CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several...
Transcript of CROWDFUNDING IN DENMARK - Universitetet i Agder · Authority) has already approved several...
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Danish Ministry of Business and Growth
Slotsholmsgade 10-12
DK - 1216 Copenhagen K
Denmark
Tel 45 33 92 33 50
evmevmdk