The Business Angel law has now been introduced into the Romanian legal system. Whether it will stimulate investment in new ventures is a question which still has to be answered. It is a step taken by the Government to try and bring new investment into the market.

Law no. 120/2015 regarding fiscal facilities granted to individual investors – “business angels” – was published on 2nd June 2015 in the Official Gazette and applies from 17th July 2015.

The Business Angels Law is a big step made by the Romanian authorities regarding the nurturing of new businesses and they have declared that at this stage the Business Angels Law is an accomplishment in the context of the Romanian framework legislation.

The law provides some stimulants that offer to people possibility to become Romanian business-angels. Investments from business angels bring the funding of start-ups into the private sphere and in areas where standard financing sources (bank loans or European founds) are more difficult.  The law is intended to encourage young businesses as well as those that were previously established some year ago because they have the most important business dynamic, as well as a larger risk associated with their development. If these businesses succeed, they will provide jobs, prosperity and generally positive economic effects.

The Business Angel Law wants to be a success in terms of the input for local businesses, and a natural appearance in the Romanian business arena. Individual investors have been present for many years in other countries and their contribution is noticeable for the economic development of these countries.  As witness crowd funding and other measurers in the United Kingdom.

In Romania, Business Angel investors have been trying to build a position in the absence of a legal framework that would encourage them.  Now, by the means of this law, they should gain confidence to fund ideas, new businesses and to generate jobs.

As businesses have an acute need to be financed in the early stages of development and institutional providers, banks or investment funds are not willing to finance them, either because of high risk, or because they are too small.  Consequently, stimulation by this type of investment, through fiscal facilities, can spur the development of small enterprises and generate economic growth.

The law introduces several fiscal facilities for individuals investing in micro-enterprises and small – sized enterprises and presents the requirements that need to be fulfilled in order for the facilities to apply.

The law exempts the Business Angel from tax on dividends received from the company for the first three years from the purchase of the shares. The exemption is granted up to the equivalent of the invested amount.  Second benefit regards the exemption from tax on capital gains from sale of shares, if the sale of the shares takes place at least three years after their purchase.  So, the Business Angel is exempt from tax on the positive difference between the sale price and the purchase price, if the transfer occurs after at least three years from the date of acquisition.

In order to benefit from the Romanian fiscal facilities, both the investor and the company (SME) benefiting from the investment have to comply with a number of requirements set out in the law.

For the company these requirements are:

  • The company has to be constitute as Romanian limited liability company,
  • it has to be an autonomous enterprise and not in partnership with another company,
  • It has not failed to pay its debts nor is it insolvent or bankrupt, neither has it entered into a deed of arrangement nor had a liquidation procedure opened against it.

The facilities given by the law do not apply to companies that carry out banking, insurance, financial intermediation, real estate, gambling, naval construction, steel, coal, weapon production and sale, and consulting. In this way, a number of companies will be blocked from being created to only benefit from the tax exemption, because that will absorb significant funds and small businesses will potentially remain underfunded. For the same reason the law limits the funding only to micro and small enterprises.

The conditions to be met by the investors are not overly restrictive. Under the law any physical person can become individual-investor and a business angel to the type of permitted company subject to the restrictions listed above, provided they meet the following conditions:

  • They are a person not previously connected to the company. The business angel should not already be involved in the company in which he wants to invest.
  • They will become the associate by the contribution to the capital of the company either by cash or an in-kind contribution to the capital of the Company and which results in the issuance of new shares in favour of the investor.
  • The investment must be in the lei equivalent of between 3,000 EUR and 200,000 EUR.
  • The investment is made strictly in order to fulfil the main object of the company and the business plan which was prepared for individual-investor business angel to enable him to invest.
  • The investor cannot hold as a result of investment in its own name or through intermediaries, more than 49% of the share capital of the company concerned.

In practise the idea is developing that firms receive the capital needed for business development, through an interest-free loan from a business angel rather than an investment in share capital.  Many law firms in Romania will be asked to consider the best way to deal with this capital injection and will need to co-operate with the funder and other professionals to ensure that funding is properly safeguarded.

As to how the funds are made available will depend on each individual circumstance and the requirements of the investor and the owner of the business.  The major question is as usual whether this law will stimulate investment as envisaged.  Only time will tell. If the examples from other countries are anything to go by then investment for start-ups and small businesses will improve.  The question will have to faced by all parties as to how investors and companies requiring monies meet and match up, but again that is in the future.