Investor Shield: Crowdfunding rules to change in Russia
New rules for crowdfunding will come into force in Russia. A bill regulating the activities of investment platforms has been submitted to the State Duma. The initiative should improve the mechanisms for attracting business financing. The proposed measures will reduce the risks of fraud, manipulation and artificial distortion of data, experts say. However, their adoption will entail the need to finalize the internal regulations of operators, review agreements with counterparties, and configure digital and technical systems. Whether government regulation of crowdfunding needs to be tightened is in the Izvestia article.
Tightening of mechanisms
The rules of operation of investment platforms will change in Russia. The relevant bill was prepared by a group of deputies and senators, and the document has been submitted to the lower house of parliament. It sets the rules for investing through the purchase of securities and digital rights. Its necessity is caused by the fact that often retail investors (individuals) do not want to invest in a project that does not involve a large or "anchor" investor. And he, in turn, does not agree to contribute funds on general terms, since he risks a disproportionately large amount.
The document allows financing of the project immediately after reaching the minimum amount of necessary investments. At the same time, the maximum difference between the minimum and maximum amount contained in the investment proposal is set. It should be no more than 25%. This is necessary to prevent the risk of investing in projects that have not received funding.
The initiative also changes the concept of "the moment of conclusion of the investment agreement". Now it is considered the moment when funds are credited to the bank account of the person attracting investments. However, operators often receive accurate information about the funds received with a delay. The bill proposes to consider the transfer of funds from the nominal account of the operator as the moment of conclusion of the contract.
According to the draft law, its operator will also be able to invest and raise funds on the platform. But in order to increase the conditions of transparency, he will not be able to combine both these roles. This is expected to help offset conflicts of interest.
An important rule prescribed in the document concerns an increase in the size of the investment limit for individuals. This is necessary to meet the increasing demand for financing, including from SMEs. The system for monitoring these limits by operators will be upgraded. At the same time, investors will be allowed to reinvest during the year the money that was returned to them under the agreements concluded on this investment platform, which will increase the space for investments.
In addition, in order to protect the rights of the parties, a ban is imposed on unilateral refusal to execute an investment agreement if there are already existing agreements or accepted investment proposals.
Additionally, the bill improves the control and supervisory mechanisms of the Bank of Russia. The grounds for sending instructions and terminating the operator's activities are being clarified.
The law provides for a transitional period. It is equal to six months from the date of the official publication of the document.
Urgent changes
Today, crowdfunding is a popular way to attract investments for businesses, says Sean Betrozov, a practicing lawyer at the Moscow Chamber of Lawyers and a member of the Russian Bar Association. It provides access to capital for startups, SMEs and other enterprises that traditional financial institutions are not always ready to provide funds to.
— However, the lack of well-established legal control mechanisms may entail risks. Individual investors who do not have sufficient financial literacy and awareness may face loss of investments due to regulatory deficiencies, the expert warns.
The issue of additional regulation of the work of investment platforms in Russia has not matured yesterday, emphasizes Alexey Govyrin, a member of the State Duma Committee on Small and Medium-sized Enterprises.
"The draft law seeks not only to describe the scope of acceptable behavior of participants, but also to resolve frequently arising conflict situations involving the simultaneous participation of one entity in several roles — investor, borrower and organizer," the source notes.
This document does not conceptually change the rules of the game in the market, but only places certain accents, says Kirill Kosminsky, executive director of the Association of Investment Platform Operators. There is no need for a systemic change in the regulation of the crowdfunding market today — thanks to the mechanisms created at the time, almost 100 platforms were able to enter the register of the Central Bank. The annual amount of financing for them exceeds 50 billion rubles.
— All this suggests that the current rules are comfortable for market players. The new bill is improving them," the expert is convinced.
Risk reduction
The protective mechanism proposed by the bill consists of several aspects, says Sean Betrozov. The role of the investment platform operator as an intermediary, who is obliged to act in good faith and honestly, is increasing. And the restriction on the amount of investments for individuals enhances the protection of retail investors.
— Legislators are trying not only to set limits, but also to streamline the system of control over them, which is extremely important, since inexperienced investors attracted by promises of large dividends sometimes invest an amount exceeding their financial capabilities and willingness to risk, — explains the interlocutor of Izvestia.
A clearer definition of the moment of conclusion of the contract, the procedure for transferring funds, the grounds and deadlines for rejecting the transaction, in turn, closes all the "loopholes" that allowed the investor to withdraw from the process after the funds were placed, the lawyer is sure.
At the same time, there is a desire to create conditions under which an investor can not only invest funds, but also receive proper documentation of their actions, even if the platform operator ceases to operate, Alexey Govyrin adds.
"The mechanism for issuing extracts from the register of contracts is not a formality, but a tool of proof, without which the restoration of rights in the event of a dispute becomes illusory," the deputy emphasizes.
According to Betrozov, these measures will help protect investors from unfair actions on the part of platform operators, reduce the risk of manipulation and artificial distortion of data.
Natural difficulties
The question remains how feasible protective measures will be in a real market, Alexey Govyrin notes. Investment platform participants may face a number of difficulties, says Sean Betrozov.
Any adjustment of the legal framework, in particular, entails the need to finalize internal regulations of operators, review agreements with counterparties, as well as configure digital and technical systems.
— Operators will have to rework their technical procedures: accounting of funds, registers of contracts, a system for identifying participants, mechanisms for blocking and refusing to conclude contracts, and so on, — says the expert. The bill gives only 180 days for this work, which may require significant organizational and financial efforts on the part of the business.
The burden on operators may also increase in terms of comprehensive compliance. They will be required to adapt to the new instructions of the regulator as soon as possible and correct the identified violations in a short time, which will require hiring additional personnel, auditing and implementing new technical solutions, Betrozov believes.
Govyrin warns that as a result, operators, especially small ones, may find themselves in a situation where the content of the regulatory framework will become economically unprofitable for them.
According to him, the question remains to what extent the proposed measures will be able to protect the investor not from a formal violation of the conditions, but from the high-risk investments themselves, in which, by definition, a refund cannot be guaranteed. It is important that an individual is aware of the risks and potential consequences of their decisions, Betrozov believes. To this end, platform operators will most likely have to invest in educating customers and explaining the essence of the products to them.
In addition, some projects that could previously attract financing without serious verification, if the bill is passed, will face a tougher audit, which will lead to the elimination of weak initiatives, the lawyer does not exclude.
"This can be a problem for small businesses that are not ready to meet higher standards of transparency," he admits.
Despite these nuances, the bill remains necessary. Any investment market requires established procedures for information disclosure, the procedure for concluding and terminating contracts, and limits for retail investors, the Izvestia interlocutor emphasizes.
— All this directly affects the transparency of transactions and the predictability of consequences for both parties. If there is no clear regulation, investors will start to face unscrupulous platforms en masse," Betrozov warns.
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