest

practicesrsquo

- Advise the Commission on the possibility of establishing a rdquoquality labelrdquo for

building trust with users

- Identify other areas that the Commission should give consideration

The European Crowdfunding Stakeholder Forum consists of 40 members of which

15 are member states including Denmark and 25 private organizations

2 Promote knowledge and awareness of crowdfunding

The Commission wishes to raise increased awareness and knowledge of

crowdfunding as an alternative source of funding among European investors and

companies Additionally the Commission wishes to build trust with users regarding

crowdfunding The Commission has still not articulated in detail how this goal will be

promoted

33 Communication from the Commission to the European Parliament the Council the Economic and Social Committee and the Committee of Regions (COM(2014)172

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 37: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

38

Initiatives from European financial supervisory authorities

The European supervisory authorities within the area of securities trading and banking

the European Securities and Markets Authority (ESMA) and the European Banking

Authority (EBA) have both initiated investigations as to how crowdfunding works the

risks if any that can be involved in crowdfunding and how the various forms of

crowdfunding are regulated within existing EU regulations especially the directive on

securities trading (MiFID) the prospectus directive and the directives concerning credit

institutions payment services consumer credit and money laundering

This work consists of investigating and identifying the most important issues and risks

that can be involved in crowdfunding Amongst these especially

Deficient assessment of the projects seeking capital via crowdfunding with the

subsequent risk that the investor loses hisher deposit

Deficient information to the persons who provide capital either by purchasing

capital shares or by providing lending capital so they cannot assess the

financial risk they are running

The risk that the funds do not reach the company that is seeking crowdfunding

The operational risks of the actual platform in the form of the risk of money

laundering and fraud and

The risks relating to IT breakdown and other operational problems

It is the aim that this work shall result in statements or recommendations as to how

lending-based and equity-based crowdfunding should be handled in relation to the

existing acquis communautaire and proposals regarding incorporation of crowdfunding

into the financial regulations in future with an aim to handling the possible risks that can

be involved in this without obstructing the development of crowdfunding as a method for

raising capital

62 CROWDFUNDING REGULATIONS IN EUROPE IN

GENERAL

Most European countries find ndash as Denmark does ndash that lending-based platforms do not

necessarily require a financial permit nor be subjected to financial supervision To the

extent that a platform performs activities under the directive on payment services andor

the credit institutions directive the platforms will have to obtain a permit to perform these

activities In line with Denmark a number of countries have introduced rules for limited

execution of payment services

Most countries consider equity-based crowdfunding to be under the scope of the MiFID

directive and require that platforms executing orders and mediating the sale of capital

shares have a permit as stockbroker The MiFID directive contains one exception making

it possible to lay down national rules for companies that solely provide investment advice

andor receive and facilitate orders but perform no other form of investment services

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 38: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

39

France have introduced national rules and they require that the platforms only may

provide investment advice that they must be registered and carry out a suitability test of

investors and provide these with a range of information In addition there is a limit of 1m

euro for crowdfunding campaigns

In Italy they have also drawn up national rules for equity-based platforms which are not

considered to be executing activities pertaining to the trading of securities within the

MiFID directive The platforms must be registered and live up to certain professional

standards and likewise retail investors must be given information material and fill in a

questionnaire about their knowledge of the most important risks involved and whether

they understand that they may suffer a loss In addition 5 of the capital must originate

from professional investors

In conformity with Italy Spain have also drawn up national rules for platforms which also

here are not regarded as performing activities pertaining to the trading of securities

These platforms must live up to certain requirements regarding design and they must be

registered Furthermore they must have third party liability insurance or meet a capital

requirement of 50000 euro (approx DKK 370000) Furthermore the platforms must

provide information about the risks involved with participating in crowdfunding The

individual investor may invest no more than 3000 euro (approx DKK 22000) in one

project and may invest a total of 6000 euro (approx DKK 45000) per year Per project

the maximum amount is of 1m euro (approx DKK 75m)

The British market for crowdfunding is the best developed in Europe In March 2014 the

British Financial Conduct Authority (FCA) issued new rules for internet platforms

regarding the employment of crowdfunding These rules cover lending-based and equity-

based crowdfunding The rules were drawn up on the basis of a public hearing on a

consultation memo from 2013 in which the FCA had stated their considerations In the

UK equity-based crowdfunding platforms which provide companies with the possibility of

raising capital rdquoby arranging investments and transactions in not immediately tangible

securitiesrdquo are considered to be regulated by the MiFID directive which implies that

such platforms must be approved by the British authority according to the rules of the

directive for securities dealers and that the investor protection rules must also be

complied with The same is the case in Denmark

Prior to the introduction of the new rules the FCA had already approved platforms

offering transactions in unlisted shares and debt instruments In that connection the FCA

had added individual terms to the approvals The new rules have replaced these

individual terms An approval requires that the companyrsquos management receive fit amp

proper approval ie that they meet requirements concerning suitability (knowledge and

experience) and professional integrity Furthermore the company must meet a series of

