The crowdfunding services sector is one of the most dynamically developing areas of the financial market globally, including Poland. The interest in this form of financing is growing year by year, causing the results of successive years to be a multiple of the results of the previous years. The size of the global crowdfunding market is estimated at around USD 12.27 billion (forecast for 2027 – USD 25.8 billion). When analyzing the number of crowdfunding platforms in relation to population, in comparison to many European Union countries, it can be stated that the Polish market in this sector is far from being saturated.

The popularity of crowdfunding is due, among other things, to the fact that the dynamics of this phenomenon fit into the broader dynamics of disruptive processes of economic reorganization, which can be called “Uberization”. In the case of crowdfunding, we are dealing with the “Uberization of investing” – in crowdfunding, an ICT system (platform) is created that connects demand with supply bypassing traditional intermediary institutions. Although this is not a completely correct formulation, because the operator of the platform (according to the new regulations in force in this area) is also an institution (and a regulated institution) and is also responsible for certain duties and tasks related to, for example, verification of fundraiser and fundraising, we are undoubtedly dealing with the phenomenon of the emergence of a model that replaces traditional intermediary institutions and brings supply (the investor) and demand (the startup) closer together, similarly to the groundbreaking, in a sense, Uber application.

Crowdfunding (social funding), or strictly speaking its form called equity crowdfunding, is a form of financing of various types of projects (particularly well suited to financing of innovative technological startups) by a large number of investors who pay individually often not very high amounts in exchange for shares in the financed companies. Apart from fulfilling the role of an investor, people making payments create a community around the financed project, which in the environment of social media (and not only) supports the financed company, believing in its success and contributing to its realization.

One of the reasons for the rapid growth of the number of equity crowdfunding projects is that the crowdfunding investment structure itself directly addresses the needs of both sides of the investment process – typical crowdfunding investors don’t have many investment alternatives (and they certainly don’t have them in terms of the rate of return available in crowdfunding), and in turn, those seeking funding don’t have many readily available alternative funding sources provided on favorable terms.

The shortened distance between the investor and the company provided by the crowdfunding formula encourages both parties to cooperate.

Crowdfunding investing is available to everyone – in this investment scheme, there is no problem with the barrier of entry through too high so-called investment ticket – it is possible to invest as little as PLN 500. Crowdfunding makes the world of investing in companies accessible to individuals, breaking the previous monopoly of venture capital funds and laying the foundations for a new phenomenon which can be described as the democratization of investing.

Functioning in the web environment is extremely important for the crowdfunding. The phenomenon of migration of economic processes to the web is a constant trend, it meets the needs of both sides of the investment process, and is one of the reasons for the success of crowdfunding. The success of crowdfunding, caused by its functioning in the web, overlaps and create synergies with the social character of this phenomenon. Startups themselves create their products (to a greater or lesser extent) online, crowdfunding platforms operate online, and investors,  companies and platforms are active in the social media. Crowdfunding platforms can be also often classified as fintech startups themselves, their creators come from startup and innovation environments, they are part of the same innovation ecosystem, which contributes to better understanding of the needs of companies seeking financing and easier communication between fundraiser and the crowdfunding platform.

After years of functioning in a kind of regulatory vacuum, the crowdfunding sector has lived to see regulation in the EU legislative system. On 7 October 2020, Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 was adopted. Although the Regulation entered into force on 10 November 2021, work is still underway in Poland on a draft of the relevant law implementing it into the national legal system. On 7 February 2022. Ministry of Finance, Funds and Regional Policy forwarded a draft law on crowdfunding for business ventures to the Committee for European Affairs, which means that in the near future it can be expected that the law will be enacted, which will enable practical implementation of the provisions of the Regulation.

One of the important solutions introduced by the Regulation is the introduction of a relatively high fundraising limit (up to EUR 5m, according to the Polish draft act, initially EUR 2.5m) and the introduction of a single European crowdfunding licence, and it is worth noting that the regulation applies to both investment (investing in exchange for shares) and debt (granting loans) crowdfunding. According to the draft law, equity crowdfunding will be available only to joint-stock companies or simple joint-stock companies (which is very important due to the absolutely dominant in startup world model of the limited liability company, which does not enjoy the benefits of access to equity crowdfunding).

