Introduction

Crowdfunding is an emerging alternative source of financing involving open invitations to the public, generally via the internet, to finance a project through a donation, a monetary contribution in exchange for a reward, product pre-ordering, lending or investment. Any type of project can launch a crowdfunding campaign: SMEs, artists, innovative start-ups and social entrepreneurs may all benefit from different forms of crowdfunding.

The legislation concerning this new kind of funding has been amended recently by the Italian Government through several recent reforms aimed at facilitating access (particularly, for start-ups) to alternative forms of (micro)financing. Crowdfunding is playing a key role in the current economic climate, providing an alternative to ever more tightening bank credit during the present crunch scenario¹.

Legal Framework

Among the provisions contained in the Growth Decree bis², which entered into force Oct. 20, 2012, when the Italian Parliament issued and published its implementing law³, are new measures for the incorporation and development of innovative start-up companies, including equity crowdfunding.

The law was preceded by the presentation and publication of the “Restart, Italia!” report, drafted by the task force of the Minister of Economic Development, and equity crowdfunding was finally allowed by Consob (i.e. Commissione Nazionale per le Società e la Borsa, the Italian authority on financial markets), which issued the Regulation No. 18592 of June 26, 2013, for the collection of risk capital by innovative start-ups via online portals.

Basically, pursuant to Article 30 of the Growth Decree bis, interests held in innovative start-up companies incorporated as limited liability companies can be bid in the context of a public offer of financial products, including through online fundraising portals. This rule represents an exception to the provision under Article 2468, first paragraph, of the Italian Civil Code, pursuant to which (i.e. società a responsabilità limitata – S.r.l.) stakeholders’ interests in a limited liability company cannot be represented by shares or offered in a public offering of financial products.

On the one hand, this exception, which applies to riskier start-up companies, is interesting from the perspective of growing new companies, which generally are incorporated as limited liability companies, as well as the development of Italy’s capital markets. On the other hand, however, it calls into question the reasons behind the prohibitions under the Italian Civil Code that restrict limited liability companies in general from offering equity interests.

In addition, Article 30 of the Growth Decree bis has amended the Italian Financial Code⁴ (i) inserting the definition of “portal for the collection of capital for the innovative start-ups” (intended as an online platform having as its exclusive scope the streamlining of fundraising for innovative start-ups) and (ii) stating that the management of such portals is limited to investment firms, banks authorized to provide related investment services and entities enrolled in a special register kept by Consob (i.e. Register of portal managers), which must send orders for subscriptions and acquisitions of financial instruments representing corporate capital to banks and investment companies exclusively.

In order to enroll in Consob’s Register of portal managers, entities other than banks and investment firms must meet the following requirements:

The registered entity must be formed as a joint stock company, limited partnership, limited liability company or cooperative company;

• It must be registered or have an administrative office in the Italian Republic, or, for European community entities, a stable organization in the territory of the Italian Republic;

• It must have as its corporate purpose the professional management of portals for fundraising for the innovative start-ups;

• Consob’s requirements of honorability applicable to controlling entities and entities performing administrative, directing and supervising activities must be satisfied; and

• Consob’s requirements of professionalism applicable to entities performing administrative, directing and supervising activities must be complied with.

Furthermore, the Growth Decree bis introduced the new Article 100-ter of the Italian Financial Code, titled “Offers trough portals for the collection of capital”, pursuant to which public offers for subscriptions of financial instruments issued by innovative start-ups may be carried out exclusively through one or more fundraising portals. The consideration for such subscriptions must be lower than an amount determined by Consob.⁵

Recently Consob has adopted rules applicable to such offers, which are aimed at ensuring that professional investors or particular categories of investors subscribe for a portion the offered financial instruments and at protecting investors, other than professional clients, in the event that the controlling stakeholders of innovative start-ups transfer their interests to third parties after an offer.

Crowdfunding Cases in Italy

Crowdfunding, as a relatively new form of finance, has slowly become established in Europe⁶ and two years following the publication of the relevant regulations in Italy various portals have been authorized. As of today, each of the first three portals registered with Consob, Unicaseed⁷, StarsUp⁸ and Assiteca Crowd⁹, has successfully closed its first offering, raising, all together, over one million euros.

The first proposal, which was successfully funded through Unicaseed, was by Diaman Tech, a financial software company that closed its capital raise on March 30, 2014, receiving 157,780 euros in three months covering 107.3 percent of the target. Seventy-eight investors invested in the offering, three of which were institutional investors with subscriptions totaling 19,600 euros (13.3 percent of the total offering). Consob regulations require, as a mandatory condition for closing, that at least 5 percent of the investment is subscribed for by a professional investor. The minimum investment in the Diaman Tech offering was 490 euros and the maximum was 11,000 euros.

