corporate & commercial LAW
AMENDMENTS introduced by LAW 5/2015 of 27 april on Promoting CORPORATE financingREGARDING Bank Financing of Smes, legal FRAMEWORK ON Financial Credit establishments and crowdfunding
Law 5/2015 of 27 April on promoting corporate financing (Ley 5/2015, de 27 de abril, de Fomento de la Financiación Empresarial) (“Law 5/2015”) was published in the Official State Gazette (BOE) on 28 April 2015. Among other matters, the law establishes a number of changes to encourage bank financing to small and medium-sized enterprises, sets out the new legal framework on financial credit establishments and regulates crowdfunding. The law entered into force the day after its publication in the BOE.
Law 5/2015 has also introduced amendments on other matters, including securitisations and debt issuance. The most significant changes to the securitisations framework are summarised in our newsletter available at this link. The most significant changes to the debt issuance framework are summarised in our newsletter available at this link.
This newsletter addresses the main amendments introduced by Law 5/2015 regarding (i) bank financing of small and medium-sized enterprises, (ii) the legal framework on financial credit establishments; and (iii) crowdfunding.
1. Amendments TO the bank financing FRAMEWORK for smes
Law 5/2015 imposes an obligation on credit institutions to provide small and medium-sized (“SMEs”) at least three months’ prior notice in the event the funding flow to an SME is to be cancelled or reduced by at least 35%. In so doing, Law 5/2015 aims to provide SMEs sufficient time to find new funding sources or to adjust the management of their own funds to avoid sudden liquidity deficiencies.
In an attempt to ease SMEs search for alternative sources of financing, credit institutions must provide the SME information on its financial situation and payment records, without charge and within 10 days of the abovementioned notification. The report must be based on all the information the credit institution has collected from the SME in connection with the funding flow and it must adhere to a model to be created by the Bank of Spain.
2. New legal FRAMEWORK ON financial credit establishments
After losing the classification as credit institution, by virtue of Law 10/2014 of 26 June on the organisation, supervision and solvency of credit institutions (“Law 10/2014”), Law 5/2015 clarifies and regularises the legal framework on the financial credit establishments (“EFC”, for its Spanish acronym). The few amendments introduced aim to modernise EFCs, adapting them to current demand in financial markets. The most important changes are the following:
- EFCs will be governed by Law 5/2015 and its implementing rules. For those aspects not covered, these will be governed by the regulations applicable to credit institutions. Law 3/2009 of 3 April on structural modifications of companies will apply to EFCs regarding the legal framework on global or partial en bloc transfers of assets and liabilities between credit institutions.
- Under the new legislation, the Ministry of the Economy and Competitiveness is competent to authorise the creation of EFCs, rather than the Bank of Spain. Nevertheless, this authorisation requires a mandatory prior report from the Bank of Spain.
- Hybrid institutions (i.e., EFCs that also provide payment services or issue electronic money) are now regulated. These EFCs must have an additional specific name of a payment institution or electronic money institution (EFC-EP or EFC-EDE, respectively) and must apply for the relevant authorisations. The authorisation for an EFC-EP or EFC-EDE consists of a single, combined authorisation.
- Regarding solvency matters, although Law 10/2014 applies, Law 5/2015 creates an express exemption for EFCs in relation to the fulfilment of specific mandatory requirements for credit institutions. In particular, EFCs are not obliged to draft a general feasibility plan, or comply with the liquidity coverage requirements established in Part Six of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012. However, EFCs must maintain sufficient liquid assets to meet their commitments and avoid liquidity imbalances that could jeopardise their financial situation. EFCs classified as SMEs are not obliged to maintain either the capital conservation buffer or the counter-cyclical buffer.
Law 5/2015 regulates crowdfunding, which was previously unregulated under Spanish law.
According to the consultation paper date 3 October 2013 of the EU Commission titled “Crowdfunding in the EU – Exploring the added value of potential EU action”, crowdfunding is an emerging, alternative financing approach through the use of Internet. It directly connects those who can give, lend or invest money with those who require financing for a specific project. Therefore, it is a non-intermediated form of investment in which the fund requestor or project owner announces a project and specific financing need through the Internet IT platform, offering third parties the possibility of contributing to the project in exchange for consideration. Generally speaking, the project owner will define a funding target and a limited period to meet the target. If the target is not achieved, the project owner must return all money pledged by those offering contributions.
