As promised, the second part of our Equity Crowdfunding country report for Italy (the first can be found here) will look into the rules for the involved parties in more detail, but first let’s have a look at the participants:
There are basically three parties to Equity Crowdfunding deals: A) the seller of shares, i.e. the company that seeks funding through the campaign; B) the investor who wants to buy shares; and C) the crowdfunding portal that provides an investment platform and brings A) and B) together.
A) The Bidder
Ok, that is somewhat confusing, but the Italian regulation actually means by bidder the company seeking funding and not the investor “bidding” to buy shares (as it is often the case in marketplace lending where loans or parts of it are sold to the investor offering the best terms).
Bidders can come from five categories:
- Innovative start-up companies
Innovative start-up companies, including start-ups with a social vocation. According to the regulation “Growth Decree bis” they have to fulfil the following requirements:
- they are not listed on regulated markets (or on other trade systems);
- have been incorporated and have carried out their business for no more that 48 months;
- have their head office in Italy;
- are small (total annual production value of no more than 5 million Euro);
- do not distribute profits;
- are engaged exclusively, or at least prevalently, in the development, production and sale of innovative products or services with a high technological value, or operate exclusively in the sectors referred to by the legislation on social enterprises (for more information on the denomination, see art. 2, paragraph 1, of Legislative Decree no. 155 of 24 March 2006).
Innovative start-ups must also fulfil at least one of the following conditions:
- invest in research and development (at least 15% of the greater amount between production cost and value);
- more than one third of their employees must have a research doctorate or at least be graduates engaged in research (or more than two thirds must have a master’s degree);
- must be the holder of exploitation rights (at least one) for industrial, electronic or biotechnological inventions or inventions of new vegetable varieties or rights relative to a programme for an original processor.
- Tourism start-ups
Tourism start-ups, basically as a sub-form of innovative start-ups and brought within scope only in 2014. These companies need to have as their objective the promotion of Italian tourism through the use of technology and development of software targeting this sector.
- Innovative small and medium enterprises
The requirements for being an innovative SME are:
- be based in Italy;
- not listed on regulated markets;
- has already published certified annual accounts at the companies’ register;
- turnover does not exceed €50 million or the total balance sheet is not higher than €43 million;
- employs less than 250 staff;
and at least two out of three of the following:
- invests at least 3 % of its production cost or value (whichever is higher) in R&D;
- more than 1/3 of its workforce has a university degree;
- has at least one patent registered.
- Collective investment schemes
Collective investment schemes as per the UCITS directive, which invest mainly in innovative start-ups and in innovative SME;
- Investment companies
The fifth group are Companies, which invest mainly in innovative start-ups and SME.
So far, so good, but it’s important to note that innovative start-ups are subject to a series of exemptions:
- the obligation to reduce capital in the case of losses, i.e. innovative start- ups are allowed to reduce capital within the first two financial years instead of the within the following financial year;
- rights of limited company (s.r.l.) stakeholders can: unlike under the ordinary rules, they are allowed to create “stake categories” with differing rights compared to ordinary stakes, as well as stakes without voting rights;
- company crisis: innovative start-ups in crisis are not subject to bankruptcy or to the other insolvency procedures, but can instead follow the simpler procedures for reorganising debt and liquidating assets contemplated;
- the public offering of limited company (s.r.l.) stakes: the equity stakes of innovative start-ups which are limited liability companies can be offered to the public, unlike ordinary limited companies which are forbidden from doing so.
However, in order to increase transparency in such risky investments, the start-ups are required to give, and if necessary update at least every six months, the following information on their website:
- date and place of constitution, name and address of the notary public;
- head office and any regional offices;
- corporate purpose;
- brief description of the activities performed, including the research and
- development activities and expenses;
- list of shareholders, showing trustees and holdings, with self-declaration;
- list of companies in which it holds interests;
- indication of academic qualifications and professional experience of the
- shareholders and personnel who work for the start-up (except sensitive data);
- indication of professional collaboration or commercial agreements with certified incubators, institutional and professional investors, universities and research centres;
- last financial statement deposited (in the “XBRL standard” format);
- list of exclusive rights to industrial and intellectual properties.
Furthermore, in order to list an offer on an Equity Crowdfunding platform, the bidder’s articles of association contain the right, in favour of non-professional investors or investors other than the other categories indicated in paragraph 2 of art. 24 of the Consob regulation on “the collection of risk capital via on-line portals”, which have acquired or underwritten financial instruments offered via a portal, to withdraw from the company or to sell the participation instruments, as well as the relative procedures and conditions to exercise the mentioned rights, in case the controlling shareholders, after the offer, transfer directly or indirectly the company’s control to third parties.
B) Investors in Equity Crowdfunding Campaigns
Investors can basically be divided into two categories:
1. physical or legal persons on one hand, i.e. retail investors
2. Several forms of sophisticated investors on the other, which are divided into 6 sub-categories, i.e. sophisticated investors.
