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Equity Crowdfunding in Italy – Six months on

It’s been 6 months since the CONSOB Regulation enabling equity based crowdfunding was introduced in Italy. This was a significant event as it made Italy the  first country in Europe to formally introduce equity-based crowdfunding into the national legislation.

It seems that there has been a great deal of debate and apparent activity without a great deal actually being disclosed or indeed to show – “tanto fumo e niente arrosto” as Italians would say (“all talk and no action”). We can leave the issues of an apparent lack of transparency for another day but it is right and proper to ask – after six months exactly where are we with equity crowdfunding in Italy?

The regulation officially went into action at the end of July and inevitably, before we could expect to see offers popping up on the web and investors investing millions in them, there needed to be platforms in place to handle the offers. According to the Regulation, embryonic platforms need formal approval to operate via an application to Consob, the national financial authority, in order to be authorised and included in the portal owners registry. Who can open a platform? Individuals and institutions who meet the integrity and professionalism requirements set by Consob, who can be divided into two groups – those seeking registration for the first time, who are required to undergo a registration process, and those that already have certain financial approvals in place – like Banks and financial intermediaries – who can be placed on a special section of the registry. This later group must simply inform the CONSOB of their interest in becoming crowdfunding platforms. Such bodies are in effect pre-approved but they must wait to be officially included in the special section.

Perhaps surprisingly, the first equity platform to be included in the registry was one that had to complete the full approval process and is called StarsUp, listed in  October 2013. This was followed by Unicaseed, a platform operated by Unicasim, a financial intermediary firm, who curiously enough had to wait a bit more to see its portal first in the special section of the registry.

So far so good, two platforms registered, question is how are they doing? Unicaseed, as we announced, launched their first offer on the 31st of December with Diaman Tech Srl, a spin-off of the Diaman Holding group. The innovative startup is developing a financial analysis software and it’s seeking €147,000 (18.92% equity). The offer is currently under due diligence from an institutional investor until the end of this month. Starsup launched this week, with Cantiere Savona Srl, a young startup developing an innovative and sustainable concept for yacht. The three young founders are seeking €380.000. The offers will close after a period of (respectively) 3 and 4 months, therefore between end of March and end of May we will know the fate of these two pioneer experiences.

We also need to acknowledge the pioneering platforms, who are to be applauded for their innovation. Whilst they may not perhaps be blazing a trail, they are certainly breaking new ground and setting the tone for those that follow. And they are doing so with the help of the crowd. Leonardo Frigiolini, CEO of Unicaseed, told us that they are learning a lot from the people who have started using their portals and who are sending lots of suggestions for improvements, that Unicaseed team are carefully taking into account. For a traditional brokerage company such as Unicasim, this is a totally new way to operate, and whilst crowdsourcing may seem familiar to many of us, for firms in the established and conservative world of financial service we should applaud their courage and vision to adopt such novelty into their operations. Are we perhaps witnessing the beginnings of wider innovation in the traditional financial marketplace through these little things?

What is puzzling is the lack of other platforms. In the latest Analysis of Italian Crowdfunding Market (carried out with Ivana Pais) 9 equity platforms were identified as being in their launching phase, but so far only two have launched.

To try to understand what was happening and why there seemed to be such a delay we had a chat with some of the aspiring equity portal managers. What we found that key issues are – perhaps predictably – compliance issues and satisfying these requirements and translating the articles of the regulation into a real portal. It’s also worth remembering that these embryonic platforms are, in many cases, startups, and funding the costs associated with compliance can certainly take time. Many commentators in the media translate this delay into a message of “the regulation is too rigid” but the protagonists don’t always share this view, even those that are finding the approval process quite a protracted and painful one. On the question whether it’s easy to become an equity-based crowdfunding platform or not, the general answer was ‘no’ and it was generally answered with another question: Should it be? The entrance in the sector of a good number of operators (at least 10) would be positive and it would contribute to make the tool credible. However opening the process to anyone without regulations would mean to put the growth of the sector and the protection of investors at risk”, says Carlo Piras, co-founder of Starsup.