The second proposal, which was funded through StarsUp, was by Cantieri di Savona for a project to develop a low emission boat. It raised 380,000 euros in six months (from Jan. 28, 2014, to July 21, 2014) from 44 investors, including the single largest investor who invested 132,000 euros (35 percent of the total). There were 31 investors who invested less than 499 euros – the limit for a single investment established by Consob under the simplified procedure not requiring MiFID profiling¹⁰, representing 70 percent of the investors and less than 4 percent of the total amount raised.

The third proposal, which was funded on Assiteca Crowd, was by Paulownia Social Project, SRF – Short Rotation Forestry, which raised 520,000 euros from only 12 investors, with an average investment from non-professional investors of over 34,000 euros each.

The characteristics of the three offerings described above were quite different:

• Diaman Tech raised money mainly in its customer community;

• Cantieri di Savona raised funds mainly from investors from its region (Sardinia); and

• Pauwlonia’s offering was structured more like an unsecured loan than an equity investment; in fact the terminal value of the offer is equal to zero and the return for the investors is expected to be a share of profits.

In these first three cases, surprisingly the number of investors was inversely proportional to the total amount raised. This is the first year for Italian equity crowdfunding and we can observe a significant number of initiatives in this area. More than 10 portals have been authorized already, although only a few are active with at least one proposal raising funds. The last quarter of 2014 is seeing an increase in proposals looking for funding and several more platforms joining those currently authorized by Consob.

Creation of a New Market: Equity Crowdfunding

The challenges to creating a viable and healthy market are significant. The first challenge is due to the strong limitations introduced by the legislation and the Consob regulations.

In particular, with respect to the demand side, only “innovative start-ups,” as defined by law, are allowed to raise risk capital online. This limitation associates equity crowdfunding with a class of high risk enterprises. There are a limited number of qualified start-ups (2,480 as of today) and a high percentage of start-ups are likely to fail. On the supply side, the regulations limiting investments to less than 500 euros per transaction and less than 1,000 euros per year under the simplified investment procedure (not requiring a MIFID profiling procedure) is artificially compressing the investment amount distribution.

The second challenge, related to the first challenge described above, is the Italian market’s propensity for risk and the hurdles this creates in reaching a critical size to sustain at least a few equity crowdfunding platforms.

The current scenario shows an average 5 percent success fee on funding. In order for platforms to reach a total turnover of 2.5 million euros in commissions, a 50 million euro equity crowdfunding market is required. The total venture capital market in Italy is estimated at 100 million euros per year with the Italian Business Angel Network (IBAN) estimating angel investments at 32 million euros in 2013.

Given that the direct financing of private companies and the digital transformation of financial markets are long-term solid trends, it will take years and hopefully progressive European legislation to obtain a shake out and a transformation of equity crowdfunding platforms.

In conclusion, the new provisions are aimed at facilitating the transition from an e-commerce generation to an e-investing generation. Equity crowdfunding has a long way to go, but considering that next year Italy will host the Global Entrepreneurship Congress and EXPO in Milan, 2015 will be an important year in the history of equity crowdfunding.

This post was written with contributions from Ada Villa.

 _{1 Another new form of financing recently implemented by Italian Governments is that concerning mini-bonds. For references, see L. SANTA MARIA and A. VILLA, A View from Italy: New Italian Private Corporate Debt Rules - Opportunities for Foreign Investors, in The GT M&A Report, Vol. 6, Ed. 1, June 2014.} 

 _{2 Law Decree No. 179 del 18 October 2012 - Further Urgent Measures for the Growth of the State (“Ulteriori misure urgenti per la crescita del Paese”) known as Growth Decree bis.}  

 _{3 Law No. 221 of Dec. 17, 2012, published on the Official Gazette No. 245 of Oct. 19, 2012 –Ordinary Appendix No. 194.}  

 _{4 Legislative Decree, Feb. 24, 1998, No. 58 as subsequently amended.}  

 _{5 As demonstrated by data showing that in Europe funds amounting to about one billion euros in 2013 were collected.}  

 _{6 As demonstrated by data showing that in Europe funds amounting to about one billion euros in 2013 were collected.}  

 _{7 See http://www.unicaseed.it}  

 _{8 See http://www.starsup.it}  

 _{9 See http://www.assitecacrowd.com}  

_{10 The Markets in Financial Instruments Directive 2004/39/EC (MiFID), as subsequently amended, has formalized the need for financial firms to get to know their customers. Specifically, the MiFID requires financial operators to investigate the suitability and appropriateness of a product or service to a client, by submitting him or her with a corresponding questionnaire. Depending on the result of the suitability and appropriateness questionnaire, investors can be provided with different services and products according to their needs.}