The fundamentally important role of crowdfunding in funding and developing innovative technology startups should not be overlooked. Traditionally, crowdfunding platforms have been a constant and important part of the innovation ecosystem in developed economies, and as such they significantly contribute to the development of tech startups. Due to the growing role of innovation, there is a growing role of startups in the Polish economy, which will be one of the reasons for the dynamic development of crowdfunding platforms.

A very important (equally to equity crowdfunding) area of crowdfunding is loan crowdfunding. The development of this sector may facilitate companies’ access to debt financing in various areas, including, for example, debt financing for the construction projects, which may be particularly important in view of the deepening difficulties in accessing such loan financing. This area – as particularly important to the real estate development community – will be presented separately.

We will follow up on further legislation in this area and share relevant news as it becomes available.

Miller Canfield Law Office provides comprehensive legal services to startups, investors and crowdfunding platforms – we encourage you to contact us if you find the above interesting or if you need legal advice.

FOR MORE INFORMATION, PLEASE CONTACT THE AUTHOR

Andrzej Chełchowski, PhD
Partner, Attorney at law
T: +48 22 447 43 00
E: chelchowski@millercanfield.com

Disclaimer: This publication has been prepared for clients and professional associates of Miller Canfield. It is intended to provide only a summary of certain recent legal developments of selected areas of law. For this reason the information contained in this publication should not form the basis of any decision as to a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases. The services of a competent professional adviser should be obtained in each instance so that the applicability of the relevant legislation or other legal development to the particular facts can be verified.

Polish Law Review #1/2022

• CHANGES TO RULES REGARDING EMPLOYMENT OF FOREIGNERS
• REMOTE WORK AND LABOR CODE
• KEY CHANGES TO PUBLIC PROCUREMENT LAW
• PRONCIPLE OF EFFICIENCY IN NEW PUBLIC PROCUREMENT LAW
• NEW OBLIGATIONS UNDER WHISTLEBLOWER PROTECTION REGULATIONS AND CONSEQUENCES OF THEIR VIOLATION
• WHISTLEBLOWER PROTECTION UNDER NEW WHISTLEBLOWER REGULATIONS
• NEW GUIDELINES FOR TRANSFER OF PERSONAL DATA FROM EU TO US
• AMENDMENT TO ARRANGEMENT APPROVAL PROCEEDINGS

Surging prices for construction materials, an inflation rate that is highest in years, and spiralling operating costs are a major headache for construction companies at the moment. The problem is particularly acute when it comes to putting together project cost estimates, as it has become all but impossible to predict with any precision future prices of major cost components and, consequently, the overall project cost. This article looks at the issue of change of remuneration in construction contracts in Poland, focusing in particular on construction works contracts awarded under the public procurement regime. There is no doubt that the contract valorisation provisions of the Public Procurement Act have an immense impact on the entire construction market. The objective of the mechanism is to reduce the high risk of cost escalation borne by firms that bid for, and receive, construction works contracts from public entities, by permitting modifications to the overall contract price to reflect cost increases. Therefore, understanding its practical aspects can help economic operators to manage their risks better and execute projects more efficiently.

Change of remuneration has a considerable history in Polish law, and is well established in the country’s public procurement regulations. Both the Public Procurement Act of 29 January 2004 (henceforth “old PPL”) and the law that superseded it, the Public Procurement Act of 11 September 2019 (henceforth “current PPL”), contain provisions on change of remuneration.

Under both old PPL and current PPL, change of remuneration is distinct from a change of public contract by mutual agreement. As has been repeatedly pointed out in both legal doctrine and practice, in the event of a genuine increase in the cost of performing a contract, the economic operator is entitled to seek a commensurate increase in the contract remuneration.

