Alternatives for funding small and medium-sized businesses proposed

21.07.2015 Alternatives for funding small and medium-sized businesses proposed

The Bank of Lithuania, acting in cooperation with the Ministry of Economy and the Ministry of Finance, has prepared a package of proposed measures, implementation of which should encourage possible alternatives for funding small and medium-sized businesses. The proposed measures would offer alternatives to bank financing, which is often unavailable for new businesses.

Mantas Gofmanasa Senior Associate of TGS Baltic, states that implementation of the below-mentioned proposed measures of legal and taxation regulation should surely encourage alternatives for funding small and medium-sized businesses. Thus, in the future small and medium-sized businesses could expect to have a possibility to finance its projects not only with funds obtained from banks or other financial institutions, but also from other market participants. It is also very important that, in preparation of these proposals regarding legal regulation measures, state authorities also asked for the opinions of business associations and other interested market participants. Hence, the formulated proposals more or less reflect expectations of market participants regarding ways in which alternative funding for small and medium-sized businesses could be encouraged.

The main possible legal regulation measures planned by authorities for this purpose are as follows:

1. Regulation of crowd financing (CF) activity based both on investing and on borrowing, and on some other ways (e.g. factoring). This, inter alia, should provide for a possibility to establish CF platforms, which are not currently regulated, by clearly providing that the Law on Financial Institutions does not apply to their activities, also amending other legal acts, which currently prevent development of this activity. According to the proposed conception, non-professional investors could invest up to EUR 1,000 to one financed project, whereas for professional and informed investors the investment amount would not be limited. Project owners (financed entities) would be obligated to announce information about the project (financed company, planned activities, risks, etc.), also to regularly inform investors about the course of the project and to disclose its annual financial data. The administrator of the CF platform would have to ensure that the information given to it by project owners would be published on the CF platform in due time.

2. Giving of a possibility to private limited liability companies (UAB)to publicly offer bonds (except for convertible bonds) (currently, this possibility is given exclusively to public limited liability companies): both until the limits provided for by the Law on Securities, when no prospectus has to be prepared (on the basis of an informational document (memorandum)) and when exceeding them (after preparation and publication of a prospectus). According to the proposed conception, bonds could be publicly offered only by those private limited liability companies, which audited sets of their annual financial statements at least for 1 year before the planned bond issue and will continue to audit them until that financial year in which the bonds mature (this requirement would not apply to newly established companies, the history of which activities is less than 1 year, when bonds are offered through the CF platform).  

3. Establishment of criteria for private offering of securities by private limited liability companies. According to the proposed conception, it is recommended to establish that offering of shares or bonds of a private limited liability company is private if the offer is given to (i) shareholders, (ii) employees, (iii) creditors of the private limited liability company issuing the securities, (iv) professional investors or (v) informed investors, and (vi) such offering is subject to at least one of the conditions set in the Law on Securities when, in case of public offering of securities or admission of securities to trading on a regulated market, it is not required to announce a prospectus.

4. Giving of a possibility for companies to give shares to employees free of charge or for a partial charge. It is proposed to give a possibility to give shares of a company (in case of a share issue or by transferring treasury shares) free of charge (by paying for such shares with the funds of the company) or for a partial charge (by paying for such shares with the funds of the company and the employee) to employees, including the head of the company, as well members of the Supervisory Board and the Board, except for cases set by law (when employees of the company are its shareholders or persons closely related to its shareholders), subject to fulfilment of both these conditions: (i) the company must have formed a reserve for payment for the shares given to employees and members of governing bodies of the company (its amount must be no less than the aggregate value of the shares given free of charge (at the issue price of the shares or the acquisition price of treasury shares) or the aggregate of that part of their value, that is paid by the company); (ii) the general meeting of shareholders must have approved the policy of giving shares to employees and members of governing bodies of the company by a qualified majority of votes.

5. Adjustment of the regulation by the Law on Partnerships, making it more attractive for activities of risk and venture capital funds, which are most often established namely in the form of a partnership (limited partnership). According to the conception, it is proposed to eliminate the following obstacles posed by Lithuanian legal regulation: (i) to drop the requirement to disclose the identity of all limited partners of a limited partnership and the amount of their investments into the limited partnership, however, leaving the obligation to disclose the identity of those limited partners, who were founders of the limited partnership; (ii) to review the requirements for the content of the document of incorporation (agreement on activities) of a limited partnership to be submitted to the Register of Legal Entities, in order to create a possibility not to disclose confidential information, which currently is a part of the agreement on activities of a limited partnership; (iii) to create legal possibilities for general partners and limited partners of a limited partnership to discuss confidential issues regarding activities of the limited partnership and their mutual relationships in a separate non-public agreement.

6. Performance of changes in the taxation system encouraging creation and use of alternative measures for funding small and medium-sized businesses.