With the “Regulation on raising of equity capital by innovative startups arranged through online platforms” published by CONSOB (the Italian financial service regulator) on 12 July 2013 to implement Articles 50-quinquies and 100-ter of the Consolidated Law on Financial Intermediation, Italy is the first country in Europe to have developed a proper regulation of the equity crowdfunding phenomenon.
Introduced by Law Decree no. 179 of 18 October 2012 (so called Growth Decree bis “Additional urgent measures for the growth of the Country”) with the purpose to facilitate the access of startups to equity capital markets in a macroeconomic scenario which is marked by the strong contraction of financing sources obtainable through traditional channels, the Italian crowdfunding legislation grants startups the possibility to promote the offer of equity financial instruments to the public through one or more online platforms specialized in the solicitation of the ‘crowd’ of potential investors.
For such purpose the Italian Government has created a new kind of financial intermediary: the “platform manager”, that is the entity that professionally manages online platforms, having as its exclusive purpose the collection of equity capital by innovative startups, including startups with social purposes.
Platform managers, which are the core of the new legislation, operate, through the online platforms, as ‘showcase’ of the innovative startups entrepreneurial projects and may provide, depending on the selected business model, a variety of additional services on behalf of startups and investors, such as screening of entrepreneurial projects to be presented to investors, monitoring of ongoing projects, facilitation of information flows between startups and investors in the period following the conclusion of the offer, strategic consultancy, etc.
The CONSOB Regulation concludes the regulatory process by establishing: (i) the requirements for platform managers to be authorized by CONSOB and enrolled in a public register kept by CONSOB itself and the relevant registration procedure (Articles 4-2); (ii) the rules of business conduct that platform managers must comply with when providing their services to investors (Articles 13-21); (iii) CONSOB’s supervisory powers vis-à-vis platform managers (Articles 22-23); (iv) procedures for the carrying out of offers to the public through online platforms (Articles 24-25).
Although CONSOB made a definitely significant effort to find a balance between the requests for a flexible regulatory framework coming from a developing industry, on the one hand, and the need to protect retail investors from the risks of a market whose boundaries are presently unfamiliar, on the other hand, the resulting overall picture seems nevertheless to show, at least at a first analysis, some weaknesses. These latter are mainly due to certain regulatory choices made by the Government when drafting Growth Decree bis and, as a matter of fact, appear not carefully worked-out.
There are at least four crucial points to be promptly solved by the Government in order to eliminate the most serious distortions that may impair the launch of this industry.
First of all, the Italian crowdfunding legislation has at the moment the features of an exceptional architecture, which may be used by a limited number of businesses. In fact, fundraising through online platforms may be exclusively aimed at the raising of equity by “innovative startups” having the requirements provided for by Growth Decree bis while it cannot be used by all the companies nor by all the startups. Hence, only companies incorporated by no longer than forty-eights months, with a yearly turnover value not exceeding five million Euro and having as exclusive or prevalent corporate object the development, production and marketing of high technological value innovative products and services may promote offers through online platforms. Moreover, to access the crowdfunding opportunity the company (i.e. the startup) must invest to a certain level in research and development, avail itself of a certain percentage of ‘skilled’ personnel or be the owner of intellectual property rights. Therefore, relevant sectors of economy are excluded from the possibility to benefit from this important financial markets access channel. Actually if the regulatory choice to provide a “friendly” regime limited to innovative startups only may be perhaps justified to certain extent (e.g. in relation to fiscal benefits provided by the State), it appears much less appropriate in relation to a legislative instrument such as crowdfunding, which, affecting private market relationships between enterprises and investors, should be characterized as not discriminatory.
Furthermore, the offer through online platforms has been limited to the raising of equity excluding the possibility for startups to offer debt, subordinated securities and hybrid instruments not representing the share capital. Also this option, which perhaps may be apparently justified by the intention to strengthen the financial structure of “innovative” businesses through contributions of equity, determined, on the one hand, an exceptional and improper tightening of rules and regulations to the detriment of certain companies and, on the other hand, the exclusion from the circle of potential investors of those with financial preferences and portfolios who do not contemplate the investment in shares. A further regulatory restriction, once again imposed by the Government is represented by the requirements that, for the purposes of the execution of the offer on the platforms, a quota equal to at least 5% of the offer be subscribed by professional investors or bank foundations or incubators, with the consequence that entrepreneurial projects having (at least initially) a minor economic relevance could hardly find room in the new regulatory framework. That without having made well clear what are the benefits in terms of protection of retail investors.
A highly remarkable barrier to the entrance in the online platform industry is, finally, represented by the compulsory involvement of a bank or an investment firm in the lifecycle of investment orders given to online platforms by single investors. In fact, with a choice due to the existence of restrictions originating from the European Union Markets in financial instruments directive (MiFID - Directive 2004/39/CE), the Italian Government imposes that platform managers transmit orders concerning the subscription and sale and purchase of financial instruments offered on the platforms exclusively to banks and investment companies. But the compulsory intervention of a bank or an investment firm to achieve the execution of investment orders with the issuer implies the increase of subscription costs in terms that are hardly consistent with the small size of single investments, typical of the crowdfunding universe. All this in a context in which the same intermediaries – in addition to being an essential link for the operation of independent platform managers – are also potential competitors of the platforms since they are authorized by law to manage the on line platforms.
The result is an overall regulatory framework that, even if motivated by the praiseworthy intention to promote the reputation of the equity crowdfunding industry, by strengthening investor protection measures, is burdensome, costly and in contradiction with the aim of the Italian Government, which intended to issue simple regulations to foster new companies.
Thus, despite the common belief that the crowdfunding channel may represent an opportunity and really a unique tool for companies in order to raise financial resources, the ambition of the Italian Ministry of Economic Development of a widespread development of this instrument may hardly come true.