MONEY FROM MULTIPLE SOURCES

In which financial institutions can a nascent entrepreneur source the capital required to develop a lucrative project? Financial institutions typically require a credit history and reliable collateral, and venture capital funds are generally selective in their investment criteria. Personal savings may also be inadequate for some entrepreneurs. One potential solution is crowdfunding, which involves raising modest sums from a large number of people via a specialised online platform.

For Azerbaijan, this mechanism is still new and not yet fully understood by the general public. However, the law approved on 24 July 2026 by President Ilham Aliyev establishes, for the first time, a legal framework for its practical application.

In simple terms

The term 'crowdfunding' is derived from the English words 'crowd' and 'funding'. The term 'crowdfunding' literally means 'funding by a crowd of people'. An entrepreneur posts a project on an online platform, specifying the amount required and the intended allocation of funds. Should users express interest in the idea, they have the option of transferring funds, thereby enabling the project to get off the ground or expand its activities.

The principle itself is by no means new. People have long pooled their resources for charitable causes, community initiatives and creative projects. The internet has simply made this process faster, more transparent and more accessible, enabling organisers to reach thousands of potential contributors simultaneously.

There are several crowdfunding models in use around the world. In the charitable model, money is donated without any expectation of a material return. In the reward-based model, a contributor may receive a finished product, a ticket, a book or another gift.

The new Azerbaijani law does not focus on these formats, but rather on investment crowdfunding, whereby funding is provided in anticipation of future returns. There are two main types: equity-based and debt-based. In the first case, the investor purchases shares and becomes a co-owner of the company. Should the business develop successfully, the value of their investment may increase, and the shareholder may receive dividends. However, should the project prove unsuccessful, the investment may be at risk.

The debt model functions in a distinct manner. The company issues bonds, and members of the public who purchase them effectively lend money to the business. The entrepreneur agrees to repay the funds within a specified period and to pay the agreed return. The maturity of such bonds may not exceed five years.

It is anticipated that the primary users of this novel mechanism will be start-ups, micro, small and medium-sized enterprises. It is precisely these businesses that find it most difficult to secure traditional financing. Many start-ups encounter challenges in meeting the collateral, credit history and stable financial performance requirements typically demanded by financial institutions when assessing borrowers.

Concurrently, an innovative concept may hold relevance for prospective consumers. If hundreds of people are prepared to invest relatively small sums in it, the entrepreneur secures the necessary capital without being dependent on the decision of a single lender. Concurrently, the campaign itself functions as a gauge of market demand. If the project fails to attract the audience's attention, this may indicate a need to review the product or business model before incurring significant expenditure.

Rules of the game

The new law 'On Crowdfunding' regulates equity and debt financing, sets out requirements for platforms and transfers oversight of the market to the Central Bank of Azerbaijan (CBA).

It is important to note that raising funds directly via social media under the guise of investment crowdfunding will not be permitted. A professional operator must act as an intermediary between the entrepreneur and the investors—a legal entity registered as a limited liability company (LLC) or a joint-stock company and included in the CBA's public register. The state fee for inclusion in the register is set at 2,750 manats.

The operator is not responsible for the commercial success of the project, but rather for ensuring the legality and transparency of the process. It is obliged to verify the documents provided, disclose the information required by law, monitor compliance with limits, store investors' data and prevent conflicts of interest. The platform itself must comply with technical requirements and security standards.

Participants' funds will be held separately from the operator's assets—in a special account at the National Depository Centre or in a temporary bank account. Therefore, any financial difficulties faced by the platform should not have a negative impact on investors' funds. Please note that funds will only be transferred to the project owner following the successful completion of the securities offering. In the event of campaign cancellation or non-compliance with the necessary conditions, the invested funds must be returned.

Each campaign is limited to a maximum duration of 90 days. A company is permitted to run a maximum of two equity and two debt campaigns per year. However, it should be noted that only public limited companies will be able to raise funds in exchange for shares, as equity crowdfunding involves the issue of additional shares.

One of the primary objectives of the law is to safeguard individuals who are not professional participants in the financial market. Prior to the commencement of fundraising activities, it is imperative that a comprehensive information document be made available on the designated platform. This document details the project owner, the purpose of the campaign, the amount required, expenses, the rights attached to the shares or bonds on offer, restrictions and the main risks.

Retail investors are given seven calendar days to consider their decision. During this period, they may withdraw from the investment without giving a reason and without incurring a penalty. The law also requires investors to confirm in writing that they understand the risky nature of the investment.

The Central Bank will establish a maximum investment limit for retail investors in a single project via a designated platform. The funding cap for the projects themselves has yet to be determined, as has the minimum stake that professional investors must provide. It is anticipated that the involvement of experienced investors will act as an additional quality filter, although this will not guarantee the success of the business. The Central Bank of Azerbaijan has been instructed to establish the necessary regulations within a six-month timeframe.

The European model utilises a comparable approach, integrating businesses' access to alternative capital with mandatory disclosure requirements, risk management rules and oversight by financial regulators. The EU's general rules for equity and debt crowdfunding have been in force since 2021.

The presence of state regulation does not guarantee investment returns. A start-up faces a number of risks, including the possibility of failing to enter the market, underestimating demand for the product, and encountering financial difficulties. Investments in a project's shares and bonds should not be considered as a guaranteed investment.

An equity investor should be aware that they are assuming entrepreneurial risk alongside the business owners. In addition, it is important to note that the shares may not be able to be sold quickly. This is because the market for these securities is likely to be limited at the initial stage. With debt financing, there is a possibility that the company may be unable to redeem the bonds or pay interest in a timely manner.

In addition, the issue of information asymmetry must be given due consideration. The project initiator possesses a significant advantage over individuals who have merely encountered the offer on the platform, due to their in-depth knowledge of the business. A colourful presentation or an interesting idea does not necessarily guarantee the company's financial stability. Investors are therefore advised to study the documents, assess the realism of the projections and avoid investing in a single project an amount whose loss would be critical to their personal budget.

Trust in the platforms themselves will also be crucial. The law provides for fines for failure to disclose information, misrepresentation in financial statements and breaches of cash management rules. The Central Bank will have the authority to remove an unscrupulous operator from the register. However, for the market to mature, not only will supervision be required, but also an improvement in the public's financial literacy.

Nevertheless, should a crowdfunding initiative be successfully launched, it has the potential to fill the funding gap between an entrepreneur's personal savings, bank loans and large-scale venture capital investments. It will provide a promising idea with the chance to secure initial capital, and offer the public the opportunity to participate in the development of new businesses.