Equity crowdfunding regulations in Italy

Equity crowdfunding regulations that provide a framework for companies to raise venture capital online have a long and eventful history.

Equity crowdfunding officially arrived in Italy in 2012, and our country was the first in Europe to deal with the regulation of the phenomenon. In contrast, we were among the last to transpose EU Regulation 2020/1503, or ECSP Regulation, which standardized crowdfunding regulations in all EU member states.

In this article we delve into the road traveled in the intervening years between these two regulatory extremes to provide a comprehensive picture of what equity crowdfunding means in Italy today.

Who can do equity crowdfunding?

When, back in 2012, the Italian legislature began introducing equity crowdfunding into our legal system, it did so with the aim of fostering the birth and development of innovative startups by facilitating their access to capital through the Internet.

The Growth Decree bis (179/2012) then introduced the possibility for only high-tech innovative startups to offer their capital shares to the public through online portals operated by banks and investment firms or new intermediaries subject to specific regulation.

Initially, therefore, very few companies were eligible for equity crowdfunding. Shortly thereafter, however, this pool expanded: the Growth Decree Law 3.0 or Investment Compact (3/2015) extended the target to include innovative SMEs and undertakings for collective investment or other corporations (UCIs and SICAVs) that invest primarily in innovative startups and innovative SMEs.

In 2017, aided by the success of equity crowdfunding and the increasing difficulty of small and medium-sized Italian companies in accessing capital, came a further extension: the Budget Law opened the possibility of raising venture capital online to all SMEs, innovative or not (companies with fewer than 250 employees and annual turnover of less than 50 million or a balance sheet of less than 43 million euros).

In the same year, Decree Law 112/2017 also extended the opportunity to social enterprises when they are established as corporations or cooperatives.

Finally, the ECSP Regulation dropped any restrictions, opening equity crowdfunding to all corporations (so all LTDs and LLCs can do equity crowdfunding).

The regulations for equity crowdfunding: the obligations of bidding companies

Companies that launch an equity crowdfunding campaign are referred to as "bidding companies" or "proponents." In order to use this capital raising tool, they must comply with a series of regulations and bureaucratic steps.

They are defined by the rules of the Civil Code relating to corporations and the Consob Regulations of 2013 (as amended) drafted to address the need to define specific operating methods for the changes introduced by the aforementioned Growth Decree bis.

Let's look at the main ones:

• The company must provide within the bylaws for the possibility of issuing shares or units for financing to be placed through equity crowdfunding platforms. Otherwise, it must convene a special meeting of shareholders to amend the articles of incorporation to include such a clause.
• The bylaws must also contain clauses regarding the types of shares that will be offered and the property and administrative rights related to each type. The simplest differentiation is between type A shares with voting rights at the shareholders' meeting and type B shares without such rights, but there are many possible diversifications that serve to attract different categories of investors. The law, however, stipulates that non-voting shareholders cannot represent more than 50 percent of the capital, and the return on investment cannot be unrelated to profit results. A special clause is also required to use the work-for-equity mode, that is, to offer company shares in exchange for professional services.
• The company has an obligation to protect investors by providing certain rights and clauses in its bylaws:

1. Right of withdrawal (within 7 days of subscribing to an offer) and right of revocation (within 7 days of discovering a new fact or material error relating to the offer)
2. Right of co-sale (tag along, i.e., the right of all investors to sell their shares to a possible buyer on the same terms proposed to the majority shareholders)
3. Shareholders' agreement disclosure clause (obligation to inform investors of any shareholders' agreements).

These are usually associated with drag along rights, which instead serve to protect the company itself by granting the majority shareholder the right to sell even the shares of minority shareholders, on the same economic terms as his own, without seeking consent.

