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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.

What can we expect now the JOBS Act permits equity crowdfunding in the US?

What can we expect now the JOBS Act permits equity crowdfunding in the US?

The Jumpstart Our Business Startups (JOBS) Act has now been signed into law ushering in a new era of crowdfunding in the USA. Many reports have incorrectly declared that crowdfunding is now legal. In fact reward based crowdfunding has been both legal and popular in the US for some considerable time. What was not permissible was equity based crowdfunding. the JOBS Act now permits small companies to seek investment from non-accredited investors within certain constraints, so effectively permitting limited selling a share of the ownership of a firm in return for cash.

This is not unique. It has been continuing in other geographies for some time, with Crowdcube in the UK being one of the leading exponents. So what difference will it make?

Well, almost certainly we will see a burgeoning of interest and uptake in an entrepreneurial but capital-constrained market like the US and, they hope, the creation of jobs – hence the acronym.

More importantly, from a wider perspective, we can expect a general global surge in attention on crowdfunding which we believe can only be a good thing.

Almost certainly we will see some fraud and illegality, not because it’s in the US but because, as in all life, the scaling up of the activity will undoubtedly attract in some unsavory sorts who will see this as an opportunity to rip folks off one way or another. Naturally the opponents of “liberalising” security trading in the US who fought to derail the legislation will seize on any evidence of wrongdoing to bolster their case.

From my perspective evidence of wrongdoing in a minority of cases does not and will not challenge the correctness of the decision to pass the legislation. If evidence of exploitative, corrupt and criminal behaviour was applied as a measure of the legitimacy of any financial body pretty much all of them would be closed down. That’s not to say we shouldn’t condemn this when we come across it or put in place sensible precautions to prevent it.

But to roll back from the democratisation of capital would be a mistake and see the loss of an opportunity that in the majority will be wholly beneficial, legal and empowering.

Nevertheless it is noticeable that much of the opposition to JOBS came from the traditional and established finance communities. They raised the spectre of fraud, and often fall back on the condescending notion of “unsophisticated” investors being preyed on by snake oil salesmen. The implication being that this is a place for only “sophisticated” investors like themselves – a position that seems to bear little scrutiny given the recent performance of the self declared “master of the universe”.

But such attitudes don’t just persist in the US. I recently attended a fascinating event , dealing with crowdfunding and populated predominantly by representatives from the established financial community. Accountants, Banks, Insurance, Corporate lawyers, Angel groups and VCs for example. The overwhelming impression one got was that, on the whole, most didn’t understand the proposition of crowdfunding. Now this is not because they were foolish, dumb or arrogant – far from it. It seemed to be because using their established analytical frameworks and heuristics it simply made no sense. “No one with any sense would do this” seemed to be the subliminal message.

But, as we tried to explain, the nature of a social and networked environment that empowers people to re imagine themselves into new roles, in this case as investors, is that it brings in new ideas, new expectations of return, altered risk perceptions and novel approaches.

I can understand their confusion. I can understand the logic of their position, and I can see why this tends to express itself as either scorn or fear. No one likes their firmly held views challenged or feel under threat.

However our role must be to help these groups understand that this is not a threat to replace them. Crowdfunding will become another option for capital raising that is complementary to and not a replacement for traditional capital markets. It addresses a gap in both the demand and supply side and so as a financial community they must learn how this investment model fits with theirs. They must learn to understand new evaluation frameworks and what to them seem unusual expectations of return and investor behaviours.

None of us knows the outcome and the next few years will yield some interesting insights and developments. We firmly believe that this is here to stay and will expand and strengthen the financial community and the availability of capital to a wide variety of groups.

But for the sake of entrepreneurs and and looking towards the democratisation of capital I welcome and toast the arrival of equity based crowdfunding in the US.


Crowdfunding leads to GOOD

Crowdfunding leads to GOOD

Last Friday we presented a very popular seminar on Crowdfunding alongside Stewart Whyte of McClure Naismith solicitors.

In a lively and engaging event that was part of Social Media Week London, we covered off the fundamentals of what crowdfunding actually is, how it has a strong relationship to social technologies and key aspects of the mindset and dynamics of a highly connected society. We also looked at elements you should take into account when considering a crowdfunding campaign and the legal complexities of equity-based crowdfunding and we emphasised the importance of taking good legal advice if you plan to move down that path. You can access the twintangibles slide pack here and the tweetdoc here, including all the lively discussion going on on twitter during the event.

It is sad, then, to hear about the closure of Profounder – a site that was dedicated to trying to guide US based companies through the complexity of securities law in the US (which varies considerably State to State). The platform had originated as a transactional platform but moved into the realms of guidance and compliance mode helping companies to a point where they could consider raising capital within the limited constraints permitted by the legislation at present. Only a couple of weeks ago I had a long conversation with Dana Mauriello, who along with Jessica Jackley of Kiva fame, co-founded Profounder. Dana was still enthusiastic then about the prospects for Profounder and passionate about helping companies grow through access to much needed capital.

The moral of the story is that the legal complexities of equity based funding means you absolutely need good advice, and that the US has some way to go before being as equity crowdfunding-friendly as the UK.

The good news is that Dana and Jessica will be taking their expertise on to GOOD. If you dont know then GOOD describe themselves as “a collaboration of individuals, businesses, and nonprofits pushing the world forward. Since 2006 we’ve been making a magazine, videos, and events for people who give a damn.” That sounds pretty damn good to us!

We at twintangibles wish them both well and look forward to hearing about their next ventures.

A Crowdfunding Blog Series

Towards the end of last year, we were asked to write a blog series on crowdfunding for Social Media Week. The series has now come to an end. Below you can find a collection of the series’ posts. Keep an eye on this blog, we will continue to share with you insights and more interviews with some of the key players in the crowdfunding arena. 


Crowdfunding – A concept whose time has come?
Tim introduces the concept of crowdfunding and discusses the strong links between crowdfunding and the reach, empowerment and engagement of social networking.



A Social History Of Crowdfunding
Daniela considers the history of crowdfunding in its connection with the web, and as a sequence of developments parallel to the growth of the social web.



Getting A Share. Equity Based Crowdfunding
Tim explores equity-based model crowdfunding for capital formation, hot topic at the moment with the legislation in the US about to change.



Crowdfunding Platforms, to each their own
Daniela describes the different types of crowdfunding platforms, classifying them by the type of return people will get, i.e. rewards, equity, or micro-credit, and further by some of the more affirmed sub-models.



Components of a Good Crowdfunding Campaign
Tim and Daniela used their experience and analysis of crowdfunding to come up with a bit of general advice that should be useful to anyone wishing to start a crowdfunding campaign.



Interview with Luke Lang, co-founder of Crowdcube
Crowdcube is the world leader in equity-based crowdfunding. Launched in February 2011, the UK based platform has set the pace in bringing to the fore a new mechanism of raising capital for entrepreneurs and established businesses alike.



Interview with Stuart McLaughlin, CEO @Fund_it
We had the privilege to interview Stuart McLaughlin, CEO of Fund it, Irish-based crowdfunding platform.



Crowdfunding Bicycle Building – An interview with Andrew Denham of the Bicycle Academy
The Bicycle Academy, an innovative plan to train people to build bike frames whilst providing bikes to the developing world, used crowdfunding to generate the funds it needed to set up. We had the chance to speak to Andrew Denham, the founder of Bicycle Academy at the very end of 2011.



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