Samstag, 6. April 2013

Italy Leads The U.S.

Equity Crowdfunding Regulations

The Italian CONSOB (equivalent of the SEC) has published a proposed set of rules around equity crowdfunding for public discussion until April 30th. Italy is the first country in Europe enacting specific legislation adressing equity crowdfunding. It seems to be well-thought out. Daniela Castrataro, co-founder of twintangibles:
CONSOB has used the “wisdom of the crowd” and listened to suggestions and criticisms received through the questionnaire, which was part of a broader and more detailed impact analysis on crowdfunding. The result is a good example of evidence-based regulation as well as crowdsourced legislation.

CONSOB states that this Regulation is to “enable the development of an initial phase of ‘testing’ of capital raising through online portals, with the main purpose of promoting the development and growth of the country.” In a country where the awareness of crowdfunding is still low, it is essential to consider this regulation as part of testing process for the raising of capital through online portals.

The main new provisions are:

- Individuals and institutions that wish to run equity crowdfunding operations must apply to be included in a special register that will list all the equity crowdfunding portals. A special section will be reserved for existing banks and financial institutions/intermediaries that inform the CONSOB an interest in becoming crowdfunding platforms. The register is published online and available to all.

- In order to be included in the register, one must meet the integrity and professionalism requirements set by CONSOB, as normally required for intermediaries operating in the financial markets (banks, investment firms, and other intermediaries). Only subjects who can prove fairness in business and financial dealings and adequate professional skills can in fact ensure the efficiency and the optimality of the business operations of a crowdfunding portal. Among the professional requirements, there is the ability of the platform owner to assess the business plans submitted by the startups, from an economic and financial point of view, rather than a technological-innovation one. The CONSOB is required to decide within 60 days of receiving an application if a platform meets the necessary requirements to be admitted to the register.

Daniela Castrataro, Twintangibles
- The operator must provide the so-called retail investors (i.e. non professional investors) with a set of mandatory information in order for them to be able to make informed decisions. This means that a crowdfunding portal must display the risks connected to investment in startups (eg. loss of capital, illiquidity, rarity of dividends, dilution, diversification); information and practical instructions about the right of withdrawal; the periodicity and the methods with which they will be provided with information on the status of pledged, the amount subscribed and the number of investors; fees and costs charged to investors; the applicable law and the competent court; the language or languages in which they are provided with the information concerning the offer. The retail investor must demonstrate that they understand the nature of the activity of the portal, the nature and specificity of the financial instruments issued by innovative start-ups and the relative risk of each offer.

- Only innovative startups (currently just over 300) can raise money through a crowdfunding portal. This is probably the biggest limitation of the Italian crowdfunding regulation. To qualify as an innovative startup, the company has to meet the following requirements: the share/quota-holders (individuals and not entities) shall hold on the date of incorporation and for the following 24 months the majority of quotas/shares and majority of voting rights of the ordinary share/quota-holders’ meeting; the company has been incorporated and has been active for a period no longer than 48 months; starting from the second year of activity, the total value of yearly turnover shall not exceed €5 million; the company does not distribute profits; the company shall not result from the merger, division or transfer of business from a going concern; and the exclusive or prevalent business scope of the company is the development and commercialization of innovative products or services with high technological value. The Start-Up Regulation also introduces the sub-category of the innovative start-up with social purposes.

- Each innovative startup can collect shares up to EUR 5 million.

- 5 percent of the totality of the shares offered is required to be taken up by “professional investors”, bank foundations, financial institutions for innovation and development or innovative startups incubators, before the offer is published.

- In order to protect retail investors, there is an obligation for innovative start-ups to include in their statutes or instruments of incorporation the so called tag-along right, thus guaranteeing investors a way out should the controlling shareholders sell their shares to a third party after the offer.

(Source: Twintangibles blog social media at work)