• The share capital declared in the articles of incorporation will be changed by the capital raised through the equity crowdfunding campaign, so it is necessary to declare this change in advance with a special deed at a notary public, i.e., the deed of capital increase. In this document, the boundaries, manner and purpose of the transaction should be made explicit.
• The other mandatory preliminary document is the offering memorandum, with which the company must provide prospective investors with complete and accurate details about the offering, such as the business plan, corporate structure, risks associated with the investment, rights granted to investors, and details about the shares or units offered. You can find an in-depth article on capital increase and offering memorandum in our blog.
• The company must provide complete and transparent information to investors both during and after the campaign. Indeed, bidders are solely responsible for the truthfulness and completeness of the information provided to investors through the platform, although the platform plays a role in monitoring the clarity and level of detail of the information.
• Finally, in order to raise capital in equity crowdfunding, a company must open an escrow account with a bank, where capital will flow as it is paid in by investors. They will be made available to the company only at the end of the campaign, only if the goal is reached and after the bureaucratic burdens have been completed and the new members have been reported to the Business Registry in the Chamber of Commerce.

The regulations for crowdfunding platforms

Those most affected by the regulatory changes for equity crowdfunding have been the platforms that host campaigns, not the companies. For the latter, a brief summary of the rules that platforms must comply with may be of interest, so as to understand how these portals work and what role they play.

The Consob Regulation we discussed in the previous section recognized the possibility of offering crowdfunding services not only to banks and investment firms but also to special online portals, subject to an application to Consob for authorization. The regulation, with its subsequent amendments to comply with the European MiFID directive, made the maintenance of this authorization subject to certain obligations for platforms:

• Independently carry out appropriateness checks on investor competencies.
• Ensure that at least 5 percent of each offering is underwritten by professional investors (later lowered to 3 percent for SMEs) and that the raising does not exceed the limits (5 million euros per offering, later raised to 8).

• Take out professional liability insurance to protect investors.
• Post on the portal all information on the selection of the proposals, order management, costs, anti-fraud measures, risks of capital loss and illiquidity, and investor rights.
• Post on each campaign page clearly and completely all information about the offering provided by the issuing company, always highlighting the type of financial instrument being offered and updating the information as it changes.
• Prohibition of making recommendations on individual offers suitable for directing investors' subscriptions.
• Prohibition of holding sums of money and executing investment orders (hence the requirement for companies to open an escrow account with a bank, which is the entity authorized to handle these activities).
• Prohibition of providing financial advice.

The ECSP Regulation did not change these obligations; if anything, it tightened them from the perspective of transparency and investor protection, but we will elaborate on this in the next section.

Here we would like to emphasize one point: the duties of the platforms primarily concern investors. In relation to companies, portals have no obligation except to provide complete and transparent information about the service they offer and its costs. In other words, crowdfunding platforms do not have to bring investors to individual campaigns; indeed, they cannot do so, given the ban on recommending individual deals: they can only promote the portal and the deals it offers as a whole. Thus, the search for investors is up to the company.

The most important new features of the ECSP Regulation

We have devoted a separate article to the European Crowdfunding Regulation, so here we summarize only the most important new developments for equity crowdfunding regulation.

• Extension of access to the instrument to all the limited companies (a measure we have already mentioned).
• Confirmation of the possibility to take advantage of the alternative scheme of share registration without costs or charges for the buyer and the alienator (introduced in Italy by Decree Law 3/2015 or Investment Compact Decree) and incentive for the creation of electronic bulletin boards to create a secondary market that can make equity crowdfunding investment less illiquid.
• Maximum collection limit 5 million.
• Dropping the requirement to have 5% or 3% paid-in capital from professional investors in order for an equity crowdfunding campaign to be considered valid.
• Increased investor protection requirements for platforms.
• Requirement to apply for a new and specific license to operate for platforms.
• Ability for companies to raise capital in any EU member state, either on Italian platforms enabled to operate abroad under the new authorization or directly on foreign platforms.

Knowing the framework within which one moves is very important for a company that wants to do equity crowdfunding consciously and accurately-a prerequisite for success.