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16 May '22
Last year, Alexandra Danopoulos (attorney at law, partner (Ploum)) and Eline van Leeuwen (attorney at law (Ploum)) reported (in Dutch) the latest developments on financial participation in renewable energy projects and its legal enforceability. In this news item, we will discuss several types of financial participation and we will particularly discuss the frequently used type of participation through which a project initiator raises capital from local residents by using crowdfunding.
The Climate Agreement sets out that 70% of all electricity needs to be generated from renewable energy sources by 2030. Participation and acceptance are of great importance in achieving that goal, especially for the feasibility of renewable energy projects as those often face resistance in practice. It is aimed to achieve a best possible distribution of the benefits and burdens of renewable energy projects. The government strives to 50% of local ownership by 2030. Local deviations from this goal could be possible due to local or project related reasons.
Roughly two types of project participation exist: process participation and financial participation. Process participation involves the substantive engagement of stakeholders in developing a policy, strategy, vision or renewable energy project, in which involvement is mainly focused on decision making and preconditions. Financial participation involves investing in or benefiting from the proceeds of renewable energy projects.
In financial participation, local residents will invest in the project or will experience advantages of the proceeds of the project. Distinction can be made between active and passive financial participation.
Active financial participation involves an entrepreneurial element; in other words: active financial participation involves a risk-bearing element for the participant. One could think of:
Passive financial participation does not involve an entrepreneurial element and the participant will simply receive a share in the proceeds of the renewable energy project. One could think of:
The government stresses the importance of considering people with less financial power when choosing certain (financial) participation options. Therefore, it is considered to be important to, before a definitive choice is made, start with an assessment of the wishes and possibilities of local residents in respect of the renewable energy project and their participation in the renewable energy project.
As noted previously, we will specifically address the provision of debt capital by crowdfunding in this newsflash. We will not address other types of financial participation (and process participation) in this news item.
This type of financial participation can offer a solution for an initiator, especially when a large number of local residents is willing to directly invest by providing debt. Depending on the minimum amount to be invested as agreed upon in the financing proposition, this type of financial participation can be very suitable for local residents with less financial means. The initiator posts its project and the financing proposition on a crowdfunding platform and the local residents can then sign up. If a predetermined threshold amount is reached, the crowdfunding campaign will be considered successful and the funds will subsequently be made available to the special purpose vehicle through the crowdfunding platform.
This gives the initiator financial resources for the benefit of the renewable energy project, without diluting the shareholding interest of the initiator or without the initiator having less control over the project (which could be the case, for example, if the special purpose vehicle issues shares).
This could also be attractive to local residents: local residents will receive compensation, like interest payments, in exchange for providing debt capital to the initiator. This may contribute to the acceptance rate of the project by local residents, which is an important objective of financial participation. For the remainder of the process, this benefits the initiator as any objection and appeal procedures in respect of the renewable energy project could (partially) be avoided. On the other hand, this type of financial participation does not allow local residents to have any direct control over (the business operations of) the renewable energy project. Additionally, local residents will have financial risk exposure as the special purpose vehicle may not be able to repay the invested capital to the local residents (along with its interest payment obligations).
In this regard, it is important to realize that the capital provided through crowdfunding, will not be the only financing raised by the initiator. The special purpose vehicle will often, in addition to any contributed equity, raise financing from, for example, a bank.
It is important for an initiator to agree with the bank whether additional financing may be raised, for example through crowdfunding, when the initiator is aware that additional capital is necessary next to the capital provided by the bank. The initiator should already take into account the raising of other capital during when obtaining bank financing, so that sufficient carve outs for additional capital are tailored for in the documentation.
If the bank agrees thereto, it will usually only do so under certain conditions. Although exact conditions eventually will be subject to negotiation, the bank will often demand that the crowdfunding loans will be subordinated. This means (in short) that claims of local residents, who have lend out capital through crowdfunding (claims connected to instalments and interest payments) may only be settled by the special purpose vehicle if the claims of the bank are settled in full. Furthermore, the bank will usually not allow that collateral will be granted to local residents participating in the crowdfunding (to that end, usually a foundation is incorporated which will be the beneficiary of the collateral for the benefit of the local residents), or either will only allow collateral having a lower rank than the collateral obtained by the bank.
All of this entails a risk for the local residents that are financing the special purpose vehicle through crowdfunding. Only if sufficient funds are available to satisfy the claims of the bank, the amount owed to local residents will be settled with the remaining funds. The local residents (or the foundation that retains the collateral for the benefit of the local residents) have no or at least a weaker position as the bank holds the strongest collateral in rank.
The initiator needs to inform the local residents about their position as part of the financing proposition as set out on the crowdfunding platform. Vice versa, the local residents should review the applicable crowdfunding conditions carefully, so they are aware of their position.
In the context of overall participation of local residents, financial participation by local residents through crowdfunding can be a valuable addition for initiators of renewable energy projects. This type of financial participation could result in a higher acceptance rate among local residents, as they have the prospect of benefiting financially from the renewable energy project. The initiator has to anticipate this type of financial participation, especially if also other financing parties will be involved. Local residents should have a clear picture of their position as a crowdfunding participator.
Do you consider any financial participation or do you have any questions related to financial participation? Please feel free to contact Lucas Lustermans or Joost Kool.
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