- Retail investors
Physical persons, i.e. individual investors and legal persons are subject to the investment limits described in part one of this article, that is €500 per single order or €1,000 annually for individuals or respectively €5,000 and €10,000 for investments by legal persons.
Though the regulation on the collection of risk capital via on-line portals does not go into too much detail in respect of rules or guidance regarding basic investors, Consob, both on its website and through publications, aims to highlight the risks involved with this form of investment, in particular:
- on the risk of loosing the entire capital due to the nature of the investment in comparison to traditional investments;
- the liquidity risk since it may be difficult to transform the investment into cash as the funds may be tied to the project given, also considering that in most cases no secondary market for trading shares in a n unlisted start-up exist;
- the risk of encountering illicit initiatives or genuine fraud.
To provide additional protection, retail investors also have the right to change their mind providing they do so within the established terms, in particular:
- within 7 days of adhesion, they may inform the portal of their intention to withdraw their funds at no expense according to the procedure indicated by the portal; and
- within 7 days of the date on which new information (new facts or the reporting of a substantive error) with respect to that given on the portal was made known to the investors, they may revoke the adhesion to the offer.
In both cases the money already paid, must be returned to the investor.
- Sophisticated investors
The second group of investors consists of the following: Certified incubators; Banks and alike; professional investors as introduced and defined by MiFID, plus professional investors upon request and investors supporting innovation. We’ll focus on the last two, but it is important to bear in mind that investors from this entire group must invest at least 5% of the targeted funding. This aims to provide a layer of seriousness and protection against investor fraud since more sophisticated investors are deemed by Consob to spot a rotten egg amongst the bidders. It also seems to be the only way to gather sufficient financing for a crowdfunding campaign given the caps on investments of the first category of investors.
Professional investors upon request are investors that do not automatically fall into any of the other categories but are deemed more sophisticated than the regular individual investor if they meet at least two of the following criteria:
- the investor has carried out transactions of a significant size on securities markets at an average frequency of, at least, 10 per quarter over the previous four quarters;
- the size of the investor’s securities portfolio exceeds EUR 0,5 million;
- the investor works or has worked for at least one year in the financial sector in a professional position which requires knowledge of securities investment.
Consob has also introduced the category of an investor supporting innovation. To fall into this category, the investor needs to meet at least one of the following two requirements:
- having made, in the last two years, at least three investments in the share capital either as shareholders’ loans in innovative start-ups or innovative SME, each of which for at least fifteen thousand Euro;
- having covered, for at least twelve months, the office of executive director of an innovative start-up or an innovative SME, other than the offering company
For the sake of completeness a word on certified incubators: The Italian legislator also intends to increase the importance of start-up incubators and the benefits such institutions can bring to innovation. However, the regulator has also made it clear that in order to effectively support start-ups, incubators must have the following:
- suitable structures, also in terms of property;
- adequate equipment such as access to high speed Internet and machines for tests and trials;
- directors and managers of recognised competence in business management and innovation;
- regular collaborative interaction with universities, research centres, public institutions and banks;
- proven experience in supporting innovative start-ups, assessed according to the actual activity performed.
If the incubators have the necessary requisites, they are entered, like the innovative start-ups, in a special section of the Companies Register held by the Chamber of Commerce, where information is available on their activities and features.
C) Providers of Equity Crowdfunding Platforms
And now for the good people that run the platforms: Unless you’re already part of the group of banks and investment firms (SIM) authorized to provide investment services noted in the special section of the Consob register, which don’t need additional approval, you need to be authorised by the regulator and added to the respective register (see here).
- Authorisation and Registration
In order to register, the company has to provide details on the company and its management as well as a report on the company’s activity and the organisational structure, including an illustration of any outsourcing of essential operational functions to third parties.
Details to be provided on the company and its management include the company name, the company’s registered head office and administrative head office, the address of the permanent seat in the Italian Republic for Community subjects, the address of the Internet site of the portal, the name and contact data of a company representative and the list of the accompanying documents. Documents to be included in the application are a copy of the deed of incorporation and of the Articles of Association accompanied by a substitute declaration certifying current valid existence issued by the Companies Register Office. Furthermore, the application must contain the list of subjects holding control with indication of their respective stakes in absolute value and in percentage terms, with indication of the subject through which the stake is held in the case of indirect shareholdings plus several documents verifying the integrity of the subjects that hold the control of the company.
