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Crowdfunding : When financing your sustainable project turns you into a bank

crowdfunding

You have now developed all technical and commercial aspects of your renewable energy project, but you still need to find a solution to finance its construction? You don’t have enough capital on your own, or you want to increase your return on capital?

In that case, depending on the project volume and your capital constraints, a good option to consider is the use of third party debt. This makes perfectly sense, as most clean energy generation projects will have stable and statistically predictable cash flows (through, for instance, contractual purchase of the energy produced at an agreed price throughout the useful life of the installation by Swissgrid or electrical utilities), allowing to pay back debt principal and interests. In a context of zero, or even negative interest rates in Switzerland, projects that can offer a reasonably “safe” return of, say, 4 to 5% to investors look increasingly attractive.

The devil, unfortunately, lies in the details, and a lot of cleantech entrepreneurs in Switzerland may be unwittingly breaching finance and tax regulations by issuing debt without having due regard to the legal framework.

crowdfunding Basically, any Swiss incorporated or limited liability company that raises interest bearing loan from non-bank creditors becomes automatically a bank, under current laws, if it has more than 20 different investors providing external capital, even if these investors belong to family and friends close circles. The consequences are potentially hard, as banking is a (heavily) regulated field: operating a bank activity without a banking license (which is in practice impossible to get for such projects) is subject to severe penalties by the Swiss finance regulator FINMA, including folding up of the company having issued such debt. In addition, companies doing such operations will also be subject to withholding tax obligations on any interest paid to investors, by virtue of tax law consequences of their “banking” operations, with potentially severe personal consequences for their board members.

We are always puzzled at the number of entrepreneurs, trying to finance their renewable energy projects with third-party loans, and unwittingly putting themselves (and their partners) in a potentially difficult situation. It is true that the global climate policy context is opening new “target investors”, as people are increasingly open to invest some of their savings in so called green projects. But the logic behind this “banking” issue is to protect the general public from investing in “dodgy” projects, or from being solicited without proper information disclosures.

Knowing this, there are, fortunately, ways to finance cleantech projects with third party debt, provided a number of technical steps are taken, allowing financing to meet legal exemption criteria, such as: having a specific, adequate legal structure to benefit from bona fide exemption, issuing a bond with the adequate prospectus, limiting leverage to a reasonable level to ensure interest deductibility, registering with the tax authorities, etc… These steps are a bit technical, but not unsurmountable, and will protect entrepreneurs, and their investors, against the unintended consequences of a non-compliant financing. They are also likely to reinforce professionalism in the project structure, and therefore to improve investors perception of and, hopefully, willingness to invest in such projects.

Useful additional information can be retrieved from FINMA website, but professional advice is always recommended to ensure a successful, and legal, project financing.

Do you want to finance your cleantech project using crowdfunding? Please contact us and we will be happy to help you on your way to crowdfunding and participative financing.

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