Yesterday, the Italian Financial Authority has formally announced the legislation on equity based crowdfunding and tomorrow the Regulation will be published on the Gazzetta Ufficiale. After the 15-day vacatio legis (period between the promulgation of a law and the time the law takes legal effect), equity-based crowdfunding will be legal in Italy, which becomes the first country in Europe to implement equity-crowdfunding laws.
The imminent publication of the regulation on crowdfunding by CONSOB, the Italian Financial Authority, introduced by the Legislative Decree n. 179 (Growth Decree) in December last year – was officially announced by Dr. D’Agostino, vice-director of CONSOB, at an event organized by Mission Community held in Milan yesterday.
Dr. D’Agostino began his presentation with a review of the circumstances that have led to the development of equity crowdfunding as a means of alternative finance in Italy. He explained that the Bank of Italy says that the country is in a time of contraction of bank financing, especially for small enterprises, which have enormous difficulty in accessing capital markets; furthermore, that private equity has never taken off in Italy.
This represented a challenge when Consob was tasked to regulate a very new phenomenon, in a non-harmonized European regulatory framework, where there is no benchmark to refer to. He pointed out that in other countries, equity crowdfunding is “regulated” through exemptions from traditional legislation, and there are no established and consolidated regulations dealing specifically with crowdfunding. Consob, therefore, adopted a very open approach, as the most appropriate means of developing highly participatory and “crowdsourced” legislation with clarity in a new and complex matter. D’Agostino believes that the transparent nature of the regulatory instrument is also apparent from the fact that an “ad hoc” regulation was preferred to regulations scattered all over the legislation. This means that a single document is available for consultation, greatly facilitating the understanding of regulatory constraints.
Consob opened the collection of ideas and analysis to all stakeholders through a survey that received “a huge number of contributions”, and which was followed – in February – by an open hearing that was intended to capture the essential aspects of the regulation in order to get to a first draft. This was then placed once again in public consultation during March/April from which it received further contributions from the public.
Last Wednesday, the first part of this process has come to an end and tomorrow the Regulation will be published on the Gazzetta Ufficiale. After the 15-day vacatio legis period, the Regulation will take legal effect, but new portal operators can already apply to be included in the register.
Dr. D’Agostino revealed some of the details contained in the regulation, notably the constraints under which it will permit this type of crowdfunding. Equity crowdfunding will only be for risk capital and not debt capital, this includes equities and shares issues from Limited Companies. Perhaps the most significant constraint is that equity crowdfunding is only permitted for “innovative startups”, as defined in the decree (you can read more on this in our previous post about equity crowdfunding in Italy http://twintangibles.co.uk/italian-equity-crowdfunding-regulation-what-you-need-to-know/)
The purposes of the regulation is to facilitate the financing of companies with a very high risk profile and high-tech orientation. It is also intended to regulate the online platforms operators with the aim to reduce operational and legal risk, as well as the risk of litigation and fraud.
The legislators who introduced the initial decree that has led to the development of the regulation wanted specific provisions to bring a level of discipline to the running of the platforms. In addressing this the CONSOB has included a mechanism for the creation of an “ad hoc” register of operators to provide traceability and transparency.
Consequently wanna-be portal managers have to apply to be included in the register, whereas banks and financial intermediaries will “by right” be permitted manage their crowdfunding portal without prior registration. However they have an obligation to inform Consob when they start and they will then be included in a special section of the above mentioned register.
In terms of the professional requirements for operators, considerable flexibility has been introduced permitting non-executive directors of the platform to come from backgrounds other than financial ones. The CEO, however, must have experience in the financial sector. Consob has also introduced the so-called “interlocking” ban, so as to avoid situations in which certain personalities who meet the right professional criteria are in the Board of more than one portal, simply to fulfill legal requirements.
Dr. D’Agostino emphasised that the regulations try to reduce the administrative burden in the process in order to encourage growth in the sector. That said a number of “information obligations” on operators are included in particular with regard to requirements to inform investors. The information obligation specifically addresses share offers and reaffirms the need to carry out suitability tests on investors, and that before making any investment the investors must complete a questionnaire that verifies that they are aware of the high risk involved in their investments. The obligation to provide information to the customer on the amount of money invested has also been introduced.
There are also efforts to simplify the investment process for smaller investors through the elimination of some requirements for investments of less than 500 Euro/offer (1000/year) (exemption from MiFID).
One important point to note is that it is absolutely forbidden for crowdfunding portal operators to give any investment advice but portals must make an effort to make information about offers as clear and complete as possible.
One of the most debated points of the proposed Regulation during the consultation process was the requirement for professional investors to subscribe to at least a 5% of the shares in any offer. This was hotly debated and the compromise seems to be that this requirement now must be met in order to complete the process but is not necessary as a pre condition and prior to an offer being made. As it happens incubators of innovative start-ups are included in the professional investors category, so this offers a mechanism to those entrepreneurial champions to easily participate as equity based investors.
Italy can be proud of the fact that it is the only country in the EU with a legislation on equity crowdfunding even if it is limited to innovative startups. This places a responsibility not only on Consob, which will have the important task to supervise and monitor the market so that everything can develop in a fair and transparent way, but also on the entire sector.
Dr D’Agostino, emphasised the emerging nature of this sector and the innovation at the heart of this regulation. He made the point that, in such circumstances, it is impossible to be certain that this type of regulation is robust, and that failures are in the nature of these initiatives. Consequently it is the responsibility of all to challenge opportunistic and questionable behaviours. But, above all, he believes, that it is right to explore this form of alternative financing, and that open debate in such a young and emerging sector is a good thing. All Italian crowdfunding lacks at present is a critical mass and it is hoped that the regulation can act as a catalyst for growth and make this development a reality and not just an ambition.