Under old PPL (Article 142), change of remuneration was permissible only in cases specifically indicated by it, however, which set it apart from price adjustment as laid down in the Civil Code (Article 358¹). Furthermore, old PPL put the onus on the economic operator to prove that e.g. an increase in the prices of construction materials affected the cost of performing the contract.

Although old PPL included mechanisms to prevent gross imbalances of contractual power between contracting authorities and economic operators, and the placing of excessive risk on economic operators, its provisions proved an insufficient safeguard. To address that, current PPL introduced significant changes.

The part of current PPL that deals with change of remuneration is Article 439. Under it, any public construction works contract longer than 12 months has to include a change of remuneration clause that provides for the adjustment of the contract price to account for changes in the prices of materials or other cost components of performing the contract. In shorter contracts, change of remuneration clauses are optional, although in the prevailing market conditions it appears they should be widely used in such contracts, too.

Article 439 then sets out elements that the change of remuneration clause of a public construction works contract should contain.

First, it should specify what extent of changes in materials prices or other cost components of the contract will trigger change of remuneration, and what the initial date of determining the change of remuneration will be (Article 439 paragraph 2 item 1)).

“The initial date of determining the change of remuneration” deserves special attention, for the expression is not precise and has raised interpretive problems. There are two major alternative interpretations. One is that it is the date from which the changed remuneration applies. The other is that it is the baseline date, i.e. the date with reference to which cost data will be analysed to determine the extent of changes. The latter interpretation appears more justified; it is also more often used in practice.

“The level of change in the price of the materials or costs” also requires explanation. It refers to the prices for any materials, or any other costs that affect the overall cost of performing a contract, so it covers prices for raw materials, construction materials, electrical supplies, installation materials, finishing materials, etc., but also e.g. prices for fuel or waste disposal, as well as the costs of services that go into delivering a contract, including labour costs. It is common for contracting authorities to express the extent of changes in percentage terms.

A remuneration change clause also has to specify “the method of determining the change of remuneration” (Article 439 paragraph 2 item 2). The provision says that the change of remuneration can be based on indices of costs or prices, such as those published by the Central Statistical Office (GUS), or some other point of reference, e.g. a mutually agreed list of materials or other cost components whose price changes can trigger change of remuneration.

Future economic operators should pay special attention to this aspect, because in the case of contracts in which the contract price is one lump-sum amount, using price and cost indices from publications such as Sekocenbud or Katalogi Nakladow Rzeczowych can lead to disputes with the contracting authorities. These indices should be used for change of remuneration in cases where there is a breakdown into cost components. Using GUS indices is effective in the case of bill-of-quantities type of contracts, or more detailed schedules of works and expenditures.

The option that the contracting authority chooses should be appropriate to the nature of the project, and should also correspond to knowledge of market. Failure to give proper consideration to these matters can significantly reduce the number of bidders.

Thirdly, a change of remuneration clause has to specify the way of establishing the impact of changes in materials prices and other cost components on the overall project cost, and indicate time periods when change of remuneration can be made (Article 439 paragraph 2 item 3)). This is especially important in the case of raw materials prices, which are subject to major seasonal fluctuations. But in the current highly volatile and uncertain environment, amid the supply chain disruptions of the pandemic, change of remuneration may have to be conducted more frequently for other items, too.

Finally, a change of remuneration clause must necessarily specify the maximum change in the contract price permitted by the contracting authority (Article 439 paragraph 2 item 4). This requirement, which runs counter to the spirit of the other provisions, is meant to ensure that contracting authority maintain financial discipline. Again, however, with the volatility that now characterises many markets, it may easily cause unwanted consequences for contracting authority if not used carefully. Economic operators should begin their risk assessment by examining this part of the change of remuneration clause.

In the current volatile circumstances, both economic operators and contracting authorities are facing unprecedented challenges when assessing business risk, as regulations and contract terms are repeatedly overtaken by events. It should be noted that change of remuneration clauses do not eliminate business risk but merely reduce it, since not every change in materials prices or other project costs will trigger change of remuneration in the contract.

Tomasz Mielko is a lawyer with the Warsaw office of Miller Canfield. He specializes in defence and security matters, public procurement law and international export compliance.