On 29/03/2013, CONSOB, the Italian equivalent of the Securities and Exchange Commission, published the Regulation implementing Article 30 of the Law Decree n. 179/2012 (Decreto Crescita), which introduced equity crowdfunding in the Italian Trattato Unico Finanziario (Financial Services Act). The regulation is now open for public consultation until 30 April. These are the key features you need to know.
This marks an important date for Italy, making it first in Europe to enact specific legislation addressing one of the most important and disruptive phenomena of recent times namely equity based crowdfunding. Innovative startups will soon be able to use equity crowdfunding described as “the widespread collection of risk capital through online portals” or more simply to raise money by selling their shares online, up to a total value of 5 million Euros.
The regulation represents a well-thought out, detailed and thorough document, and above all it fully reflects the suggestions of the industry leaders who participated in the questionnaire distributed in February. CONSOB has used the “wisdom of the crowd” and listened to suggestions and criticisms received through the questionnaire, which was part of a broader and more detailed impact analysis on crowdfunding. The result is a good example of evidence-based regulation as well as crowdsourced legislation.
CONSOB states that this Regulation is to “enable the development of an initial phase of ‘testing’ of capital raising through online portals, with the main purpose of promoting the development and growth of the country.” In a country where the awareness of crowdfunding is still low, it is essential to consider this regulation as part of testing process for the raising of capital through online portals. In November, our survey of Italian crowdfunding platforms done in collaboration with Ivana Pais of Cattolica University (Milan) highlighted that many crowdfunding project owners had a fundamental lack of understanding of the basic principles of crowdfunding, and a lack of strategic thinking in crowdfunding campaigns. The results also highlighted low awareness of crowdfunding among the general public, in the view of crowdfunding platform owners. It’s fair to say that this legislation comes in ahead of the market, but this is not necessarily a bad thing: now it can serve as a guide to the market itself.
Throughout the CONSOB Regulation emerges a strong will to reduce the administrative burden in equity crowdfunding, an important requirement if the incremental cost of collecting funds is to be kept low. So, for example, allowing much of the “paperwork” to be processed online through the use of certified electronic mail (PEC).
The social nature of crowdfunding and the scrutiny that this brings seem to contribute to a relatively low level of fraud and default in crowdfunding, in all its forms. As volume of transaction increases it remains to be seen how this “crowd policing” develops, but the CONSOB regulation seems to have both recognised and embraced the fundamental underpinning of this behaviour by stressing and insisting on transparency requirements in its provisions.
We will be producing a series of posts that will examine the implication of the legislation from several angles in the next weeks hopefully leading to the enhancement of the regulation, hand to spurring debate and discussion around it. In the meantime, here are the main new provisions introduced by the Regulation:
– Individuals and institutions that wish to run equity crowdfunding operations must apply to be included in a special register that will list all the equity crowdfunding portals. A special section will be reserved for existing banks and financial institutions/intermediaries that inform the CONSOB an interest in becoming crowdfunding platforms. The register is published online and available to all.
– In order to be included in the register, one must meet the integrity and professionalism requirements set by CONSOB, as normally required for intermediaries operating in the financial markets (banks, investment firms and other intermediaries). Only subjects who can prove fairness in business and financial dealings and adequate professional skills can in fact ensure the efficiency and the optimality of the business operations of a crowdfunding portal. Among the professional requirements, there is the ability of the platform owner to assess the business plans submitted by the startups, from an economic and financial point of view rather than a technological – innovation one. The CONSOB is required to decide within 60 days of receiving an application if a platform meets the necessary requirements to be admitted to the register.
– The operator must provide the so-called retail investors (i.e. non professional investors) with a set of mandatory information in order to make them able to take informed decisions. This means that a crowdfunding portal must display the risks connected to investment in startups (eg. loss of capital, illiquidity, rarity of dividends, dilution, diversification); information and practical instructions about the right of withdrawal; the periodicity and the methods with which they will be provided with information on the status of pledged, the amount subscribed and the number of investors; fees and costs charged to investors; the applicable law and the competent court; the language or languages ??in which they are provided with the information concerning the offer. The retail investor must demonstrate that they understand the nature of the activity of the portal, the nature and specificity of the financial instruments issued by innovative start-ups and the relative risk of each offer.
– Only innovative startups (currently just over 300) can raise money through a crowdfunding portal. This is probably the biggest limitation of the Italian crowdfunding regulation. To qualify as an innovative startup, the company has to meet the following requirements: the share/quotaholders ( individuals and not entities) shall hold on the date of incorporation and for the following 24 months the majority of quotas/shares and majority of voting rights of the ordinary share/quotaholders’ meeting; the company has been incorporated and has been active for a period no longer than 48 months; starting from the second year of activity, the total value of yearly turnover shall not exceed €5 million; the company does not distribute profits; the company shall not result from the merger, division or transfer of business from a going concern; and the exclusive or prevalent business scope of the company is the development and commercialization of innovative products or services with high technological value. The Start-Up Regulation also introduces the sub-category of the innovative start-up with social purposes.
– Each innovative startup can collect shares up to EUR 5 million.
– 5% of the totality of the share offer is required to be taken up by “professional investors”, bank foundations, financial institutions for innovation and development or innovative startups incubators, before the offer is published.
– In order to protect retail investors, there is an obligation for innovative start-ups to include in their statutes or instruments of incorporation the so called tag-along right, thus guaranteeing investors a way out should the controlling shareholders sell their shares to a third party after the offer.
Keeping up with the good crowdsourcing tradition, CONSOB invites any interested party to send their comments on the published regulation by the end of the month. The regulation should be implemented by the end of May-early June. Bravo CONSOB, now up to the crowd.
What would you think if the FCA or SEC were to introduce similar legislation in the UK or US?