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 39: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

40

organisational requirements including a requirement regarding money laundering In

addition the company must either have starting capital of 50000 euro (approx DKK

375000) or third party liability insurance

Furthermore the UK have also introduced certain restrictions as to whom an equity-

based crowdfunding platform and others offering equity-based crowdfunding may market

rdquonot immediately tangible securitiesrdquo These restrictions will ensure that only

sophisticated andor wealthy retail customers retail customers who receive investment

advice from an approved securities dealer or customers who do not invest more than 10

of their free assets are offered such types of investments

These restrictions are based on surveys of who typically employ this type of investment

and on experience regarding the areas in which ordinary retail investors lack knowledge

and understanding of the risks involved in investments in unlisted shares and various

forms of illiquid securities

As lending-based crowdfunding in the opinion of the FCA is characterized by a number

of persons making capital available to a number of borrowers the regulation must take

the lenders as well as the borrowers into consideration

The regulation depends on the model used by the platform including whether the

platform merely mediates the contact and transfers the funds between the parties or

whether customer funds are held In the latter case the platform is subject to rules

concerning the protection of customer funds but there are no specific requirements that

the platform needs to be a member of the investor protection scheme

In general the rules state a minimum capital amount for the platform of 20000 pounds

(approx DKK 200000) certain requirements to the design of the company and a

number of requirements regarding information not only for those making capital available

but also for those are raising loans

63 REGULATION OF CROWDFUNDING IN THE US

The US is among the leading nations with regard to crowdfunding

and the worldrsquos two largest reward-based crowdfunding platforms are

both located in the US In 2012 President Barak Obama signed the

so-called Jumpstart Our Business Startups Act (JOBS Act) The

purpose of the act is to promote job creation and growth among US startups

Subsequently it has been the task of the US Securities and Exchange Commission

(SEC) to transform the JOBS Act to actual legislation and implement it at federal level

The JOBS Act is divided into six parts Title I-VI of which Title II and III are the most

relevant in relation to regulation of lending-based and equity-based crowdfunding Of

Title ll and lll only Title ll has been implemented whereas Title III is still being

completed which has caused several states to start introducing special legislation

enabling equity-based crowdfunding

Title II (Access to Capital for Job Creators)34

Title II maintains that the prohibition against public offering or public marketing does not

apply to offering and selling securities if all purchasersinvestors are professional

investors In general public offerings of securities must be registered with the SEC

unless they qualify for an exemption to the registration requirements Registration with

the SEC implies a description of the companyrsquos product or service the management of

34 httpwwwsecgovdivisionsmarketregexemption-broker-dealer-registration-jobs-act-faqhtm

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 40: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

41

the company the type of securities to be put on offer and financial details about the

company

Exceptions from the registration requirements already exist but the purpose of Title II is

to make it easier for entrepreneurs to turn the exception concerning offering and selling

securities to professional investors to their advantage Traditionally securities which

have not been on public offer and where the investors were wealthy individuals or

qualified institutions have been exempt from the registration requirement

Title II provides companies with the possibility of publicly marketing their offer of

securities as long as they can prove that the buyers of the securities meet the

requirements for professional investors It is the duty of the issuer of the securities (the

company) to verify that the buyers of securities are professional investors The

boundaries regarding reasonable measures are set by the SEC These amendments

have been implemented and became effective in 2013

Title III (Crowdfunding)35

Title III is still awaiting full implementation which means that the US equity-based

crowdfunding platforms companies and investors are still waiting for the final rules This

means that the review of Title III given below may not necessarily end with being

implemented as described here However in March 2015 the SEC did pass parts of Title

III including the upper-limit with regard to the maximum amount companies may raise on

Internet platforms

Companies

From Title III it appears that companies seeking investments through crowdfunding will

be obliged to submit annual reports to the SEC and in addition forward certain details

about the company to their investors The companies will amongst other things be

obliged to provide information on the companyrsquos financial situation management

application of proceeds and prices of the securities on offer

Companies may raise up to 50m dollars (approx DKK 343m) through public offering of

securities over a 12 month period provided that the individual investments do not

infringe the rules for investors and that the company uses an intermediary who is either

an approved broker or is registered as a crowdfunding platform with the SEC

Platforms

Title III assigns SEC to exempt with or without reservations platforms from registration

and approval with the SEC as a stockbroker The platform (or company behind the

platform) must however be registered with the SEC as a financing platform and it will be

subject to the scrutiny of the SEC Platforms shall furthermore be members of a

registered national securities dealer organization

A financing portal is defined as a crowdfunding intermediary who does not 1) offer

advisory services or recommendations 2) encourage to buy or sell or offer to buy

securities on offer or displayed on the portal 3) compensate employees agents or other

persons for encouraging purchases or sales or compensate them based on the sales of

securities on the portal 4) possess administer or handle the investorrsquos funds or

securities 5) participate in other activities which the SEC do not find appropriate

