In this second section of our series on fintech regulation in Paraguay, we review the regulatory efforts of some of the most dynamic financing modalities offered by the fintech industry: crowdfunding and lending through crowdfunding platforms.
In crowdfunding, a group of investors finances a project or venture in exchange for bonds, obligations, shares, participation, dividends, or project-related income, among other benefits.
Law No. 5810/17 on the Securities Market explicitly excludes crowdfunding or collective financing from its application, stating in article 8 that "[...] credit contracts under the collective financing modality, either through platforms or other means," are not covered by its scope.
While Paraguay does not have specific regulations for crowdfunding, these activities are legal in the country, and some sectors consider necessary to regulate these activities, taking into account the financing opportunities they provide for small and medium-sized enterprises (SMEs) and startups. In this regard, the Superintendency of Securities (the "SV") is working with key industry players on the drafting of a bill to regulate crowdfunding activities.
1.1. Projected Bill and Potential Implications
The National Securities Commission, now the Superintendency of Securities, has drafted a bill to regulate crowdfunding platforms. The bill has not yet been presented to the Legislative Branch, as we understand they are finalizing details for its submission.
According to its current wording, the bill aims to establish the SV as the enforcing authority of the law and requires platforms to submit information to the Information Center of the Superintendency of Banks, a subsidiary of the Central Bank of Paraguay (the "BCP").
The bill defines 'crowdfunding' as the public solicitation of funds from a large number of individuals to finance a business, project, or cause.
Additionally, crowdfunding platforms are defined as "[...] companies that, through a website, electronic systems, digital means, or other mass communication methods, regularly connect a plurality of natural or legal persons offering financing with others seeking some form of financing."
The bill regulates not only crowdfunding platforms but also lending or collective lending platforms. In this sense, it seeks to formalize crowdfunding and lending as forms of collective financing in the national legal framework. The bill also includes provisions applicable to factoring crowdfunding through platforms.
If the bill is passed in its current form, investment, lending, and factoring crowdfunding activities would fall under its scope. This means that crowdfunding platforms would include platforms that provide collective financing in any of these modalities.
It is worth noting that these crowdfunding platforms would not be permitted to engage in activities other than those expressly authorized, unless expressly authorized by the SV and provided they have sufficient mechanisms and procedures in place to minimize conflicts of interest that may arise in the exercise of their activities.
In addition, these platforms would not be allowed to provide recommendations or personalized advice on the investments they facilitate, nor participate as investors or promoters (defined as individuals who request funds through these platforms) in collective financing operations they facilitate. They would only be allowed to charge fees and commissions for providing their services.
The bill provides for the creation of a Registry of Crowdfunding Platforms, which will be managed by the SV. Registration requirements for platforms include the incorporation of a company, minimum capital requirements set forth by the SV, and having operational and technological risk mitigation procedures in place.
Additionally, the bill imposes obligations on the platform to ensure that investors and promoters are protected when participating in this form of financing. For this purpose, platforms must collect and monitor information about promoters, investors, and the transactions conducted through their means, in particular the agreed interest rates.
Finally, the bill outlines the types of offenses, their gradation, and the sanctions that may be imposed by the SV, ranging from warnings and disqualification from engaging in this activity to fines of up to three hundred times the minimum monthly wage (approximately USD 115,000).
Lending, along with crowdfunding, is a widely used form of collective financing around the world. In lending, unlike crowdfunding, a group of individuals lends funds to individuals or legal entities in exchange for the repayment of the capital provided, together with interest thereon.
The granting of monetary loans, whether by individuals or legal entities who do so on a regular basis (the "Lenders"), is regulated by the BCP, as detailed in the following section. However, lending as a form of collective financing typically requires the intervention of a platform to facilitate it. Therefore, the draft of the proposed bill for the regulation of crowdfunding platforms includes the regulation of this activity within its scope.
Currently, there are crowdfunding platforms in Paraguay focused on lending that have connected thousands of investors with users in need of credits.
2.1. Applicable Regulation
The BCP, through Resolution No. 7/19 (the "Resolution"), included individuals and legal entities that regularly provide monetary loans as subjects of Law No. 861/96 of "General Law of Banks, Financial Institutions, and Other Credit Entities" and its amending Law No. 5.787/16 of "Modernization and Strengthening of the Regulations Governing the Operation of the Paraguayan Financial System."
As a result, the BCP created the Registry of Monetary Lenders, where any individual or legal entity regularly engaged in granting credits (the “Lenders” as defined above) must be registered.
Subsequently, the BCP issued Resolution No. 30/22, establishing the Regulatory Framework for Information Transparency and Integrity Management for the Lenders.
This new resolution introduced specific obligations for the Lenders. The Resolution explicitly states that the Lenders must comply with the BCP's regulations on corporate governance, complaints and inquiries Management, and interest rates.
Additionally, it requires Lenders to sign contracts, either in physical or digital form, for loan transactions. These contracts must include details such as the loan amount, maturity date, interest rate, fees, expenses, and penalties.
The resolution also establishes obligations for the transfer of credit portfolios, in particular related to notifying the borrower of the transfer, including a 5-day period for such notification after the purchase is formalized, and ensuring that the notification has been made correctly.
The provisions related to the Lenders are effective in regulating the activities of individuals who regularly grant credits with their own funds. However, lending through crowdfunding is a more dynamic activity that requires its own regulation.
Therefore, it is appropriate that the scope of the bill includes this activity and the platforms that facilitate it. Thus, if the current bill is passed, the granting of money loans through lending platforms would be supervised by the SV rather than the Superintendency of Banks.