“Shareholder” crowdfunding in Ukraine: what is it and how to take part
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Companies in Ukraine have different legal ways of obtaining financing, the choice depends on the size of the investment, the nature of the business, investors’ expectations, as well as many other factors.
Earlier we talked about the loan as an investment instrument, the practice of applying the “investment” agreement and other legal schemes. However, these are not the only ways to invest in a business in Ukraine. For example, investors often face the proposals to become members of the project by buying its “share”.
In the classic sense of equity crowdfunding involves obtaining investor’s share in the authorized share capital, but in Ukraine, joint stock companies are not too common. Therefore investors are offered not shares, but otherwise executed membership in the project. Below we will elaborate on the most common legal formats of the procedure.
Buying shares in the authorized share capital of the Ukrainian legal entity
A project is structured so that among the groups of companies, one is created solely for the purpose of attracting investment. Usually it is a limited liability company, because it is easier to administer than, for example, a joint-stock company. A retail investor will acquire a share in the authorized share capital of this target company, while project founders will retain control of the company – more than 50% of the share capital.
Usually the target company is not directly involved in the project for which the money is being raised. There is an operating company for that purpose, in which investors are almost never invited to participate. The target “investor” company has a contractual relationship with the operating company. The project’s valuable assets (real estate, equipment, intellectual property) are either concentrated in the operating company or in a separate legal entity.
If the target company makes a profit, it is distributed to the investors, the owners of the shares. Another option is to expect the value of the stake to increase as the business grows. It is possible to withdraw from the investment by selling your share to another investor or to the project. Sometimes founders promise an obligatory buyback after some time at a pre-agreed price.
A common case is when, after purchasing a share in the authorized share capital, the investor transfers it into the management of the project's founders. Then it is a completely passive investment; the investor does not make management decisions or decide on profit distribution.
The key aspects that the investor should consider are as follows:
- in most cases, the investor’s income is not fixed; it depends on the profitability of the project;
- the liquidity of the investment is low; without the consent of the project managers, the investor is unlikely to be able to sell its share;
- the investor should check whether the company owns valuable assets (the value of a share in a company without assets is zero);
- anonymity is important for some investors, but in this case, ownership of a share in a legal entity will be reflected in a public registry.
Entering into an agreement to acquire a share in a business in the future
The format is similar to the preliminary agreement, but provides for an additional step: when the project is at the initial stage and the corporate structure has not been formalized, the parties conclude a counterpart of the preliminary agreement. It stipulates the obligation of the project founder to transfer to the investor a share in the authorized share capital of the company as soon as it is created.
The prospect of the enforcement of such an agreement in Ukraine is unclear; therefore, the format tends to be closer to a “gentlemen’s agreement”. However, it is widely used by startups wishing to incorporate in Ukraine. Approximate analogues are available in other jurisdictions (e.g. Simple Agreement for Future Equity, Conversion Loan, Option Agreement, Founders Collaboration Agreement and others).
You may also like: Electronic Agreements and Signatures in Ukraine.
Investor participation in a cooperative in Ukraine
A cooperative is an organization that is created to meet the specific needs of its members. Cooperatives can be production, service and consumer cooperatives. There are agricultural, housing and construction, residential, garage-building, and other cooperatives depending on the area of activity. The investor pays the entrance and share fees and becomes a member of the cooperative, depending on the provisions of the charter it participates in the activities of the cooperative and the distribution of property. Foreigners can also be members of cooperatives (here you can read about general peculiarities of investing for foreigners in Ukraine).
Investors, as a rule, participate as associated members of cooperatives, without the possibility to manage it (they have only the right of deliberative vote). In addition, associated members have a preferential right to the property of the cooperative in the case of its liquidation. When the project ends, the investor exchanges its share for property or other values (for example, the share is exchanged for real estate).
Activities in the cooperative format have for some time been quite popular in the construction sector, and are generally found in the investment sector in Ukraine. Under certain conditions, cooperatives can be attractive from the tax point of view.
In practice, investors usually find it difficult to control the financial flows of the cooperative and the redistribution of its property. In general, the problem of any type of investment in Ukraine is that the investor has limited tools to check the financial and other documents of the object of investment. Assets of business can be hidden in the complex corporate structure, the analysis of which will require from the investor thorough legal knowledge.
Important: We offer our Clients a comprehensive review of the business, we prepare a full list of legal risks of a particular investment project and help them to invest more safely.
Buying “property rights” in Ukraine
The notion of property rights is especially widespread on the real estate market: if in exchange for an investment a company cannot give an actually existing object, the investor is offered the right to a certain property, which will be created in the future. For example, the possibility to register an apartment or a house as investor’s property after the completion of construction.
There are also more extravagant options, when the investor is offered property rights to a certain abstract part of the project: not a share in the authorized share capital of a particular company, but the general right to participate in the business initiative in proportion to the funds invested. This happens when the project is either at a very initial stage or when the founders of the business are unscrupulous and unwilling to give investors real legal instruments.
If you encounter such a case, it is highly recommended to apply to professional investment lawyers. We, for example, are always ready to professionally help our Clients in such situations, to structure the deal in the interests of the investor.
There are many other options of investors’ participation in business projects on the Ukrainian investment market (for example, through joint investment institutions), and as the legislation develops new ones appear.
If you do not feel that you are in full control of the situation, our team of experts will be able to advise, prepare the necessary documents and legally support the conclusion of the agreement. One of the first steps can be a legal due diligence of the investment project, and we will also help with tax optimization of your investment activities.
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