SECrsquos proposed implementation will also impose an obligation on platforms and other

mediators to educate investors engaged in crowdfunding together with registration

duties and due diligence requirements in connection with complying with the regulation in

force

35 httpwwwsecgovdivisionsmarketregtmjobsact-crowdfundingintermediariesfaqhtm

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 41: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

42

Investors

The SEC proposes that an annual limit be set for the amount a citizen may invest The

proposed limit permits investments of 10 of either the citizenrsquos income or means (the

largest of the two will apply) provided that the amount of the annual incomemeans is

above 100000 dollars (approx DKK 650000) For persons whose annual income is less

than 100000 dollars the SEC proposes an investment limit of 2000 dollars (approx

DKK 13000) or 5 of the annual income (the larger of the two will apply) These rules

do not apply to professional investors

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 42: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

43

7 PROMOTING CROWDFUNDING IN DENMARK

The largest obstacle for the development of crowdfunding in Denmark is considered to

be the uncertainty as to how the players should approach the regulations The report

contributes to this by giving an overall account of how investors companies and

platforms engaged in crowdfunding should approach the existing regulations The report

thus contributes to creating a framework on which financing through crowdfunding can

grow and develop in Denmark in the future

It has not been found necessary to create government programmes for promoting

crowdfunding in Denmark Instead the market should be allowed to develop within the

existing framework However the government may play a role with regard to increasing

businessesrsquo awareness and understanding of crowdfunding If Danish companies are to

make serious use of the growth possibilities that crowdfunding presents it requires that

they both are aware of and understand how to exploit it to the best possible extent

Several initiatives have already been made to promote crowdfunding in Denmark

These include

Pilot project with crowdfunding in the Market Development Fund

The deadline for applying for the first round of the match financing initiative by the Market

Development Fund was in March 2015 Here companies that have or wish to employ

crowdfunding to assess their growth potential can obtain co-funding from the fund

Crowdfunding is an obvious tool for the Market Development Fund to use for co-

financing consumer-oriented projects which normally have difficulty in obtaining approval

or fall outside the boundaries of the fund entirely

Today B2C projects are especially difficult to finance in the Market Development Fund

amongst other things because the market development process for B2C projects is of a

different nature than B2B This applies to the scope and the number of tests and an

ongoing adaptation based on customer feedback The goal of the fund is to encourage

that consumer-oriented companies should also include the testing and adaptation phase

in their development and therefore they should exploit the possibilities inherent in

crowdfunding

Crowdfunding offers real market validation of innovative products performed by private

consumers Consumer-oriented products such as 3D printers wearable technology

mobile batteries and intelligent bicycle lamps are examples of products that are being

financed on reward-based crowdfunding platforms By matching the funds that a

company raises on a crowdfunding platform the fund will co-finance such innovative

consumer-oriented projects It is obvious because the development step which the

companies that normally obtain financing from the Market Development Fund is the

same as the one companies that start a reward-based crowdfunding campaign are on

The companies will have to apply for financial support from the Market Development

Fund via a specially customized application module for crowdfunding The company will

then in line with other applicants be assessed by the fund and its board If a company

receives conditional approval it will have to rsquoproversquo its market potential on a reward-

based crowdfunding platform And a successful crowdfunding campaign will trigger co-

financing from the Market Development Fund according to the model below

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 43: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

44

The Market Development Fund with its match financing initiative contributes to

developing and lifting the Danish market for crowdfunding and at the same time creates

growth employment and exportation among small and medium-sized companies

As crowdfunding is a relatively new financing tool financial support is provided so the

companies can receive assistance from private advisors for the planning of their

campaign

The crowdfunding module will initially run as a one year pilot project (2-3 round) of which

the first application round for crowdfunding was in March 2015 At the end of 2015 the

project will be assessed and it will be determined whether the project will continue37

Preparation of guidelines for all types of crowdfunding

The report provides an overview of the rules that companies investors and platforms

must take into consideration However it has assessed that further guidelines are

necessary with regard to how the players should approach these rules Concurrently with

this report guidelines in relation to crowdfunding have been prepared the purpose of

which is to assist companies investors and platforms in relation to the regulatory

framework in force There are guidelines for all four types of crowdfunding and these are

available at startvaekstvirkdk

The guideline modules have been prepared together with SKAT the Danish FSA the

Danish Patent and Trademark Office and the Danish Competition and Consumer

Authority

Based on the conclusions of the report and the desire to the strengthen Danish

companiesrsquo awareness and use of crowdfunding further it is recommended that further

initiatives be introduced to help strengthen SMEsrsquo and entrepreneursrsquo access to financing

through crowdfunding

Growth guarantees for lending-based crowdfunding platforms

Growth guarantees which are offered by the Growth Fund support the financing of

SMBs who cannot provide sufficient security in order to obtain an ordinary loan in the

bank Growth guarantees cover up to 75 of the bankrsquos loss on loans of up to DKK 2m

which increases the bankrsquos incentive to provide the companies with the financing

