It’s been three weeks since the publication of the Consultation Document on the Regulation on Crowdfunding by the Italian Financial Authority CONSOB. Three weeks full of discussions, praise and criticism of the regulation. I have had the opportunity to discuss it with many people from various sectors and I wanted to share some points of view on a regulation that is innovative, challenging and the object of some criticism.
Notably I have spoken to a number of lawyers who are, perhaps understandably, taking a particular interest in the regulation. Umberto Piattelli is a partner of the international law firm Osborne Clarke and he revealed that many of their clients present the same problem: they have innovative ideas but they struggle to get any funding from banks or investors – a problem not just limited to Italy! “Crowdfunding can become an interesting option for companies that require only modest capital”, Umberto says. Furthermore, crowdfunding, according to Umberto, has great flexibility and people can be innovative in the way they use it if they open their minds. For example, for Umberto, it also has potential in the field of public administration: crowdfunding could be used by public bodies, for social activities with mutual purposes, solidarity and study or research funding. “After all, who is it to stop a public body from creating their own portal?“
“In Italy we are among the first in the world to have adopted legislation,” Umberto says, “my colleagues abroad are working together with clients interested in developing crowdfunding platforms, but in a different way. The UK and Germany, for example, haven’t got specific regulation, Spain and Portugal are just at the beginning.” Having begun to receive input from people interested in raising capital online, the law firm is looking at the Consob regulation with great interest. However the regulations are not entirely positive according to them and it could be argued that they hinder crowdfunding rather than facilitate it. Let’s see why.
The limits of CONSOB Regulation: “innovative startups”
The CONSOB regulation implements Law n. 221, the so-called Decree Growth, which includes within it certain limits to the eligibility for crowdfunding. The most restrictive one is that crowdfunding is only and exclusively available to so called ”innovative startups”, which currently number ca. 450 in Italy due to the strict requirements that need to be satisfied to be recognised as such. For example startups with innovative ideas without a university researcher in their team (one of the requirements to be considered an “Innovative Startup” in the terms of the law) will be excluded. Clearly this limits the availability of the option to crowdfund and constrains it to a small market.
5% of the firms equity must be subscribed by an institutional investor
The regulation further provides that if there isn’t an institutional investor to subscribe the 5% in the capital, it’s not possible to start collecting capital online. This means that one must necessarily create a link with some bank or financial intermediary (or some incubators). This seems to be an attempt to get registered investors to undertake some sort of “due diligence” and build confidence but with such relatively small investments one wonders how thorough the diligence will be? Is this choice really a form of protection for non-professional investors as claimed by the CONSOB?
The transaction must go through banks and investment firms
Crowdfunding portal operators must process the transactions through banks or financial intermediaries who will enable the collection, transmission and settlement, we assume for security and fraud prevention. This legislative approach is understandable but it will limit the functionality of the site operator: the simple manager of portals will have to create a relationship with a bank or broker with whom they may not have relations or a bank account already, making things more complicated and time consuming. Therefore whereas the Regulation attempts to make it less costly and to introduce faster procedures on one hand, on the other hand it includes clauses that could have exactly the opposite effect. Despite the effort to lower the barriers and make it easier for everyone to access the financial markets, it inevitably ends up in the banking system (with all the related costs), the very institutions that some inspired by the promise of crowdfunding are trying to avoid. Also, “if Paypal is an authorized intermediary to manage electronic payments, why can’t portal managers use it?“
Little Clarity on Timing and Procedures of Order Management
One of the fundamental characteristics of crowdfunding is to give a specific time to collect a defined amount of money after which the project ends. But these schedules are not regulated anywhere. After an order is placed to a financial intermediary, who runs it, how is it operated, when are the funds returned to investors if the project doesn’t reach the target?
Other portals that are not covered by the legislation
Another critical point is the presence of portals like match funding platforms or marketplace for ventures that do not fall within the scope of the regulation. Are they allowed? Where are the limits if you do not perform the financial transaction on the portal itself? What happens to the managers of existing portals? The definition of “online portal” is included in Article 30 of Law 221, which states that a “portal” is “an online platform that has as its exclusive purpose the facilitation of the process of raising venture capital by innovative startups.” Does this mean that whoever does not gather funds for innovative startups can do whatever they want?
“It seems paradoxical, but today, if you give money (on a reward- or donation-based platform) you can be scammed with no warranties, if you want to buy shares you’re overprotected”.
What do you think? Would you widen the scope of the Regulation to include other types of companies or should we consider this a testing period of the regulation in a relatively young crowdfunding market? Do you agree with the significant role given to traditional investors, banks and financial intermediaries? Is the 5% clause to be considered “a bribe to the banking system” or is it a necessary guarantee against fraud, especially in a time of transition like this?
The debate is heated and interesting. The regulations must balance many views and interests and still place Italy at the cutting edge. The world is watching to see how this develops and it is good that there is both opportunity and openness to consult and share our ideas and suggestions. Let’s participate in the debate and allow for a healthy development of crowdfunding in Italy and in the rest of the world.