Crowdfunding is an alternative form of financing for the expansion of a project, company or business by a large number of people, usually through online platforms. Funding through crowdfunding has achieved many successes in many countries, including the Republic of Armenia. Within the framework of this article, we will look at a number of issues related to crowdfunding, which will give an opportunity to form a general understanding of this field.
What is crowdfunding?
Crowdfunding allows people who want to be funded to present a proposal to attract money to the general public at once, for the implementation of which they receive funding, in return providing investors with certain benefits in the form of manufactured products, gifts or dividends.
How is crowdfunding different from traditional funding methods?
Unlike traditional financing methods, crowdfunding has the following advantages and is characterized by the following features:
- Access to the advantages of the digital platform – creates an opportunity to present the idea to thousands of people at once,
- Affordability – as a rule, the only cost is the platform commission of the company providing the crowdfunding platform. It generally ranges between 5-10%. If we compare it with other forms of traditional financing, for example bank lending, then this is considered quite an attractive option.
- Risk reduction and distribution – in a crowdfunded project, when small funds are invested, the issue of non-return is essentially pushed into the background.
What are the types of crowdfunding?
The main types of crowdfunding are as follows:
- Peer to peer (P2P) lending – in this case, the amount provided is returned together with interest.
- Equity crowdfunding, i.e., investment crowdfunding, is the online offer of securities of a private organization with the expectation of having investments, that is why it is considered part of the capital market.
- Rewards-based crowdfunding – individuals donate to a project or business in exchange for non-financial compensation such as goods or services.
- Donation-based crowdfunding, i.e., crowdfunding based on donations, a large number of individuals donate in favor of a project or business.
- Hybrid crowdfunding means that more than one type of crowdfunding is involved.
How is crowdfunding regulated in Armenia?
The provision of crowdfunding services in Armenia is governed by Regulation 4/07 approved by the decision of the Central Bank of Armenia Council No. 113-Ն of April 8, 2008 (hereinafter referred to as the Regulation).
In what framework does the Regulation apply?
The Regulation applies only to the provision of crowdfunding services related to crowdfunding (investment crowdfunding) carried out through a public offering of securities.
Want to know more about crowdfunding regulation in Armenia?
Our team will be happy to support both prospective issuers and investors in this entire process, providing legal advice from the stage of registration on the platform to the completion of investment crowdfunding.
Who are the participants in investment crowdfunding?
As a rule, the main participants of investment crowdfunding are:
- Issuer: in the case of providing crowdfunding services, the issuer is considered to be a resident or non-resident of the Republic of Armenia carrying out any entrepreneurial activity that finances or plans to finance its project by issuing securities through a crowdfunding offer.
- Investor: every person over 18 years of age from anywhere in the world will be able to invest through the platform in projects whose success they believe in.
- The operator of the platform, ARFI, the first investment crowdfunding platform was created in Armenia at the initiative of the Armenian State Interest Fund (ANIF), which provides an exclusive opportunity to invest in small and medium-sized enterprises operating in Armenia, in new technology startup projects, from all over the world and become some of them.
What documents are required to obtain issuer status on the platform?
In order to decide on granting issuer status or publishing the issuer’s crowdfunding proposal on the crowdfunding platform, the platform operator requires a number of documents from the issuer, including:
- the application to obtain issuer status or to implement a crowdfunding offer,
- documents certifying compliance with the issuer’s selection criteria,
- a summary document on the crowdfunding proposal,
- issuer’s business plan, etc.
Is the publication of a prospectus mandatory for investment crowdfunding?
When making an offer through the appropriate crowdfunding platform, the requirement to publish a prospectus does not arise if the total value of the offered securities at the issue or sale price within 12 months does not exceed AMD 2.5 billion. This circumstance facilitates the issuance of securities through the crowdfunding platform, because in the case of a request to publish a prospectus, there is a requirement for annual financial statements approved by an independent audit opinion, and in the case of crowdfunding, the company can present the financial statements of the last 1 year without conducting an audit, if up to 1 year is an operating company and the total value of issued securities does not exceed 2.5 billion AMD as of the last 12 months.
How to start the investment crowdfunding process on the ARFI platform?
The issuer must obtain online registration on the platform and sign an agreement defined by the Regulation with the operator, after which the operator of the new platform grants the issuer user status.
As one would expect, the process of investment crowdfunding is not limited to this, it is a multi-stage process. Our team will be happy to support both prospective issuers and investors in this entire process, providing legal advice from the stage of registration on the platform to the completion of investment crowdfunding.