Crowdfunding is an innovative instrument to finance projects by using on-line portals as an alternative to traditional forms of financing. The public can support projects with a social purpose, as well as new entrepreneurial initiatives, by paying their contributions through on-line portals which usually operate as platforms for donation-based or social lending, or through reward based crowdfunding, depending on whether the contribution is made as a donation or loan between private individuals, or whether a reward is provided for each contributor when certain circumstances are met.
The main characteristic of crowdfunding is that each contribution is usually represented by a small amount of money. Accordingly, the more people making contributions, more the chances are that the relevant project will attract enough funds for its implementation.
The crowdfunding phenomenon is continuously evolving. Its latest form is equity crowdfunding, according to which the public can support a project by subscribing to equity securities and becoming shareholders/quotaholders in the relevant company.
In October 2012, the Italian legislator outlined some measures related to equity crowdfunding whose effectiveness has been subject to regulation by the authority responsible for the Italian securities market (Consob). The regulation was issued in July 2013; Italy is now the first country in Europe to regulate equity crowdfunding.
2. How equity-crowdfunding works under Italian law
2.1 Who are the parties involved?
According to Italian law, the equity crowdfunding mechanism is based on a four-sided relationship amongst: a) start-ups, b) investors, c) on-line portals and d) banks or investment companies.
- Start-ups: only start-ups qualifying as “innovative” or start-ups with a social utility purpose, according to the applicable law, can launch a public offer of their own equity securities through an on-line portal.
- Investors: the investors who can take part in the public offer by subscribing to the start-up’s equity securities can be professional investors or the general public.
- On-line portals: only companies duly registered with a new register kept by Consob can operate as on-line portals. In order to be enrolled in this register, companies shall submit specific documents to Consob allowing the latter to verify that they meet the requirements provided by the new regulation. Companies admitted to operate as on-line portals will be subject to ongoing monitoring activity by Consob and they will not be entitled to perform any investment services, nor to take care of any payment made by the investors to finalize their subscription.
Banks and investment companies intending to act as on-line portals will be automatically registered in a special section of the above registry without submitting any documentation to Consob.
- Banks/investment companies: in cases where the on-line portal is not represented by a bank or an investment company, the subscription to the equity securities and the payment of the related contributions shall be made by investors through the support of specific banks or investment companies. The on-line portal shall communicate the orders of subscription received by the investors to these institutions, and the start-up shall open its own bank account with them in order to collect the funding.
2.2 How does the operation of equity-based crowdfunding work?
The equity crowdfunding mechanism consists of the following steps:
- Selection of the on-line portal and definition of the relevant contractual terms: a start-up intending to launch a public offer of equity securities shall select an on-line portal enrolled with Consob’s special registry. It shall then provide the portal with all information concerning the offer, as well as that concerning its business and organization, to allow the latter to make the relevant assessment. The on-line portal will host the public offer and publish it on its portal on condition that it agrees with the start-up on the terms and conditions of their business relationship, and that the start-up meets the requirements provided by law, such as: (i) the public offer does not exceed, in aggregate, the value of EUR 5 million; (ii) the by-laws of the start-up provide for specific way-out mechanisms (i.e. withdrawal or tag along rights) in favor of the investors in the event that, after the subscription of the entire offer, controlling quotaholders/shareholders sell their quotas/shares to a third party; (iii) the quotaholder/shareholder agreements have been communicated to the start-up and are published on its website.
- Launch of the public offer on the on-line portal: the on-line portal must provide investors with specific, detailed information about the start-up and the public offer (i.e. information on the project; the business plan and internal organization of the start-up; rights and duties concerning the equity securities subject to the public offer; existing provisions on the transfer limitations of such securities; information on the banks and investment companies which will take care of the payments related to each subscription; any costs to which the investors are liable; information on the professional investors already subscribed to a portion of the equity securities; information on any public offer already launched by the same start-up on other on-line portals, etc.) and such information shall be continuously updated as necessary. Such measures are designed to ensure that each investor is fully aware of the risks connected to their investment. The information reported in the public offer published on the on-line portal is not subject to any approval by Consob. Only the start-up will be liable for its completeness and truthfulness.
