Bank of Lithuania report on crowdfunding operators (auto-translated)

Activities of financial market participants

Overview of crowdfunding platform operators

2022 m.

Overview of crowdfunding platform operators ISSN 2669-073X

Series "Activities of financial market participants"

2022 m

This overview covers the overall performance of all crowdfunding platform operators operating in Lithuania 2022, all data in the tables and graphs are as at 31 December 2022, unless otherwise stated

Data from the Bank of Lithuania and crowdfunding platform operators have been used for this review. The overview was prepared by the Bank of Lithuania Investment Services and Company Supervision Division, Financial Services and Markets Supervision Department

© Bank of Lithuania, 2023

Gedimino pr 6, LT-01103 Vilnius www lb lt

Abbreviations

SFI Law on crowdfunding in the Republic of Lithuania

SFP crowdfunding platform

SFPO operator of crowdfunding platforms

SFR Regulation of crowdfunding providers

NT real estate

UAB private limited company

VP Securities

SUMMARY

The following trends will characterise the activities of Lithuanian SFPOs in 2022:

1) Despite the geopolitical crisis, financial market volatility and regulatory changes, the SFP market continued to expand Both the number of projects financed and the amount of funding made available have increased significantly In 2022, another SFA became active, with a 40.3% increase in the amount financed during the year to €161.07 million;

2) The largest SFPO on the market, Profitus Crowdfunding Platform UAB, has helped finance more than €41.18 million of projects in 2022 (25.57% of the total market);

3) Increased arrears were recorded in real estate and business finance;

4) The number of transactions increased significantly by 51 38% (more than 618 000 units);

5) The number of projects published in the SFP continues to increase Over the whole period of operation, 5,332 projects have been announced, of which 2,718 will be announced in 2022, an increase of 79.29% compared to 2021 This trend shows that crowdfunding is becoming an increasingly used alternative for business financing

OPERATORS OF CROWDFUNDING PLATFORMS

Following the entry into force of the SFI in November 2016, the first SFPOs started to be established in Lithuania. The SFI gave the Bank of Lithuania the right to license and supervise these platforms. The SFI created a clear legal environment for the provision of crowdfunding services. It should be noted that from 10 November 2023. The SFI will expire on 20.11.2020 and the SFPOs will be governed solely by the SFR.

In accordance with the SFI, the Bank of Lithuania:

1) authorises companies to provide SFPO services;

2) monitor and analyse their performance;

3) carrying out planned, targeted and thematic inspections;

4) deal with complaints from their customers;

5) apply the SFPO's impact measures, where appropriate

These regulatory and supervisory measures are designed to support investment through crowdfunding Institute, to mitigate risks

Key concepts in the SFI

Crowdfunding is a type of financing where a project that has been made public on a dedicated platform is funded by financiers unrelated to the project or where the financiers buy the creditor's claims for sale through the SFP

SFP - the information system managed by the SFO for crowdfunding

SFPO - the legal entity that manages the SFP. An investment service provider established in other Member States may not have the status of a legal person, provided that the investment service provider licence authorises the provision of investment services

A crowdfunding transaction ("transaction") is a transaction between a financier and a project owner, whereby the financier provides or undertakes to provide the project owner with crowdfunding funds in the form of a loan or other monetary instrument or by acquiring financial instruments issued by the project owner, and the project owner issues the financial instruments and/or undertakes to reimburse the financier for the funds received

A project is a project designed to meet business, professional, scientific, research and other nonconsumption needs and published in the SFP, for which the project owner seeks to raise crowdfunding funds.

