Just as every new initiative, crowd funding collides with some existing legal regulations or it exceeds the existing regulatory framework. In the end, this is the nature of changes and progress. However, the participators of financial enterprises must take care that the implementation of their projects take place in a legally secure way.
It is often said that the restrictive regulations about public collections and public offering are the main obstacle for the development of crowd funding in Poland, as they limit the freedom of raising capital from minor investors. This is true, but I'd like to address a different issue - the question of who should be the owner of an office block which has been financed by the use of crowd funding. There are a few possibilities, let us imagine the two simplest ones. The first option: every investor becomes a co-owner. The second option: investors set up a legal person, who will be the owner of the office block.
We are all co-owners
In case of the first option, every investor who contributes a minimal amount demanded for a given project becomes an owner of a proportional part of real estate. In an office block worth 20 mln PLN, with the minimal amount for example 5 thousand PLN this would mean 4 thousand co-owners.
The first challenge will be the process of receiving appropriate authorizations from the investors. Crowd funding is a child of the Internet and common electronic communication, whereas purchasing real estate, or even a smallest share in real estate, demands the form of notarial deed. Such form is also a demand in case of power of attorney. Every investor must therefore grant suitable power of attorney in a form of notarial deed to the people delegated to purchase the office block. Additionally, investors who have community of property with their spouse must make sure to have their agreement, also in a form of notarial deed. All personal data should be carefully checked, as they will be entered into the land register once the office block is bought, and they have to be identical with the data in the PESEL system.
It is also problematic to effectively manage a building that has a few thousand minor co-owners. Under the general provisions of civil law, acts of routine administration of common property demand the agreement of the majority of co-owners. Other decisions and activities demand the agreement of all owners. When no agreement can be reached, permission can be granted by the court. This way is definitely inadequate to professional management of large commercial property. It would be necessary for the investors to sign an agreement regulating the management of the property. The problem is such an agreement will always have weaker effect than property right.
We invest via a separate entity
The idea in the second option is to have one entity, which would be the owner of the office block. In this way, the ownership structure of the building and its management would be easier. However, all of the above mentioned problems of organizational and legal matter, connected with a few thousand investors who do not know each other, would manifest themselves in creating and managing such an entity. Obviously, it could not be a joint-stock company or an investment fund, although they have appropriate legal regulations for such a structure of investors, because crowd funding is a way to finance projects that should be alternative to these entities. The remaining options are then: a registered association, another type of company, a cooperative, or something similar.
Each of these forms of organization has its advantages and disadvantages. A company would be the most business-like and an association seems most suitable for the idea of social funding but it does not pay dividends and it cannot transfer membership. A cooperative is something in between, but it evokes somewhat negative feelings. No existing form of legal entity would be perfect here. After all, crowd funding is a novelty also in corporate law.
An entity chosen to play the role of the office block owner must be created with observance of appropriate forms (again, this means power of attorney in suitable form and with right content from all investors!) and it is necessary to bear the costs of maintenance. Apart from the marketing message: "We're going to buy an office block together", investors must be duly informed about the right they obtain in return for their contribution and about the way in which the law guarantees them the right to share in the profit from lease or sale of the office block. Tax issues are also important here. It is important to find such investment structures that the investors would not be subject to double taxation. Although a commercial building project is thought as a long-term enterprise, it is equally essential to think of a way out of it. Every investor should be clearly informed if he can transfer his rights at any time and what the legal and actual restrictions are, as well as if the rights can be inherited. These issues can prove especially difficult when choosing the right organisational form for the crowd funding enterprise, other than simply the co-ownership of property.
Is it worth it?
Social funding of an office block purchase includes some difficult legal issues. The initiators of crowd funding enterprise for the purchase of an office block should adapt a thoughtful legal model and prepare for it. As always when we are on the edge of a legal system, it is easy to slip. This could change an innovative idea into an infamous financial disaster.
Therefore, both organisations and investors who will contribute their hard earned money need to be extremely cautious. Still, I think it is worth trying and paving the way for social business enterprises.