The Current State of Crowdfunding in Lithuania
According to the Bank of Lithuania, approximately 40 percent of SME loan applications are rejected in Lithuania, 50 percent of Lithuanian residents hold their savings in cash. Therefore the necessity for alternative financing and alternative investment opportunities in Lithuania during the last year was one of the top priorities of the Ministry of Finance and the Bank of Lithuania. With the ambition to become one of the most attractive FinTech destination in Europe, this autumn Lithuania approved a number of regulatory changes: amended KYC regulation (enables non face-to-face identification), amended consumer credit rules related to peer to peer regulation. Finally last week the Parliament of the Republic of Lithuania passed the Law on Crowdfunding. The Law on Crowdfunding eliminates obstacles in Lithuania related to crowdfunding business in Lithuania.
Inhabitants: 2,88 million
GDP (ppp) per capita: $29,380
(Source: Wikipedia; Image Credit: NuclearVacuum
€2,3 million has been raised on P2P consumer lending platforms in 2015. This market volume is based on statistics for 2015; for more information, please see (only in Lithuanian): https://www.lb.lt/vartojimo_kredito_rinkos_apzvalga_2015_m.
Savy.lt, a P2P consumer lending platform launched in 2014.
FinBee an P2P consumer lending platform launched in 2015.
Paskolų Klubas a P2P consumer lending platform launched in 2015.
Manu, a P2P consumer lending platform launced in 2016.
Optimalus Kreditas (OK), a P2P consumer lending platform launched in 2015.
No foreign platforms are currently operating in Lithuania.
Regulations in Lithuania
General requirements for crowdfunding
The law does not apply to crowdfunding based on non-financial consideration/incentives (donation and reward crowdfunding). A legal entity (though sometimes without such status) may be an operator of a crowdfunding platform. The operator of a crowdfunding platform must be domiciled in the Republic of Lithuania, save for the cases where entities established in other Member States in accordance with the legal acts are entitled to act as intermediaries in forming transactions for financing without having registered their domicile in the Republic of Lithuania or with their branches established in the Republic of Lithuania. Funds can be granted through equity, non-equity, loan, other credit arrangements.
Requirements for start of crowdfunding activities
The operator has the right to engage in crowdfunding activities after the operator is included by the Bank of Lithuania in the public list of crowdfunding platform operators. When applying to the supervisory authority for inclusion in the public list of crowdfunding platform operators, the operator must submit information related to members and managers (heads) of the platform operator, information on prudential requirements of the platform, a plan in case ongoing concern and other documents. In general the supervisory authority makes a decision regarding inclusion in the list within 30 business days. Operators included in the list will in general be considered to be financial advisory firms.
The operator must also prepare the following information and documents:
- the information on investment-related risks by providing their descriptions;
- the information on organisational and administrative measures in place to prevent conflicts of interest;
- a description of the procedure for using the crowdfunding platform;
- rules for secondary trading in the crowdfunding platform provided the platform operator intends to engage in secondary trading;
- the method of calculating the remuneration for the operator of crowdfunding platform paid by project owners and project investors;
- the information on taxes applicable to a financing transaction and types of such taxes;
- the terms and procedure of funds repayment to investors in the event the project owner does not raise a sufficient amount to develop the project;
- the information on risk mitigation measures, if any;
- rules for handling complaints of customers;
- the procedure for implementing rights of a personal data subject.
Restrictions and limitations
In the final draft there are some amendments which boost competition for Lithuanian regulation. The project owner is not obligated to allocate its own funds to finance the project. Restrictions for the maximum amount to be invested do not apply to investors. Before providing an opportunity for a investor to enter into a financing transaction of specific type (investment or lending) for the first time, the platform operator must carry out assessment of appropriateness of the specific type of financing transaction for that investor. When assessing the acceptability of the financing transaction for the investor, the platform operator must request from the investor to provide information on his knowledge and experience in the area of investments related to the type of anticipated financing transaction.
If the assessment of appropriateness of the type of financing transaction to the investor reveals that a certain type of financing transaction is not acceptable to the investor, or if the investor refuses to provide information about his knowledge and experience in the area of investments or provides insufficient information, the platform operator may allow the investor entering into the financing transaction but must:
- inform the investor that the type of financing transaction is not acceptable to the investor, or that non-provision of the required information prevents from determining whether the type of financing transaction is suitable to the investor;
- provide the investor with the information on investment-related risks.
The requirements listed above do not apply in the event the investor is an informed investor.
Conditions of raising funds through crowdfunding
No additional requirements related to raising funds apply to a financing transaction which is intended to raise an amount less than EUR 100,000 in 12 months. The project owner wishing to enter into one or more financing transactions for the total amount ranging from EUR 100,000 up to 5 million euros in 12 months must draft a document specifying the information about the project owner and the proposed project, and submit it to the platform operator. The project owner wishing to enter into one or more financing transactions for the total amount of 5 million euros or more in 12 months can do so only by issuing securities in the manner established by the Law on Securities, i.e. by preparing a prospectus, and after obtaining an approval of the supervisory authority.
What is the potential of crowdfunding in your country?
Taking into account that Lithuania faces problems in financing small and medium enterprises (for example, in the second quarter of 2014, as many as 40% of credit applications from small and medium enterprises were denied by the banks in Lithuania) crowdfunding should become a tool to boost the economy and provide the necessary financing for small and medium enterprises. Crowdfunding is strongly welcomed by the market, the regulator and legislators alike.
What are the biggest challenges?
The biggest challenge facing crowdfunding in Lithuania is financial education. People will not be sufficiently aware of crowdfunding’s potential, or of its benefits and risks. As a result, the crowdfunding market could face constant challenges to growth in Lithuania. Another challenge worth mentioning is institutional investors in Lithuania. These investors are currently suspicious of crowdfunding and it will take some time to see them cooperating with crowdfunding platforms.
What is the future holding for Lithuania?
Huge potential exists for crowdfunding in Lithuania due to lack of financing for small and medium enterprises. Crowdfunding should help to minimise the funding gap and increase competition among traditional investors, such as banks and various funds. The market expressly declares the need for crowdfunding.