There are usually three sides to crowdfunding transactions: the project owner, which is the person (usually, natural persons, although can also be legal persons) with an entrepreneurial project that requires financing; the potential fund contributors or investors who intend to participate financially so that the entrepreneurial project comes to fruition; and the platform, which provides communication services through its website, on which the project owner can announce its project and raise funds.
Law 5/2015 addresses this phenomenon from three perspectives: the legal framework governing crowdfunding platforms; the authorisation, registry and reservation of activity in favour of the platforms; and the regulations applicable for each of the three sides involved in the financing channel, including restrictions on activities permitted and rules to protect non-qualified investors, as defined in Law 5/2015.
ii. Legal framework governing crowdfunding platforms
Crowdfunding platforms subject to Law 5/2015 are defined as authorised companies that perform activities in Spain consisting of the professional linking, through websites or other electronic means, of a variety of natural or legal persons offering financing in exchange for a financial yield. These persons are termed “investors” and the natural or legal persons requesting financing to use for a crowdfunding project are termed “project owners”. Companies in which the financing raised by project owners comes exclusively from donations, the sale of goods or services and interest-free loans are expressly excluded.
A reservation of activity and denomination (plataforma de financiación participativa, or “PFP”) is established for those companies.
Specific restrictions apply to the ways through which the platforms can raise financing (only through the issuance of stakes in public limited companies, obligations or other equity securities, issuance of shares in limited companies and loans, pursuant to Law 5/2015), use of the funds contributed (only for entrepreneurial, educational or consumption ends) and on the services that can be rendered by the platforms (primarily marketing and communication services and never investment services or activities reserved for credit institutions).
iii. Authorisation and registry
The activities of the crowdfunding platforms are subject to authorisation from the National Securities Market Commission (the “CNMV”) and registration in the CNMV’s registry created for this purpose in accordance with the procedures established in Law 5/2015.
The CNMV, in collaboration with the Bank of Spain, is in charge of the supervision, inspection and disciplining of the platforms and any other natural or legal persons violating Law 5/2015 regarding crowdfunding.
Specific requirements are established for carrying out the activity. These requirements include compliance with certain financial requirements (share capital, interchangeable and combinable with other types of guarantee, and different levels of minimum own funds depending on the financing raised).
iv. Framework governing the project owner and projects
The project owner must be incorporated or have its residence in Spain or in a European Union Member State and not have been disqualified pursuant to insolvency law or be serving a sentence for crimes or misdemeanours against the company’s assets, the social-economic order, the Public Treasury, the Social Security, or money laundering.
For each project, the platform must define a funding target and a time limit. If the funding target (or, in certain cases, 90% of the target) is not reached within the time limit, all funds must be returned. If the funds raised exceed the target, the excess amounts must be refunded to the investors. The maximum limit for funds raised for a project in a single platform is EUR 2,000,000. When the project is directed exclusively to qualified investors (as defined in the following section), the maximum amount is EUR 5,000,000.
The platform must ensure that the information published through the platform is complete and it must publish all other significant information available to it regarding the project or the project owners. Nevertheless, the project owner is the party liable to investors for the information provided.
Projects may be structured as loans or as issuances of securities. Projects based on loans may not include a mortgage guarantee created over the project owner’s habitual residence and information on the loan’s essential characteristics must be provided. For projects based on the issuance of securities, investors must be informed of the basic information on the issuer company and the securities issued. In addition, the articles of association of the project owner must contain certain shareholders rights.
v. Protection of investors
Law 5/2015 refers to qualified and non-qualified investors, differentiating them primarily on the basis of proven economic capacity and, in some cases, on whether the investor has expressly applied to be considered a qualified investor. In the latter case, if the requestor is a natural person, the crowdfunding platform must analyse the request on a case–by-case basis.
Non-qualified investors may not invest more than EUR 3,000 per project, or more than EUR 10,000 within any 12-month period, in projects published through a single crowdfunding platform.
Moreover, the platform must warn investors of specific risks associated with the investment.
Finally, subject to specific particularities, regulations on the protection of consumers and end users apply to relationships between project owners and investors as well as relationships between platforms and project owners, in the event the project owner is considered a consumer.