Bildnachweis: Dr Lysander M. Heigl, LL.M..
Crowdfunding is a method of raising money to finance projects by collecting small contributions from a large number of people, typically via online platforms. It has long been considered a topic for idealists. However, crowdfunding can also be used for business purposes, providing the capital – in the form of equity or debt – to financially sound investments with corresponding returns. Especially in the life sciences sector, crowdfunding may turn out to play a bigger role in the future, due to recent developments.
A crucial milestone to promote crowdfunding is the EU Regulation on European Crowdfunding Service Providers for Business Crowdfunding Service (ECSPR), which has been in force since November 2021. It creates a uniform, harmonised legal framework in the EU with the following pillars:
- Increase in the prospectus requirement limit: projects can raise up to EUR 5 million within twelve months without a prospectus requirement (previously usually EUR 2 million).
- EU-wide licence: platforms can acquire a licence for the entire EU area and thus operate across borders.
- Investor protection: providers must publish annual default rates.
- Investor flexibility: providers are allowed to operate secondary markets.
- New forms of investment: ‘real’ loans and bonds characterised by an unconditional repayment obligation can be brokered as well as equity securities such as shares.
All these measures help to ‘democratise’ access to investment opportunities, which formerly were limited to institutional investors. At the same time, a pooling mechanism of the investors into a trust foundation – making use of the EU-wide licence – can help to keep the cap table clear and manageable.
Crowdfunding and taxes
Profits from crowdfunding are considered income from capital assets and are subject to flat-rate withholding tax (25%), plus solidarity surcharge (5.5% of the tax) and church tax, if applicable. The effective tax burden is between 26.375% and 28.0%. Losses from crowdfunding investments can be claimed for tax purposes and offset against respective income from other investments. The tax burden is calculated from the total profits less the realised losses generated within a calendar year. Respective losses reduce the taxable amount and therefore ultimately also the taxes payable. In case of crossborder investments, it is necessary to check whether a double taxation agreement (DTA) is in place in order to avoid double taxation. The tax procedure of crowdfunding depends on the character of the funding: in the case of dividends from equity instruments (crowdinvesting), capital gains tax is deducted by the distributing company. Regarding interest income from debt instruments (crowdlending), according to a new tax regulation since 2023, the payment service institution is responsible for withholding and transferring the capital gains tax. This helps to standardise processes and ultimately makes life easier.
Technological Innovations
The blockchain technology is developing further. Creating tradable digital assets (tokens), which represent stakes in start-ups, will further facilitate the investment process in the future. The same applies to socalled smart contracts, which can help to automise payment processes among other things.
Characteristics of the Life Sciences sector
In the overall context of the venture capital universe and in contrast to other sectors of business, the life sciences sector is characterised by several features:
- It is a matter of life, life expectancy, and quality of life. As such, life sciences address very personal health issues: for example, the object of the company is the development of a new type of cancer drug or the development of a specific medical or technical device. In both cases, the company’s success is based on curing and helping people – a point which also addresses intrinsic and emotional motives.
- In terms of time, it is a matter of very long-term dimensions: many steps and stages are regularly required before a new drug can be commercialised: from the preclinical phase to clinical development (phase I, phase II, phase III) and approval, it regularly takes ten to 15 years.
- The extensive preclinical and clinical studies regularly consume very large sums of money.
This means that, from an investor’s perspective, not only are the required investments particularly high, but at the same time, the expected returns are comparatively far in the future. But not every investor has both deep pockets and the stamina of a long-distance runner. In fact, many venture capital funds strive to pay back capital within a maximum of ten years.
Outlook
Given these challenges in the funding of life sciences projects, the recent regulatory and technical improvements of crowdfunding might give rise to hope: what a small number of investors are unable to raise in terms of capital can potentially be achieved by broadening the investor base, attracting a larger number of diverse contributors, comprising both sophisticated institutional investors with ‘big tickets’ as well as a broader public such as internet-recruited private investors, ‘investment beginners’, intrinsically-driven do-gooders and people who themselves are in need of the product which the start-up is working on. Hence, crowdfunding might help to realise medical, pharmaceutical, biological, or technical innovations for the benefit of mankind, which otherwise might not have seen the light of day.
About the author:
Dr Lysander M. Heigl, LL.M. is an Attorney-at-Law, Tax Expert, and Certified Public Auditor. He advises entrepreneurs, managing directors, shareholders and investors in corporate governance, M&A and finance, NextGen business successions and business continuity. He also is active as a business angel and speaker and serves as Chairman of an Advisory Board and President of Fachvereinigung Unternehmensnachfolge e.V. (FvU). Dr Heigl pursued his education at the Universities of Münster, Paris, London, Düsseldorf, and Harvard.