Key operational requirements for SFPOs and SFPs

The SFPO has a duty to act honestly, diligently, fairly and professionally in the best interests of and on terms that are in the best interests of the funder and the project owner. It must also have and use sound tools and procedures necessary for the operation of the SFPO

Other requirements:

1) The SFPO must assess whether a particular type of financing transaction is acceptable to the financier;

2) The SFPO must approve the information document, which must contain basic information for investors;

3) An SFPO included in the list of Public Crowdfunding Platform Operators must have a permanent establishment

In the Republic of Lithuania

In summary, the SFI is the main piece of legislation regulating the activities of SFPOs, it sets out the conditions and requirements for SFPOs' activities and the crowdfunding regime in Lithuania, the scope of mandatory disclosures, the procedure for inclusion in the list of operators of public crowdfunding platforms and for exclusion from the list, and the procedure for the supervision of SFPOs. Crowdfunding is designed to raise funds for business projects in the form of loans or securities. For each business project to be financed through the SFPO, a project plan must be prepared The funds raised cannot be used for personal consumption It should be stressed that crowdfunding does not include activities for charitable and/or aid purposes

In addition, the activities of the SFPO are also regulated by Bank of Lithuania Resolutions

Risks of investing on unregulated platforms

Investing in unregulated SFAs exposes investors to the following additional and significant risks:

1 Different rules for SFPOs In the presence of different rules, some SFPOs may fail to assess important characteristics of the project owners (creditworthiness or reliability), and may give investors the opportunity to invest without first informing them of the potential risks The absence of rules allows for the emergence of different models of SFPOs and different operational practices, which may not necessarily be in the best interests of investors.

2 Lack of supervision Investors are exposed to the risk that SFPOs are not supervised Such activities may not be focused on representing the investor's interests, but rather on financing as many business loans or entities as possible Lack of supervision means that the investor's interests are not protected by the supervisory authority

3 Complex complaints and dispute resolution process Investing on unregulated platforms loses the possibility to seek out-of-court dispute resolution from supervisory authorities When complaining to an unregulated SFPO, the resolution of the complaint can be long and complex and in some cases only possible through the courts.

European regulation of crowdfunding

The Regulation (EU) 2020/1503 on crowdfunding providers (the "Regulation") entered into force on 10 November 2021 and establishes a common legal framework for crowdfunding across the EU Under the Regulation, crowdfunding service providers are licensed entities whose main purpose is to act as intermediaries between project owners and financiers. The Regulation limits the scope of crowdfunding to business needs and therefore excludes consumer loans, charity or other financing without financial remuneration As crowdfunding is aimed at medium and small businesses, the Regulation limits the size of a project (or a project per owner per year), i.e. under the Regulation, this size cannot exceed EUR 5 million. It should be noted that the principles and substantive requirements for crowdfunding providers set out in the Regulation are very similar to those set out in the SFIs, with the exception of a few major innovations, i e The Regulation allows for individual loan portfolio management (auto-lending) and a cooling-off period to protect the rights of funders, prohibits crowdfunding service providers or their affiliates from publishing projects on the platforms they administer, sets qualification and experience requirements for the managers of the crowdfunding service provider, introduces new categories of funders (experienced and inexperienced funders) etc.

OVERVIEW OF THE PERFORMANCE OF CROWDFUNDING PLATFORM OPERATORS

As of 31 December 2022, 23 SFOs were listed as SFOs, of which 11 were active and 12 had not yet started operations SFPOs have helped to finance projects related to the financing of real estate businesses and have financed other smaller business projects, refinanced business loans and raised working capital It should be noted that the crowdfunding market was dominated by loan financing.

Figure 1 shows how the amounts financed and the number of transactions have evolved since the entry into force of the SFI at the end of 2016. In 2022, €161 07 million worth of projects have been funded, with as many as 618,000 transactions having been made to achieve this funding (one person can make multiple transactions on different platforms, so the number of transactions does not equal the number of unique investors). Compared to 2021, the amount financed has increased by 40.3% or €46.28 million and the number of deals has increased by 51.38% or 207.2 thousand units.

1 Figure 4.1: Trends in the amount financed through the SFP and the number of transactions concluded

2 Figure 1: Number of projects funded

Figure 2 shows that the number of projects published by the SFP has increased throughout the period. Over the whole period (2017 to 2022), 5,332 projects have been published (2,718 in 2022, 1,516 in 2021, 650 in 2020, 352 in 2019, 74 in 2018 and 22 in 2017). The number of SFP projects announced during this period has increased more than 120 times. In 2022, 2,718 projects will be funded through the SFPO (79.29% more than in 2021). The majority of projects were financed for business loans and working capital needs (71 9% or 1 955 units), while a smaller share (28.1% or 763 units) were projects related to the financing of real estate businesses (see Figure 3).

