Ban on equity crowdfunding in limited liability companies

In July 2022, the President signed the Act on Crowdfunding for Business Ventures and Support for Borrowers. The vast majority of its provisions came into force within 14 days of its announcement, with certain exceptions. One of these was Article 48 of the Act, which concerned amendments to the Commercial Companies Code. These regulations began to apply only on 10 November of the current year. The provisions introduced a ban on crowdfunding for limited liability companies, which under previous law was fully legal. Equity crowdfunding, under the previous legal framework, was one of the forms of crowdfunding financing used, whereby an entrepreneur operating as a limited liability company obtained a certain grant or funding through a public offer from private investors. Companies issued shares in exchange for specific financial contributions. Entrepreneurs used the obtained funds to finance various projects or investments. Crowdfunding was generally conducted via online crowdfunding platforms directed at an unlimited audience. Therefore, it is worth becoming familiar with the changes introduced by the new regulation.

New prohibitions and consequences of their breach

The new prohibitions are regulated in Article 182(1) and Article 257(1) of the Commercial Companies Code. The first stipulates that an offer to acquire shares in a company may not be made to an unspecified addressee and acquisition of shares may not be promoted by advertising or any other form of promotion directed at an unspecified addressee. It can therefore be stated that these provisions completely prohibit previously used methods of attracting investors or funds. Entrepreneurs, under the current legal framework, may not encourage the acquisition of existing or new shares by means of advertisements or other promotional forms addressed to an unlimited audience. It should be emphasised that the ban covers all activities or actions that directly or indirectly aim to persuade an investor to decide to financially support a given venture. In practice, this means that companies will cease to organise events, meetings, or business breakfasts. It is important to underline that these prohibitions significantly limit entrepreneurs’ possibilities regarding financing and seeking new groups of investors. It can be said that under the previous legal framework, companies had a much broader range of options, and obtaining the necessary funds for a given investment was considerably easier. Failure to comply with the new rules may result in serious and severe consequences for entrepreneurs. According to Articles 595(1) and 595(2) of the Commercial Companies Code, anyone who breaches these prohibitions may be subject to a fine, restriction of liberty, or imprisonment for up to six months. It should be noted that the legislator has introduced very strict sanctions in the new provisions, which is particularly reflected in the penalties of restriction or deprivation of liberty. Therefore, attempts to breach these prohibitions may have painful and long-lasting effects for the company and the individuals involved.

Which forms of financing remain available?

Despite the introduced bans, limited liability companies will still be able to use certain forms of financing for projects or ventures. This includes issuing bonds and taking out loans using crowdfunding.

None of the prohibitions discussed in this article cover the above-mentioned activities. It should also be noted that there are currently no indications suggesting any future changes. Consequently, entrepreneurs will still be able to issue bonds and take out loans through crowdfunding to obtain additional funds.

Summary

In summary, the introduced bans are certainly significant from the entrepreneurs’ perspective. These provisions completely change the sphere of crowdfunding and private investor acquisition by limited liability companies. The new regulations eliminate one form of activity which, under the previous legal framework, was widely used and legal. Business entities must adapt to the changes that have already taken place and definitively end equity crowdfunding. Companies must change the previously used methods and rely on the forms of crowdfunding financing that are available and legal under the current regulations.