Legea Business Angels in Romania

English version

The Business Angels law in Romania

I’d like to comment a bit about the law on Angel Investments which is now under public scrutiny. There has been some discussion here and the text of the legal proposal can be found somewhere, but I couldn’t find it quickly now.

I would structure this post in three parts: a) what the law says, b) how I think it should be and c) some comments

a) As it is now outlined, the law reads as follows:

• The definition of the private investor: an individual who gets less than 49% of the shares of the eligible company. In other words, taxes paid, all the good stuff;
• The investor gets the shares in exchange for a loan granted to the company;
• The investor’s dividends are exempt from tax in the first three years (but only if their value doesn’t exceed that of the loan);
• The profit obtained from the sale of the shares, if they are sold after the first three years, is exempt from tax (profit is defined as the difference between the sale price and the value of the loan).

b) How I think it should be:

• A framework law that defines investments in startups (and not only). And another law, a different one, (I assume it should be part of the tax code) that defines (potential) fiscal incentives;
• The framework law should define all types of investments: both those made by individuals, and those made by companies. So I am including here the law on holdings. And I am not talking here about the incentives, but only about the definitions;
• It should correctly define an investment as the acquisition of shares, not as a loan;
• It should go into some very important details related to the management of shares, including ESOP (Employee Share Option Plan), investments with a premium, the fair market value of the shares and many other such concepts that, for now, are undefined instruments in Romania;
• The goal of the framework law should be that of aligning Romanian legislation to the international legislation and of clarifying the way we operate here.

c) Comments:

In a context in which there is very little experience with investments – Romania being a beginner in this direction – and in which entrepreneurs look to the law in search for definitions and best practices, I think it (the law) should be very clear and concise, defining investments almost scholastically. For example, an (equity) investment means issuing new shares in favor of the investor who, in exchange for those shares, invests money in the company. Anything else does not qualify as an investment. Yes, I agree there are many alternatives to simulate an investment (loans, convertible loans, purchasing shares from an existing shareholder and so on), but these are not and should not be considered “main stream”. These are exceptions and should be treated as such.

The way it is conceived now, I believe this legal proposal wrongly defines an investment as being a loan and, as such, it will generate an avalanche of misperceptions and failed approaches.

Again, I am not referring here to the fiscal incentives. These incentives are much less important than a clear legislation that leaves no room for questions, ifs and buts. It is not the fiscal facilities themselves, but a clear, coherent and stable legislation that offers the best incentive for an investor.

So I dare to conclude that this law – as it is now drafted – does more harm than good by mixing things up and confusing everyone. We have the opportunity, in a field where there are no laws, to make good ones [that are clear, understandable and without contradictions] from the very beginning. And I think that what we are seeing now will only confuse everybody. My 2 cents.

(English version by Teodora Popescu)