Growth guarantees can at present only be employed by financial institutions It is

recommended that the scheme be expanded to include lending-based crowdfunding

platforms in an appropriate way An expansion of the scheme will remedy an existing

anti-competitive situation where loans from financial institutions are supported without

similar support of loans from competing financial institutions

The scheme has existed since 2013 and will be in force until the funds from the

associated loss pool are exhausted The funds are expected to last until the end of June

2016 If the expansion of the growth guarantees for the lending platform is constructed in

36 Financial support is provided in accordance with the de minimis rules with a maximum amount of 200000 euro 37Market Development Fund httpmarkedsmodningsfondendkcrowdfunding

Project budget total Co-financing from

crowdfunding

Co-financing from the

Market Development Fund

DKK 500000 ndash 1000000 Min DKK 250000 DKK 250000 ndash 750000

gt DKK 1000000 Min DKK 500000 DKK 500000 ndash 150000036

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 44: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

45

such a way that is does not change the risk exposure of the scheme the expansion is

not expected to affect the expiry of the funds significantly

Growth guarantees reduce the risk on loans in return for payment of a premium thus

making high-risk loans more profitable Increased profitability on lending-based

crowdfunding supports this financing concept

The structure for offering growth guarantees to lending-based platforms cannot be

transferred directly from financial institutions as lending-based crowdfunding platforms

cannot in general absorb any losses Therefore the scheme will have to be designed in

a way that takes this difference into account

Training of regional innovation office consultants

The regional innovation offices assist Danish companies with increasing their growth and

export by guiding and liaising with them Each year the regional innovation offices meet

thousands of Danish companies and that is why it is necessary that their consultants are

properly prepared when it comes to crowdfunding Therefore it is recommended that the

consultants complete a training course so they are fully trained to guide the Danish

companies in about and how they can use crowdfunding as a source of finance and

which public and private options exist within this area

Monitoring the market

Crowdfunding is an expanding and developing market and thus it is difficult at present to

foresee how the market will develop in years to come Abroad platforms can be seen

employed in crowdfunding property investments equity-based platforms where the

platform itself andor business angels co-invest with other investors and many other

business models

If crowdfunding in the long run is to become a reliable and interesting alternative for

Danish companies it is necessary that the government continues to monitor whether the

regulatory framework in Denmark can keep pace with the crowdfunding market In step

with the development of the market obstacles may arise which have no effect on the

present market but which will be necessary to consider if crowdfunding is to continue

developing Likewise business models may arise within the crowdfunding market which

do not fall within the existing regulation and which are not desirable for instance in the

event of significant surrender of investor protection

It is therefore recommended that the development of the crowdfunding market in

Denmark is monitored closely on an ongoing basis and that yet another in-depth report

of the regulatory framework in force for crowdfunding be carried out in Denmark at the

end of 2016

International collaboration

At international as well as at EU level much focus is directed towards crowdfunding

Internally in the EU the member states have varying approaches to the regulation of

crowdfunding There is a risk that the member states may introduce overly-strict and

unnecessary regulatory constraints and thus inhibit the development of crowdfunding at

EU level However introduction of overly-lenient legislation may lead to loss of investor

protection and thus damage consumer confidence Therefore it is recommended to

continue following developments within the EU closely and to work towards finding a

balance with a healthy regulatory framework for crowdfunding in the EU with all due

consideration to protection of the investor

If the EU is to develop into a more harmonic and cohesive crowdfunding market it is

necessary to work towards increased harmonization of the regulation of crowdfunding

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 45: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

46

across the borders of the European countries with the aim of ensuring a stable and

sustainable market for all types of crowdfunding It is recommended to work towards

achieving clearer and simpler regulation of crowdfunding that can ease the upstart of

crowdfunding activities and thus strengthen the market In the course of this work

consideration towards ensuring the companies better opportunities for raising venture

capital through crowdfunding must be counterbalanced with maintaining sufficient

investor protection

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 46: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

47

Crowdfunding iN DEnmark

The publication can be downloaded from the Danish Ministry of

Business and Growthrsquos website wwwevmdk

ISBN electronic edition 978-87-78623-48-5

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

wwwevmdk

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk

Page 47: CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several lending-based crowdfunding platforms. Equity-based crowdfunding From a regulatory point

Danish Ministry of Business and Growth

Slotsholmsgade 10-12

DK - 1216 Copenhagen K

Denmark

Tel 45 33 92 33 50

evmevmdk