Real estate business financing Business development

Source

A different picture emerges when comparing the types of funding by the amount financed A comparison of the amounts financed by type of financing (see Figure 4) shows that the amount of business financing for real estate (EUR 88 47 million or 54.93%) is higher than that for business financing (EUR 72.59 million or 45.07%). This can be explained by the fact that real estate business financing projects are generally larger and require more funding Although real estate business financing projects are potentially a safer alternative for the investor (using primary mortgages as collateral), these projects pay lower average interest rates

Investments in business finance projects are riskier but potentially more profitable investments for small investors

Real estate business financing Business development

3 Figure 1: Breakdown of funded projects by type and number of projects

4 Figure 1: Breakdown of funded projects by type and amount funded

The value of the projects funded in 2022 was €161 07 million UAB "Finansų bitė verslui", UAB Nordstreet, UAB "Bendras finansavimas", UAB "Trečia diena", UAB "Profitus", UAB "EstateGuru Lietuva", UAB, UAB "Inrento", UAB "HEAVY FINANCE", UAB, UAB "8 Stars", UAB

"FinoMark and Iban online UAB (see Table 1) The largest amount of funds (EUR 41 18 million) was lent through the platform managed by UAB Profitus, which helps to raise finance for real estate business projects

The smallest amount was lent through UAB

"According to the data as of 31 December 2022, the largest number of financing transactions (237 2 thousand) will be concluded through EstateGuru Lietuva, UAB, the second place will be taken by UAB Finansų bitė verslui (228.5 thousand), and the third place will be taken by UAB Profitus (58.1 thousand).

The following review assesses only active SFPOs

1 Table 1. SFPO data

As of 31 December 2022, the average value per transaction increased by around 32.87% to EUR 3 364 (see Table 2) This can be explained by the fact that UAB Iban online became operational in 2022, through which larger projects were financed. Compared to 2021, the average value of transactions concluded by UAB Finansų bitė verslo (Finbee verslo) increased the most, by 14 5% to EUR 66, while the average value of transactions concluded by UAB Inrento decreased the most, by 65.83%.

Analysing the average transaction values, it can be said that investors tend to lend money in larger amounts for projects related to real estate development, while they tend to lend smaller amounts for investments in business loans, working capital, business development, and loan refinancing.

It took on average 10 days to raise funds through the SFP for real estate business finance projects in 2022 (the same as in 2021) and 8.5 days to raise business finance (0.5 days longer than in 2021).

An analysis of the SFPO's performance in 2022 shows that the highest average annual interest rates are paid for projects related to business financing (11% on average), while projects related to real estate business financing generated an average interest rate of 5.49% for investors.

2 Table 1. Average amounts invested

than 30 days but not more than 60 days

At the end of 2022, payments to financiers were delayed by project owners who had raised funds through UAB "Finansų bitė verslui, UAB Nordstreet, UAB Profitus, EstateGuru Lietuva, UAB, UAB HEAVY FINANCE and UAB FinoMark (see Table 3). The highest overdue payments of more than 30 days but not more than 60 days by project owners were recorded for Profitus, UAB (overdue payment amount of EUR 1 232 306) The highest late payments of more than 60 days but not more than 90 days were recorded for UAB HEAVY FINANCE (overdue amount of EUR 211 057) The largest overdue payments of more than 90 days were recorded for UAB Nordstreet (overdue amount of EUR 2 569 959). The increase in the number of projects with overdue payments can be attributed to the economic consequences of the 2022 war, record inflation and the energy crisis (economic downturn, increased unemployment, stalled real estate projects, uncertainty in the markets) Project owners are obliged to pay interest to investors for late payments In cases where the project owner is unable to pay the investors, the project owner's assets are used as collateral or the project owner's assets are taken into court for recovery.

3 Table 1. Overdue payments for projects published by the SFP