A bit about innovation, crowdfunding and Ltd’s in Finland

In the last few years the world renowned “crowdfunding”-phenomenon has also circles in the minds of Finnish entrepreneurs and like-minded people. Crowdfunding is a way to seek funding to all kinds of projects, products or companies through a vast “crowd” of people usually online. This form of funding has been in the use of larger companies for years, but has not became also available especially to small- to medium-sized tech-companies to enable fast growth. Crowdfunding has been dubbed the digitalization’s gift to entrepreneurs as it allows a relatively simple way to gather even large sums of money based on a good business idea.

Although crowdfunding seems to be a perfect solution for the fast-moving markets and their innovation craze, it is important to remember that some certain realities should be always ahead of business. 

In Finland, Crowdfunding can be used even to smaller projects and completely without consideration. Here the crowdfunding “investment” is handled as a gift which is very much less problematic than traditional financing. Although when used this way then the business need a fundraising permit which is only granted to non-profit companies and foundations working in common good.  

Opposite to a gift, when crowdfunding is used to finance for example a company in exchange for something, there is an element of consideration involved. Consideration means here that in exchange for the even small amount of funding the person gives, something is expected in return. Most common example of this is a limited liability company (ltd. / Oy) where the basis’ of ownership, shares, are sold, bought and traded. In a simplified sense, the buying price of a share forms the funding of the company and the ownership of a share signifies a part of ownership of the company. In the Finnish Crowdfunding Act this kind of sale of ownership or other stake based on financial return in exchange of investment is called “investment-based crowdfunding. Only a “licensed crowdfunding intermediary” mandated by the state can organise this kinds of crowdfunding in Finland or the European Free Trade Area.

Crowdfunding can also work in the way that a company is searching crowdfunding in order to produce and sell some kind of innovative product. Here then the question isn’t about the funding of the functioning and future of the company (in exchange of shares), but the sale of a future product. In these kinds of situations the amount of funding a single person gives is seen as the buying price of the product, not a share of the company, where the legal question is not one of company law, but legal contract on the sale of that product.

As crowdfunding usually centers itself around companies, it is only natural for the one seeking funding to form a company. Establishing a company can at first seem like a big step, especially if you are doing it for the first time. Yrittäjät.fi is a good platform on giving basic information about different kinds of companies in Finland. Although crowdfunding isn’t restricted to a specific form of company, the author is of the opinion that a limited liability company (ltd / Oy) is the one that should be recommended. This is the result of many parts: First, a limited liability company offers the clearest connection to crowdfunding than others as it is based on the idea of shares and open funding. Second, the owner or founder of a limited liability company is not personally liable of the debts of the company if they haven’t guaranteed them. Third, a limited liability company is the most growth-oriented form of company as it gives the possibility of, for example, multiple owners and their work.

Crowdfunding is clearly not moving anywhere from the Finnish markets. This is not a miracle or a surprise as especially those companies which are based on fast innovation have gotten a quick and effective start to their business from crowdfunding. However, so that this practice could start and continue feasible or even profitable it is only reasonable to seek help from legal counsel in the beginning of your business venture, for example to Autio Associates.