New instruments of equity investment have been recently introduced by the Italian legislator to stimulate and encourage the growth and development of innovative start ups.
Below is a brief overview of these newly-available instruments.
Classes of quotas of innovative start ups
Unlike joint stock companies, limited liability companies have always been precluded from the opportunity to issue separate classes of quotas. They could only assign special rights to their quotaholders in relation to the management of the company and the distribution of profits.
As an exception to the above rule, since October 2012 the by-laws of those limited liability companies defined as innovative start-ups may provide for special classes of quotas which may be characterized by any of the following rights:
- voting rights limited to certain matters;
- voting rights conditioned upon certain events/circumstances;
- no voting rights;
- distribution of profits on a non-proportional basis;
- preference regarding the distribution of profits;
- a special regime in case of transfer.
The provision of different classes of quotas can facilitate the entry of an investor who, for example, does not want to be involved in the management of the start up but is interested in receiving preferential treatment in connection with the distribution of profits or the enforcement of exit rights in certain circumstances.
Unlike joint stock companies, limited liability companies are not entitled to issue financial instruments other than quotas (“strumenti finanziari partecipativi”).
However, innovative start ups incorporated as limited liability companies may issue financial instruments to raise new investment funds.
Such financial instruments can be addressed to entities or individuals (such as quotaholders, managers, employees, and consultants of the relevant company or other third parties) contributing any form of assets, such as cash, goods, services or work, to the company.
Subscriber will not become quotaholders of the company but will instead be entitled to receive remuneration in the form of a:
- fixed amount to be paid regardless of the company’s profits,
- a variable amount calculated on the basis of the company’s annual profits, or
- a combination of variable and fixed amounts.
Depending on the form of remuneration adopted, such instruments will have a varying impact on the company’s financial situation and could be defined as either equity or debt under an accounting and legal perspective.
While the titleholders of such financial instruments cannot be considered as quota holders of the company, they may be allowed to appoint a director or auditor, pursuant to specific rules provided by the company’s by-laws.
The company’s by-laws must expressly allow for the possibility of issuing such financial instruments by indicating the competent corporate body (a quota holders’ meeting or the board of directors) authorized to determine their issuance. A specific regulation shall be approved to regulate the financial instruments by, for example, specifying the value of each instrument, the number of instruments to be issued and the timing of the issuance, and the limitations and conditions to which such instruments could be subject.
Work for equity
Innovative start ups may also implement work-for-equity plans aimed at compensating directors, employees and other consultants (including professionals) with equity-based instruments (significant tax incentives are also available to the beneficiaries).
This means that those individuals providing services and/or work to the innovative start-up pursuant to a specific contract (such as an employment or consultancy agreement) could be remunerated by means of equity participation, financial instruments or option rights instead of receiving cash. In this way, they will participate in the business risk related to the implementation of the relevant project.
From a practical standpoint, in order to implement a work-for-equity plan, an innovative start up should follow the following corporate steps:
- the company’s management body must approve an incentive plan providing for a work-for-equity mechanism of compensation;
- the company’s general meeting must either (i) approve a capital increase to be subscribed to by the same company or (ii), as an alternative, authorize the company to purchase its quotas from its current quotaholders;
- the quotas owned by the company as a result of one of the actions under 2) above must then be assigned to employees, directors or consultants pursuant to the approved incentive plan;
- the employment/consultancy agreement executed by the company with each beneficiary of the incentive plan must expressly provide for remuneration to be paid partially (in case of employees) through equity-based instruments.
Innovative start ups incorporated as limited liability companies should be allowed to offer their quotas to the public through special on-line portals (so called “equity crowd funding”).
However, the rules providing for equity crowd funding mechanisms are not yet effective; a regulation is expected to be issued in the future by the authority responsible for the Italian securities market (Consob).
A draft of the regulation has been prepared and its main provisions, although they are not definitive and may be subject to further amendments, can be summarized as follows:
- only banks, investment companies or companies duly registered with a special registry kept by Consob can operate as on-line portals;
- an innovative start up can launch a public offer through an online portal provided that the total value of such an offer is be less than EUR5,000,000.00;
- at least 5% of the shares/quotas of the innovative start up must be held by “professional investors”, such as banks or financial institutions;
- the by-laws of the innovative start up must provide for specific way-out mechanisms (such as withdrawal or tag-along rights) in favour of the new subscribers should controlling quota holders/shareholders sell their participations to a third party
IN THIS CONTEXT ALSO SEE: The new regulation on ‘innovative’ start ups in Italy
 For the definition of innovative start-up please refer to our article published in IBA Newsletter [•].
 The draft regulation stipulates that Consob will select the companies other than banks or investment companies to be enrolled on the special register; to this end, such companies should also comply with specific requirements set out in the draft regulation.
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