Crowdfunding regulation in Colombia: Boost or limitation to alternative investment?

The new crowdfunding regulation in Colombia is contained in the Decree 1357 of 2018 (“the Decree”) which modifies the Main Financial Act of this country.  This regulation defines crowdfunding as a collaborative financing activity, developed by authorized entities by the Financial Superintendence of Colombia (hereinafter “SFC”) through platforms that contact several contributors with recipients, who request financing on their own behalf to allocate it to a productive investment project.

Crowdfunding, as financing activity may be held out through bonds or shares, must only be carried out by  certain companies and, like any company in Colombia that intends to be a securities issuer, must be monitored by the SFC, registered in the National Registry of Agents of the Securities Market, have the approval of the SFC regarding the Investment Regulation, among other duties that financial entities must comply with, according to the State´s commitment  to protect the rights of the investors.

Thereon, Decree 1357 of 2018 requires that the company who intends to issue crowdfunding securities, conforms to all of the requirements established in the Organic Financial Statute, specially the company capital, which is different for each financial entity (insurance company, fiduciary or pension fund manager). However, since these types of companies have a specific purpose, the exact amount of the capital which they require to establish themselves as crowdfunding companies is not yet known or regulated by law.

Regardless of the setting of the amount, a great financial muscle is required for an entity to be considered as a collaborative financing company that has the competence to issue collaborative financing securities such as bonds or shares. Therefore, it is necessary to examine whether the new regulation promotes investment through crowdfunding platforms or, in the contrary, makes it considerably difficult to connect investors with the productive projects in the financial sector.

According to the legal analysis above, it should be noted that, apart from the amount required to set up a legally authorized company to create a crowdfunding platform, the contributors must also have specific qualities when making an investment to acquire collaborative financing securitiespatrimony equal to or greater than ten thousand (10,000) Colombian minimum wages and second, be a holder of an investment portfolio in securities, different than a collaborative financing values, equal to or greater than five thousand (5000) Colombian minimum  wages.

The aforesaid confirms that it is required to have a considerably high amount of assets and/or company capital to even be considered as a contributor to the different productive projects or to be part of the financial market. It should be noted that, if an ordinary person wants to make a donation or payment for a service or a productive project, they won’t be able to do it through “collaborative financing securities” ( meaning crowdfunding securities) ,  since they cannot even participate in the market, which does not mean that cannot do so by means of an operation outside the market, as a donation or a compensation payment.

On the other side, from the State´s perspective the protection of the investors rights is well done with this regulation, but to what extent does this decree limit the possibilities crowdfunding has to offer, especially in Colombia´s economy?

Hence, it is necessary to analyse how crowdfunding is regulated in the United Kingdom, which, together with the United States, are the worldwide crowdfunding pioneers, according to statistics provided by Statista. [1].

As stablished in the Financial Services Act and the Financial Market of the United Kingdom in 2000, there are two types of crowdfunding regulated by the Financial Conduct Authority (FCA): loan and investment. There are also two types of crowdfunding that are not considered as a financial activity but that are regulated and monitored by the FCA, such as a donation and payment as consideration for products or services.

It is important to recognize that the loan type is regulated by contracts between individuals and companies, but still supervised by the FCA, while creating an investment crowdfunding platform requires obtaining a license from FCA.

With this comparison it is reasonable to think that such a regulation is more accurate to the dynamics of the market than Decree 1357. Notwithstanding the fact that other types of crowdfunding which operate outside the financial market are already comprehended in the law, such as donations and direct payments for products or services, the SFC should be more involved in those ways of crowdfunding as they are more reachable and accurate to some entrepreneurs.

By

María Isabel Aguilar Góez

Lawyer at Quarta Acompañamiento de Negocios

[1]Crowdfunding – Statistics & Facts. Recuperado de: https://www.statista.com/topics/1283/crowdfunding/

[2]Consultation Paper (CP) by 27 October 2018.Recuperado de https://cdn.crowdfundinsider.com/wp-content/uploads/2018/07/FCA-Loan-Based-and-Investment-based-Crowdfunding-Platforms-Post-implementation-review-7.27.18cp18-20.pdf