Equity-crowdfunding extended to small and medium sized enterprises

A recent law in Italy (Article 57(1) of Decree no. 50 dated 24 April 2017, the socalled "Decreto Correttivo") has extended to all small and medium-sized enterprises (SMEs) (1) and, consequently, to SMEs established in the form of limited liability companies, the legal framework concerning equity-crowdfunding. Thus, all companies having less than 250 employees and an annual turnover not exceeding EUR 50,000,000 (or whose total budget is not higher than EUR 43,000,000) will be able to take advantage of equity-crowdfunding as an alternative to financing from banks irrespective of their corporate form.

The Italian framework regarding equity-crowdfunding

Equity-crowdfunding, as an alternative credit instrument allowing easier access to financing, was introduced in Italy by means of Legislative Decree no. 179 of 18 October 2012, converted by the Law no. 221 of 17 December 2012, (so called Decreto Crescita 2.0). Italy became the first country in Europe to have a specific discipline on crowdfunding.

The Equity-crowdfunding framework, in its Italian version, is a form of "crowd" investment which consists in the subscription by investors to the share capital of the issuing company. With respect to the funding activity carried out by  through the subscription of securities offered by the relevant issuing company, each investor will receive a set of equity and administrative rights deriving from such participation.

The primary regulation on equity-crowdfunding is contained in the following provisions of the Legislative Decree no. 58, of 58 February 1998 ("Italian Consolidated Financial Act"):

• Article 50-quinquies, entitled "Management of on-line portal for the collection of capital for Small Medium Enterprises", which defines and regulates the activity of on-line portal operators, namely those that carry-out, on a professional basis, the management of on-line portal for the collection of capital, enrolled in the special Register held by Consob; • Article 100-ter, entitled "Offers via portals for the collection of capital", which established that public offers conducted exclusively via one or more online portals may only concern the subscription of financial instruments issued by certain types of companies identified by Consob, by issuing by a specific regulation. The implementing regulation on equity-crowdfunding was issued by Consob by means of resolution no. 18592 of June 26, 2013, introducing the “Regulation for the collection of risk capital via on-line portals”. With the adoption of this Regulation,  the Supervisory Authority intends to regulate the activity of the operators that manages the on-line portal, introducing a set of transparency requirements and conduct-of-business rules that must be fulfilled by such operators in order to ensure an adequate level of reliability of the service provided. The regulatory discipline applicable to them has also been graduated depending on whether the operator is:

• an entity that must obtain the authorisation from Consob for the registration in the ordinary section of the Crowdfunding Equity Portfolio Manager Register pursuant to article 50-quinquies of the Italian Financial Act; or • a bank or another investment undertaking already authorized to provide investment services, which must be enrolled in a special section of the abovementioned Register (2 ).

The success factor of the Equity-crowdfunding discipline introduced in Italy is strictly related to the compliance of the relevant transparency rules and conduct- of-business rules provided for by the on-line portal operators, which have to make available to investors the information on individual issuing companies and on individual offers through a standardized information document attached in the Regulation (Annex 3 of the Consob Regulation).

The evolution of the Italian equity-crowdfunding regulation

In order to fully understand the novelties introduced by the Decreto Correttivo, it should be noted equity-crowdfunding, in the original wording of the so-called “Decreto Crescita 2.0”, provided for offers to the public of equity participation, made through specific on-line portals, to be applicable solely to the so called “Innovative start-ups”, i.e. those companies: (i) having as their single or preexisting corporate purpose the development, production and marketing of innovative high-tech products or services; and (ii) established for no-more than sixty months.

The decision of the Italian Legislator in 2012, to limit the scope of equitycrowdfunding to innovative start-ups, albeit motivated by the incentive to create new businesses capable of exploiting the potential of technological innovation, led to unsatisfactory results in terms of funding provided through this alternative form of financing. The companies to which it was addressed were small in number compared to the larger category of Italian small and mediumsized enterprises.

Therefore, it was necessary to make a first corrective action of the matter and this was done with D.L., January 24, 2015, no. 3, then converted to law n. 33 on 24 March 2015, (so-called “Investment Compact Decree”). In particular, this last decree - emphasizing the relevance of technology companies, such as those able to increase industrial productivity, the competitiveness of the domestic economy, the creation of employment - extended the scope of subjective application of equity- crowdfunding also to the so called “Innovative SMEs” (in addition to UCI - undertaking for collective investments - that invest in shares or units of the companies that mainly run over start-ups and innovative SMEs) as defined in article 1 sub-paragraph 5-undecies of the Italian Consolidated Financial Act, such as those companies whose shares are not listed on a regulated market and which: (i) have the same innovational requirements as for innovative start-ups; and (ii) have certain dimensional requirements set out in Recommendation 2003/361/EC.

The new regulatory framework introduced by the “2017 Legge di Stabilità”

The Italian Legislator, by means of the Law dated 11 December 2016, no. 232 (so-called 2017 Legge di Stabilità), driven by the general need to introduce new and alternative kinds of financing with respect to banking as well as recognizing the potential of equity-crowdfunding as an alternative financing channel which can support the development of small and medium-sized Italian enterprises as such, has been extended to all SMEs (the word " innovative start-up " and " innovative SMEs” has been replaced by "SMEs") the possibility to exploit the equity- crowdfunding tool, regardless of the corporate object.

Although this latter legislative amendment has set forth a permanent perception shift of the Italian Legislator – at the moment equity-crowdfunding is no longer considered as a financing instrument devoted solely to entrepreneurial projects promoted by "innovative" enterprises - in the latest version as amended, because of a coordination deficit between the texts amending the measure here under discussion, the following have been omitted: • stated tout court extension of art. 100-ter TUF to SMEs (this rule only identifies the possibility to issue financial instruments which may be object of equity- crowdfunding solely with regard of innovative start-ups and SMEs);

• to recall the derogation from art. 2468, paragraph 1, of the Italian Civil Code (i.e.: unjustified enrichment), formally preventing SMEs established as limited liability companies from accessing equity-crowdfunding.

Lacking such a derogation, raising public funds was practically only possible for innovative start-ups, innovative SMEs and, of course, for non-innovative SMEs established in the form of companies limited by shares. This, however, limited the original intention of the Legislator as it did not guarantee the application of equity-crowdfunding to the most widespread corporate structures in Italy, namely limited liability companies.

Therefore, in order to make the necessary additions to the novel of 2016, 57, paragraph 1, of the Decreto Correttivo that amended article 26 of the Decreto Crescita 2.0, expressly expressing, in favor of all small and medium-sized enterprises constituted in the form of limited liability companies, the provision of a derogation from article 2468 of the Italian Civil Code.

Nevertheless, the amendment in favor of SMEs in the form of limited liability companies has finally brought companies limited by shares and the limited liability ones closer together, with respect to their respective possibilities of addressing the public in order to collect the necessary capital for their entrepreneurial activity.

That being said it should also be noted that in this reform Italian Legislator has fragmented the legal framework on limited liability companies, separating into twin-track the limited liability companies which do fall within the definition of SMEs and the ones which do not (implying the ones with more than 250 employees), to which, paradoxically, the prohibition provided by Article 2468 of the Italian Civil Code shall continue to apply.