Retail investment in Ukraine: crowdinvesting and other basic aspects for investors

Despite the dramatic events of recent months, the war has not broken Ukrainian business, which even in conditions of extreme turbulence is capable of recovery and development. Investors, who believe in the Ukrainian economy and want to reach a new level by joint efforts, provide extraterrestrial assistance in this mission.

Ukraine is developing state lending and support programs, but the long-term trend is that small and medium-sized businesses gravitate towards attracting private investment in order to avoid bureaucratic banking procedures. You don’t have to buy a store, hire employees and manage a business - you can invest in companies operating in Ukraine and expect a yield higher than standard investment instruments.

In practice, investing goes smoothly only if you know all the pitfalls. Otherwise your expectations will differ significantly from the legal reality.

We have collected our experience and will try to answer the main questions in the field of retail investing. The topic is very broad, we’ll dwell only on the main aspects. This is the first part, our second publication will be devoted to less common options for investing in business in Ukraine.

Crowdfunding or crowdinvesting in Ukraine?

Crowdfunding means that you invest in a certain idea without the intention of making a profit. During the development of the initiative, a certain value is formed, the participants can receive certain benefits or services, but such initiatives are not aimed at earning money. More often it takes the form of joining a community organization and paying a one-time or periodic fee.

Crowdinvesting is co-investment for the purpose of returning capital and making a profit. Crowdinvesting is born when a project can only be implemented with the combined funds of many investors. There are initiatives balancing on the border between social emphasis and profitability, trying to achieve a synergy of profit and collective value.

In Ukraine, both directions are at the stage of development, so companies can accumulate funds in different legal ways, which will be discussed below.

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Participation in collective funding in Ukraine

Description: The organization collects funds, which are accumulated and invested in different businesses. You enter into an agreement with it and transfer the funds, or the organization tells you which company to transfer the investment to. That is, it can work as an agent (taking funds from you), or as an outside organizer.

You follow the development and expect to return the investment with a profit. Such organizations call themselves an investment platform or investment club, for example. They can diversify investments or are set up for a specific project.

Advantages: You are not involved in operations. If the organization is known, it takes its own risk of reputation and has the motivation to do things right. If there are many investors, it can be more effective to protect your interests together.

Features and risks:

• often the rights of investors are significantly limited, as well as the legal leverage to control the activities of the organization;
• the investor may have no influence on the terms of the organization’s agreements with the objects of investment.

Crowdinvesting, for the most part, does not allow for legal protections in favor of the investor, such as a surety bond or pledge of property.

What you should check before investing:

• Available levers of control over the organization;
• Whether the organization is a legal financial institution (not necessarily in all cases);
• The organization’s investment portfolio;
• Legal mechanism used by the organization to invest funds;
• How the investor can protect rights within the organization in its relationship with the investee
• Whether the organization and the investee have common connected persons;
• The procedure for recovering the investment.

Assistance that we offer:

• Review of the internal documents of the organization;
• Analysis of its activities, the necessary permits;
• Review of the agreement with the organization and the object of investment, legal support of the agreement conclusion and settlement;
• Check of the company in which the funds will be invested, its legal history, judicial disputes;
• Consultation on the tax burden on the investor.

Equity crowdfunding in Ukraine

Description: A retail investor is unlikely to find any significant difference with the first option. The difference will be in the documentation – in this case you will become the owner of a certain security (e.g. a share, a certificate) and have certain rights to it.

You will receive a yield, you will most likely be able to sell your investment instrument (if you wish), or expect a return on the body of the investment.

Advantages: It’s basically a passive investment – if handled properly, it doesn’t require you to raise much money. You can count not only on the profit from the project, but also on the increase in the value of your financial instrument (of course, if it is liquid). If it is a legally registered investment fund, it is subject to strict regulation, so the risk of outright fraud is minimal.

Features and risks:

• The investor, for the most part, has limited ability to verify the organization’s financial documents and agreements;
• The real assets of the project (real estate, equipment, intellectual property rights) may be hidden from investors in a complex corporate structure, the analysis of which will require a thorough specialized knowledge of the investor.

What you should check before investing:

• The correct legal form of the initiative: a joint-stock company, an investment fund, or another legal form;
• The rules of operation of this “fund”, whether it is subject to specific legislative regulation;
• The company’s internal documents, and the ways they regulate the investors’ rights;
• the transparency of the structure of the group of companies: where the financing is directed, where the income settles;
• Regulatory environment of the investment project (may be bureaucratic obstacles).

Assistance that we offer:

• We will analyze the legal component of the investment project and describe possible legal risks;
• We will check the company’s internal documents (charters, rules, investment declarations), its corporate structure;
• We will prepare (analyze) the agreement with the organization, accompany its signing;
• We will monitor the project, help with the withdrawal of the investment.

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Classical acquisition by an investor of a share in the authorized share capital of a Ukrainian company

Description: You become the owner of a share in the business through one of the legal registration procedures (e.g., buying a share, making an additional contribution to the authorized share capital). It is similar to the previous option, where you also own a share of something, but this format involves fewer investors and more of them going deeper into the business. Basically, in this case, it’s about getting a share in the authorized capital of a limited liability company.

Advantages: You have a share of the business, you can demand access to financial statements, depending on the size of your contribution there are certain levers of management of the company, you participate in the distribution of profits, you have the right to withdraw from the company or sell your share.

Features and risks: Management and majority shareholders may not allow access to information and reporting, prevent audits, remove from decision-making, withdraw capital or profits through related parties.

What you should check before investing:

• The charter, other founding documents: the rights of the members, the procedure for selling a share, powers of the company’s management, whether the legal protections are the arbitrariness of the directors and majority shareholders;
• The company’s assets: whether you will really buy a share in a legal entity that has something valuable: real estate, equipment, intellectual property rights;
• The corporate history of the company since its inception:
• Financial statements, debt load;
• Litigation, fines, penalties;
• Beneficiaries under sanctions lists and statutory restrictions;
• Authorization documentation: whether the company has the right to conduct business;
• Documentation of employees;
• Main agreements with the company’s counterparties.

Assistance that we offer:

• Comprehensive legal review of the company’s documents;
• Check of the company’s rights to assets, the availability of necessary permits, any aspect of the company’s activities at your request;
• Negotiation on the best investment conditions;
• We will not only find, but also professionally analyze litigation of the company;
• Development of an agreement of purchase and sale of a share (if necessary), other necessary documents;
• We will offer changes to the constituent documents of the company which will protect you;
• Legal support of the registration of you as the owner of the share;
• We will monitor the legal aspects of the company’s business activity.

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Additionally, whichever investment option our Client chooses, we will always advise on the best way of transferring and withdrawing funds, we will conduct tax structuring, prepare any non-standard document. We have already written about how to invest in Ukraine here.

If you are interested in investing, read the second part of the analysis of legal mechanisms of investing in Ukrainian companies.

Please contact our specialists to find out the cost for legal support of investment projects in Ukraine.

Please check the cost and conditions of the consultations here.

Take care of reliable protection of your funds and their accumulation – contact professionals for qualified assistance.