The report on the company’s activity and the organisational structure must describe in detail the activity it intends to perform and in particular:
- the methods adopted to select the offers to be presented on the portal;
- the advisory service, if any, provided to the innovative start-up and of the innovative SME regarding strategic analyses and financial assessments, business strategy and related questions;
- whether periodic information will be published on milestones reached by the innovative start-up and of innovative SME whose financial instruments are offered on the portal and/or periodic reports on the trend of the companies themselves;
- whether any mechanisms will be implemented for the periodic value of the financial instruments underwritten via the portal or for the recording of the prices of any transactions in those financial instruments;
- whether any mechanisms will be implemented to facilitate information flows between the innovative start-up or the innovative SME and the investors, or between the investors;
- the description of the internal procedures for checking the appropriateness of the offer and that the customer has the level of experience and knowledge necessary to understand the essential features and the risks that the investment involves
- any other activities.
With regard to the company’s organisational structure, the portal manager must provide at least the following information in detail:
- a description of the company structure (organisational chart, chart of offices, etc.) with indication of the delegated powers, according to the company organisation, the control mechanisms implemented and every other useful elements to illustrate the manager’s operational features;
- the plan, if any, for hiring personnel and the relative state of implementation, or indication of the personnel in office to be used for carrying out the business. The plan must also specify the existence of any employees or collaborators who have carried out certified professional or academic research activities at public or private universities and/or research institutes in Italy or abroad, on matters concerning corporate finance and/or business economics and/or corporate law and/or marketing and/or new technologies and/or technical-scientific matters, with indication of the relative roles and functions performed within the company organisation;
- the procedures, including IT procedures, to ensure respect for the obligations in respect of the rules of conduct set out in the equity crowdfunding regulation;
- systems for processing the orders received from the investors and in particular to ensure the compliance with regard to the obligations related to the investors’ adhesion orders management as set out in the equity crowdfunding regulation;
- the procedures for the transmission of the orders collected from investors to banks and investment companies;
- a description of the IT infrastructure developed for receiving and transmitting the investors’ orders (system reliability, security, integrity, privacy, etc.);
- the place and methods for documentation archiving;
- the policy for identifying and managing conflicts of interest;
- the policy for fraud prevention and privacy protection;
- any outsourcing to third parties:
- of the strategy for the selection of the offers to be presented on the portal, with specification of the scope and content of the mandate;
- of any other activities or services.
In particular, the activities outsourced, the subjects mandated, the content of the mandates conferred and the measures to ensure control over the outsourced activities and to mitigate the connected risks, must be specified;
- the possible existence of mandates assigned for the selection of the offers received by other portal managers, indicating the scope and the contents of the same;
- the fee structure for the services offered by the portal manager.
- On-going obligations
Obviously, the regulatory obligations for portal managers do not end with the registration of the platform. The Consob Equity Crowdfunding Regulation contains a wide range of rules for conduct of business, both on a general and a specific level.
a) General obligations
In general, the regulation states that the portal manager has to work with diligence, fairness and transparency, avoiding any conflicts of interest, which could arise in the management of the portal that may affect the interests of the investors and the issuers, and ensuring equal treatment of the beneficiaries of the offers who are in identical conditions. Portal managers must make available all information that is provided by the bidder to all investors and highlight the risks of this form of financing in particular to non-professional investors. All information needs to be up to date, accessible for at least 12 months after the closure of the offer and at least for 5 years upon request. The portal manager must also ensure non-professional investors the right to withdraw from the adhesion order, without charge, by communication addressed to the manager in person, within seven days subsequent to the order. The portal manager hast to conduct checks to ensure the appropriateness of the offer.
b) Information on the platform and its management
The portal has to show information on the involved persons: provide for the portal managers contact information in the form of phone numbers and e-mail addresses, name any stakeholder above 20% of the share capital, the staff with administration, direction and control responsibilities. It also has to list the performed activities, including the methods for selecting the offers, and any activities outsourced to third parties, as well as starting, interruption or resumption date of the activity.
The portal has to outline any costs charged to the investors as well as a series of internal policies for the sake of investor protection and internal governance, namely with regard to fraud protection, data management, management of conflicts of interest, complaints handling and out-of-court resolution. The portal also has to list the relevant legislation and related information, the aggregate data on the offers made through the portal and on the relative results, details of any sanctions and precautionary provisions adopted by the Consob, as well as the procedure to del with issuers that do not abide by the portal’s rules.
c) Information on equity crowdfunding
With regard to the obligation to highlight the increased risk of equity crowdfunding to investors, portals have to make it clear that investors risk losing the entire invested capital, the likelihood of limited liquidity in the shares of a crowdfunding project, and the ban on distributing profit of innovative start-ups. Portals must also advice on the taxation benefits applicable to such investments since the Italian legislator has introduced measures to encourage investments in start-ups and SMEs (for instance, fiscal incentives that allows for a tax relief of 19% for individuals and 20% for legal persons). Investors must also be made aware that innovative start-ups and SMEs enjoy exemptions from obligations usually imposed by Italian corporate law (as mentioned above). The portal has to describe the typical aspects of a business plan and must mention the right of withdrawal for retail investors. Portal managers also have to ensure that such investors have read the material on investor protection and check the appropriateness of the offer. Retail investors have to declare that they can financially sustain the possible entire loss of the investment they intend to make, so the portal has to provide a way for them to do so.
d) Information on the crowdfunding offer
In respect of the offer itself, each project needs to contain a message that explains that the offer was not subject to review and approval by the regulator. The exact wording can be found in the annex of the Equity Crowdfunding Regulation. The offer also needs a description of the risks as outlined before.
