Italy was amongst the first countries to introduce dedicated equity crowdfunding regulations in 2013. The success of this form of alternative finance has been modest though as rules stifled innovation and hindered the success of crowdfunding campaigns. Recently the Italian Regulator, Consob, has launched another review and consultation of the rules, but does that mean that Crowdfunding is eventually going to take off in Italy?
Italy was among the countries that were hit the hardest by the funding gap that was the result of the Global Financial Crisis of 2007/2008. Italian banks were – and actually still are – struggling with large piles of debt and therefore aren’t in the position to support the financing needs of small & medium sized enterprises (SME) as they should. Especially, start-ups found it difficult to tap the traditional channels for funding, so the rise of equity crowdfunding was seen as a chance for a country that is build on small, often family owned companies. Just to put it in context, SMEs account for 99,9% of the total of Italian firms. They provide 80% of employment and 67% of value added. Italy also attracts very little foreign direct investment compared to its European neighbours.
The reality was a massive disappointment though: The hopes people may have had were quickly followed by disillusion as the new rules made investments in start-ups through equity crowdfunding virtually impossible. Eventually, the Italian lawmakers seemed to have realised their mistake and aimed to amend the rules to make them more business friendly. The final result, however, was once again unsatisfying. Last year in March, Consob introduced yet another update, but little more than a year has passed and we find ourselves facing another review and potential change of rules. Still the success is fairly modest with a total of about €7m in 2016; in comparison, the UK platform Seedrs alone raised £85m (>€100m) in the same period.
Obviously, the believe that any of this is going to contribute to a better adoption of equity crowdfunding in Italy as compared to the success of this method in other European jurisdiction ought to be limited.
The “new” rules
What is the objective of this latest review though? For starters, it is important to understand the latest amendments to the regulatory framework that were introduced as recently as April 2017 in the so-called Decreto Corretivo, the correcting decree, (see Article 57(1) of Decree no. 50 dated 24 April 2017). Most importantly it widened the scope of the Equity Crowdfunding regulation to all SMEs as opposed to only start-ups as long they didn’t exceed 250 employees and an annual turnover of €50m.
On the back of that, the Italian regulator has launched a consultation on 6 July to address several aspects that Consob has identified following an “ample reflection on the regulatory framework”. The regulator admits in the introduction to the consultation that previous efforts to amend the rules haven’t had the impact that was hoped for, especially recognising that the limitation in respect of “innovative” start-ups were too restrictive. Consob also emphasises that the review is further driven by the arrival of MiFID II, which will impact the Italian Crowdfunding rules as well.
In its statement, the Italian watchdog highlighted the following aspects that it intends to change through the new rules and for which it seeks feedback from the public:
- To align the definition of small and medium sized enterprises to avoid confusion with other legislative interpretations of the same;
- The restructuring of the registration process for online portals;
- The alignment of the existing legal framework with the coming MiFID II rules on Conflicts of Interest;
- The extension of alternative funding mechanisms; and probably most importantly;
- The introduction of a system of an insurance model to cover civil liability for damages resulting from professional negligence.
Especially the last point seeks to address the risk that is, according to the Consob analysis, likely to hold potential investors back and influence the perception of Equity Crowdfunding in a more positive way.
The new rules envisage with regard to the identification of the amount of the insurance coverage ceilings at least €100,000 for each claim for compensation and €2,500,000 per year for the total amount of claims.
Are the latest changes going to let Equity Crowdfunding of the leash in Italy then? Unlikely. While the Consob analysis of the raised funds between 2014 and end of the first quartal of 2017 shows a significant increase in 2016 compared to the previous years percentage-wise, the numbers remain modest. The limitation of liability to the amounts outlined above are also addressing the figures of total investments in crowdfunding we see currently and would be rather small in a jurisdiction like the UK with significantly higher volumes. At the same time, it is hopefully not too much of a burden and as such a reasonable decision.
The consultation is open until 21 August. In case you wanted to chip in.