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Tuesday, June 28, 2022

Legal Challenges Related To Crowdfunding, Volume 1

Editor’s note: This is a guest post by Antti Hemmilä from Attorneys at law Borenius.

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While crowdfunding is not a new concept, it is getting a lot of media attention nowadays. Crowdfunding is evolving and new crowdfunding platforms provide an excellent tool for financing different projects, whether these are art projects, game or hardware/device development or even equity financing. Yet the use of these new platforms and practices needs to comply with the existing regulation, which sometimes causes conflict. This first guest blog looks into the legal issues related to using donation/rewards-based crowdfunding platforms mainly from Finnish perspective, and the second blog addresses the use of equity-based crowdfunding platforms.

Lessons learned – How to plan your (non-equity) crowdfunding campaign to comply with Finnish law

The crowdfunded book campaign by Senja Larsen has sparked a lot of controversy in Finland in the past few weeks (if you don’t know Senja’s case, you can google all about it). The project was run with Kickstarter but it was terminated in September this year as the Finnish Police claimed possible violation of the Finnish Fundraising Act (in Finnish: rahankeräyslaki). The Fundraising Act states that in order to solicit funds without compensation, you need a separate licence, and individual persons cannot be licensed at all. Fundraising regulation is there for all the good purposes and it is good to know our Government looks after us (irony included), but the fundraising regulation seems to kill fair and transparent fundraising initiatives as well. Are Finns then shut out from the entire donations/rewards-based crowdfunding scene? Well, not necessarily. Studying the Police argumentations provides insight to how the Police interprets the law and may tell us how to run the campaign legally in Finland.

The magic word when considering legality of crowdfunding campaign is consideration. The current Police interpretation is that on the other end of the spectrum there is clear fundraising without compensation (regulated, illegal without a licence) and on the other end there is “normal” sale of goods or services (not affected by the fundraising regulation). Police interpretation of the “normal” sale activity is rather conservative as it requires the use of fixed prices determined solely by the seller and delivery of goods (or services) within reasonable time period.

If you want to run a crowdfunding project safely within the Finnish fundraising regulation, you need to design it as a pre-order scheme for physical or digital products and be very specific about the nature of the project. Words like donation, promotion or funding should not be used as every provider of funds should receive compensation in the form of a final product or, it is fair to assume, some form of a gift voucher or even merchandise. To be safely outside the scope of the fundraising regulation, the ability to provide funds without compensation should be excluded by for example setting some minimum level of funds accepted to the project (equal to the price of the product or service). The latter is however not possible in all crowdfunding platforms, but some form of a gift voucher or reward scheme can work as well, thus eliminating the donation element from the project.

The above-mentioned pre-order crowdfunding structure is obviously not suitable for all projects. Many of the projects for example in Kickstarter are non-profit initiatives or projects that do not fall within the “normal” sale of goods, and an important element in crowdfunding is the ability to provide funds for projects without immediate tangible gain. Any project can offer some rewards to donators and even without any goodies one can argue that the project includes compensation for the donator by way of satisfaction in seeing the project completed or having the ability to download a free app or game, even if such an opportunity is eventually available for anyone for free. However the current Police interpretation seems to be that such projects fall within the scope of the fundraising regulation, or are at least in the grey area. Testing the limits of the regulation is tempting, but it has its risks. Violation of the Fundraising Act is a criminal offence and having the Police question you about the legality of the project is not how you want to spend your day.

The legal status related to the use of non-equity crowdfunding platforms in Finland clearly needs clarification. The problem is not so much the Fundraising Act itself, but the current interpretation of the law and the idea of compensation by the Finnish Police. To put this into perspective, out of the Scandinavian countries Denmark and Iceland have specific fundraising legislation, as have Russia and certain states in Germany, but without any known issues related to the use of crowdfunding platforms (I am happy to hear any experiences to the contrary). While there is lot of uncertainty related to this subject, it is certain that we have not seen the last of this debate!

Antti Hemmilä

Disclaimer: Obviously, the articles address the legal issues related to crowdfunding on a general level and cannot be deemed as legal advice in any particular case. Also other regulation, such as consumer protection rules and tax regulation (mainly VAT issues), may come into play when running a pre-order campaign.

About the Author
Antti advises on venture capital, M&A, capital markets and general corporate law related questions. He has wide-ranging experience in advising small and medium-sized companies on numerous M&A and financing arrangements, representing both companies and finance providers. Antti has also worked on numerous capital markets transactions.
Antti Hemmilä on LinkedIn.

About Borenius
Attorneys at law Borenius Ltd is one of the leading law firms in Finland offering a full spectrum of commercial law services. Attorneys at law Borenius’ mission is to be the most hands-on, client-centred business solution provider. The firm’s approach to business challenges is team-oriented, combining its strong and diverse expertise with a thorough business understanding.

Attorneys at law Borenius Ltd is part of the Borenius Group network which consists of approximately 200 lawyers in four jurisdictions in Fenno-Baltic area as well as in New York. The member firms of Borenius Group are independent and separate legal entities practicing advocacy for their own account and following their respective local Bar rules.

Top image CC licensed by IvanWalsh.com on Flickr.

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