- Access to the public offer and subscription to equity securities by investors: the on-line portals will allow access and subscription to the public offer only to those non-professional investors who have (i) knowledge of the information on investor education provided on the Consob website, (ii) positively answered a questionnaire attesting that the investor is fully aware of the risks connected to the investment in the start-up, (ii) declared that they are in the position to support any economic loss deriving from the investment. The non-professional investors who have subscribed to a portion of the offer will be entitled to withdraw within seven days following their subscription, or to revoke their subscription should an event occur, or an error in the information relating to the public offer appear before it is definitively closed which might have a negative impact on the decision of the non-professional investor to complete its investment.
- Payment of contributions by investors: the on-line portal must transmit the order of subscription received by each investor to the bank/investment company which will collect the relevant contributions. The latter shall carry out its tasks in compliance with the regulation on investment services, which includes a series of disclosure duties in favour of the investors, except in cases where the value of the contribution made by each investor falls under certain thresholds (i.e. in the case of contributions made by an individual, the value of a single subscription is less than EUR500 or the aggregate value of all subscriptions made in the same year by the same person with respect to the same securities is less than EUR1000; in the case of contributions made by a company, the value of a single subscription is less than EUR5000 or the aggregate value of all subscriptions made in the same year by the same investor with respect to the same securities is less than EUR10,000). This is because, in cases of small contributions, the need to protect non-professional investors from the risks connected to the investment is not so great.
- Closing of the public offer: to close the funding operation, at least 5% of the equity securities must be subscribed to by professional investors, banks or incubators of the start-up.
3. Some preliminary comments on the new regulation
We must highlight the missed opportunity to open equity-based crowdfunding up to any start-up, and not only to those defined as innovative or those with a social utility purpose. Indeed, during a time of crisis such as that which we are experiencing, equity crowdfunding could have been a tool for any type of start-up to raise financing from the market.
Moreover, although the main purpose of the equity crowdfunding regulation is to help newly incorporated companies to raise funds in an easy and informal way by allowing non-professional investors access to public offers, it seems to aim at protecting such investors more than simplifying and facilitating the entire process of investment.
In this respect, how can we not be critical of the provision stating that at least 5% of the shares/quotas subject to the public offer must be subscribed to by professional investors, banks or incubators of start-ups in order to finalize the funding? This is certainly a form of protection for non-professional investors but it could nevertheless risk compromising the finalization of the entire fund-raising operation.
Furthermore, according to the applicable regulation, the on-line portal is not obliged to accept any public offer submitted to its attention by any start-up even though such start-up complies with the requirements of law. Indeed, the choice made by the on-line portal is not only based on the verification that the start-up is compliant with the requirements of law, but also on discretional assessments. Consequently, it might happen that an innovative start-up does not find an on-line portal willing to public its offer. In this respect, we wonder whether it would not have been more appropriate, and in the interest of start-ups, to provide clear and express criteria of assessment to be followed by the on-line portal.
Pursuant to the new regulation, it might be argued that should a start-up reach an agreement with more than one on-line portal, the same offer will be published on different platforms. In such a case, it is not clear how such platforms will communicate amongst themselves to periodically ascertain the number of subscribers and verify whether and when the offer can be considered closed.
Notwithstanding some preliminary critical remarks, we are of the opinion that the efforts made by the Italian legislator firstly, and later by Consob, to regulate for the first time a phenomenon that is under development and is becoming widespread are to be commended.
However, we should wait for the implementation of this regulation to verify whether gaps or inappropriate rules come to the light and whether some amendments need to be introduced to facilitate and improve the use of this new instrument, particularly in light of our first comments.
Consob has expressed its willingness to review the regulation in case it proves unsuitable. We hope that Consob will keep its promise and play an active role in monitoring the effects of the implementation of this new regulation and accepting suggestions by the relevant stakeholders, as already done during the drafting phase.
 Please refer to the definition of “innovative” start-up reported in our alert on start-ups published in this newsletter.
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Compliments of Portolano Cavallo Studio Legale, a EACCNY Member