An interesting development emerged when we had the pleasure to participate at a round table organised by LUISS, the eminent University and Business School in Rome and  co-organisers of the most recent edition of crowdfuture. The meeting was to publicise a project entitled DREAM which may well have a significant impact on the emergence of equity crowdfunding in Italy. The Luiss DREAM (Diritto e Regole per Europa Amministrazione e Mercati – Law and Regulations for Europe, Administration and Markets), is the new research centre of the Law Department of the University, directed by prof. Gian Domenico Mosco. The acronym which forms the name can be interpreted in English as it is in Italian and encapsulates the aim of simplifying the legal and regulations, and one of its objectives would be to create accessible legal resources for startups wishing to collect risk capital through online portals. An interesting and ambitious project adhering very much as it does to principles of democratising capital.

As a final point to conclude this overview of the state of equity crowdfunding in Italy six months on from its enabling, we must acknowledge an example of Italian equity based crowdfunding project that decided to go abroad. It’s the case of GlassUp, an Italian startup who already completed a reward based crowdfunding campaign on IndieGoGo in June 2013. Now they are seeking to raise £100,000 (7.69% equity) on the UK-based equity crowdfunding platform Seedrs. We asked then why did they go abroad? According to Francesco Giartosio, CEO and founder of GlassUp, they felt they wanted to try an equity round where there was already a track record of successful funds. But this does not mean it’s the easiest and most convenient solution (for example, if they are successful they will have to create a UK legal entity because Seedrs only admit British startups). Whilst this could be viewed as a loss to Italy it should be remembered that such a move doesn’t exclude the possibility of another round on an Italian platform at some point in the future.

So, a lot of irons in the fire in a relatively short period of time. But, as it’s true for the Eternal City, democratisation of capital shall not be build in a day.

Equity Crowdfunding at the ready in Italy

The first Italian equity-crowdfunding offering was announced last Friday. DIAMAN Tech Srl , “innovative” start-up, was presented by the portal Unicaseed,  the first financial intermediary to be authorised by CONSOB to the management of an equity crowdfunding portal. This follows the enactment of legislation to make equity crowdfunding legal in Italy.  At the moment, only one other equity crowdfunding platform, Starsup, has been included in the CONSOB register but it is yet to publish any offers.

Diaman Tech S.r.l.  develops financial analysis software and it plans to use the fundingto promote its product on the market. Umberto Piattelli, of the law firm Osborne Clarke, acted in an advisory capacity to ensure compliance with all legal aspects and regulatory frameworks in  preparing the offer  for equity crowdfunding. “It’s been a really interesting experience, through which all participants have played a ” pioneer” role in this new regulatory standards, putting into practice the provisions of Consob Regulation no. 18592 and demonstrating that this type of collection is not only theoretical“, said Mr. Piattelli.

It’s certainly a big innovation and the first Italian example of a limited liability company creating a class of units which establishes differentiated rights for certain shareholders. This has been made possible by the adoption of the Law 221/2012 that introduced crowdfunding in Italy.

So not only was Italy the first country in the world to create specific legislation enabling equity crowdfunding,  it is also the first to have published an offering of capital in accordance with the adopted rules. Fact should not be underestimated, since in many EU countries there is regulatory uncertainty or they’re waiting for the adoption of a regulation by the competent supervisory authorities.

Now we wait to see what the “crowd” thinks of this offer and if they’re ready to such an innovation. The latest report on the Italian crowdfunding market highlighted the fact that there is still a low awareness of crowdfunding in the country and that the offer might be outpacing the demand. It’s true that the passage of the regulation on equity-crowdfunding has provided a boost to its awareness in Italy, and for the first time crowdfunding went mainstream, being discussed on newspapers, radio and even TV.

Certainly the announcement of the offer was extensively shared and discussed on social media, newspapers and blogs. But we wait to see if words and likes will actually translate into capital.

Equity-based crowdfunding is now legal in Italy

Equity-based crowdfunding is now legal in Italy

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

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.

The New Italian Equity Crowdfunding Laws: what you need to know

The New Italian Equity Crowdfunding Laws: what you need to know

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?


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