With regard to the bidder, the description depends on the type of offeror, i.e. innovative start-up or SME, a UCIT fund or company that prevalently invests in the first group.
Furthermore, the portal needs to add a description of the corporate bodies and the curriculum vitae of the directors; the financial instruments offered, the percentage of the bidder’s share capital represented by the same, the administrative and equity rights connected with the same and the relative procedures for exercise; and a summary of the clauses drawn up by the innovative start-up companies or by the innovative SME regarding cases in which the controlling shareholders sell their own stakes to third parties after the offer.
As for the offer itself, the following information needs to be included:
- general offer conditions, including indication of addressees, and any clauses governing the effectiveness and the possibility of revocation or the adhesions;
- information on any participation already underwritten by professional investors or the other categories of qualified investors, with indication of the identity of the latter;
- indication of any costs or commissions charged to the investor, including any expenses for the subsequent transmission of the orders to banks and investment companies;
- indication of every payment, expense or charge bearing on the subscriber in relation to the possible alternative system for transfer of the units;
- description of the methods for calculating the quota reserved to professional investors or the other categories of qualified investors, and procedures and terms for the publication of the information on the state of the adhesions to the offer;
- indication of the banks and investment companies to which the orders will be transmitted for the underwriting of the financial instruments offered and the description of the procedures and the term for the execution of the same, as well as the existence of any conflicts of interest concerning such banks and investment companies;
- information on the non-transferable account opened, on the date of the effective charge of the funds onto the underwriters’ accounts;
- information on the procedures for the return of the funds in the case of the legitimate exercise of the withdrawal or revocation rights, and if the offer is not completed;
- terms and conditions for the payment and the assignment/delivery of the financial instruments underwritten;
- information on the conflicts of interest in connection to the offer, including those deriving from agreements existing between the bidder and the portal manager, those who hold the control, the persons who perform managerial and supervisory functions and any professional investors and other categories of qualified investors, which have already underwritten the quota of the financial instruments reserved to the same;
- information on the execution, on the part of the bidder, of offers for the same financial instruments on other portals;
- the applicable law and the court of jurisdiction;
- the language or languages in which the information on the offer will be provided.
Lastly, the portal also needs to describe any activities connected to the offer performed by the portal manager.
e) Order management
Portal managers also have a form of best execution obligations, i.e. they need to adopt measures that ensure that orders to participate at the offer are
- processed quickly, correctly and efficiently;
- registered promptly and accurately; and
- transmitted with indication of the identity details of each investor, according to the chronological sequence by which they are received.
The portal has to provide information on of the banks or the investment companies, which provide the processing of the orders and the identification details of the account that holds the client money. In turn the banks or investment companies have to provide for the processing of the orders received via a portal manager and immediately inform on the relative results.
f) Operational risks, record retention and communication with regulators
The portal has to adopt an operational risk policy and respective controls regarding the identified risks. It also has to set up a system for a suitable back up.
Confidential information regarding the investors needs to be treated in compliance with the applicable laws and regulation.
All relevant documentation needs to be retained for 5 years, e.g. customer information, bidder and offer information as well as transaction orders and confirmations to the executing banks and investment companies, in electronic format or as hardcopies.
The Equity Crowdfunding Regulation also establishes a framework of ad-hoc communications with regard, for example, to changes in the portal’s management or structure. It further determines that portals have to file an annual report by 31 March of each year that portrays the activities performed and the organisational structure according to the scheme described above, which as well includes data on the portal’s activities, cases of operational interruption, and on received complaints and the measures taken to rectify these.
To conclude our description of the rules for equity crowdfunding in Italy, Consob has also made it clear that it has not overlooked the fourth party to equity crowdfunding in Italy, i.e. the banks and investment firms that execute the orders and handle the money. In order to make it clear that the regulator expects the same diligence of the same as with respect to their other activities, the watchdog has reminded them in an official communication that while managing online portals to collect capital for innovative start ups, they are providing investment services. As such banks and investment firms are required to observe the pertinent rules laid down in the Consolidated Law on Finance and in the related implementing regulations.
As said in the first part of this article, it remains to be seen if the latest amendments to the regulator framework of equity crowdfunding will help to undone the initial damage and only time will tell. However, if you have any questions or comments, please do get in touch with us at firstname.lastname@example.org