Equity based crowdfunding, generally speaking, is a system that enables investors to fund a company, generally a start-up or a small to medium sized enterprise, in return for equity, usually through the internet.
A comprehensive piece of legislation was approved in Italy in 2012 (D.L. no. 179 of 18 October 2012, so-called “Decreto Crescita 2”) aimed at regulating the equity crowdfunding phenomenon. This law, at first, allowed access to crowdfunding only to companies qualified as innovative start-ups. Subsequent regulatory interventions allowed crowdfunding access also to social enterprises but, above all, to all SMEs (not just the innovative SMEs). They also introduced the possibility to undertake collective investment (i.e. Italian OICR), and for companies investing mainly in innovative start-ups/SMEs to place their capital online through the equity crowdfunding portals.
Although this legislation still presents some elements of rigidity, it has evolved significantly in order to adapt to market requests.
It’s interesting to note that the collection of financial capital through the internet presents many similarities with Initial Coin Offerings (ICO). ICOs have had resounding worldwide media success in the last few months, even though they encountered some regulatory misfortunes. In fact, in some jurisdictions this kind of capital raising has been prohibited (for example in China and South Korea).
An Initial Coin Offering (ICO) is a type of crowdfunding through which an entity places on the market a future cryptocurrency (coin or token) in return for a cryptocurrency already existing (such as Bitcoin) to finance its project, usually described to the public in a white paper. Those who adhere to the ICO and purchase a cryptocurrency bank on the hope that the underlying business will be successful and that the cryptocurrency will appreciate, in order to obtain a profit when the currency is later sold on the market. In ICOs the funding could also be exchanged for an equity token (holding an interest in the issuing company) or a utility token (currency with secondary functions that usually allows benefits to be obtained on the platform financed).
Given the analogous purpose of ICO and equity crowdfunding – both being systems for collecting risk capital for start-ups and small businesses outside regulated markets – and given the total lack in Italy, as of today, of specific regulation dedicated to ICOs, we considered whether the Italian crowdfunding law, briefly described below, could be a potentially useful tool to provide a regulatory framework also for ICOs.
Italian crowdfunding legislation
Equity crowdfunding portals
The “portal” is the online platform which has as its exclusive purpose the facilitation of the collection of risk capital by the investors. The portal is a website with the role of a mediator between the issuing company and the investor. The offer of the financial instruments to the public can be carried out exclusively through one or more registered and regulated portals.
The portal’s manager ensures that, for each raising campaign, the amount necessary for completing the order is available in the account dedicated to the investor opened in the banks and in the investment firms to which the orders are communicated.
The subscription and the subsequent disposal of shares representing the capital of the issuing company may be carried out through intermediaries authorized to provide investment services purchasing the shares in their own name and on behalf of investors or buyers who adhered to the raising campaign through the portal.
Crowdfunding campaigns are carried out publishing specific offers on website portals, the “online shop window”, through which the issuing company offers a “risk capital instrument” to investors, i.e. quotas or shares having specific rights.
The investment takes place against the investor’s assignment of quotas or shares with special rights that make the investment “desirable”. The practice is to approve a capital increase excluding the option right for existing shareholders.
Cross border crowdfunding
Italian law regulating crowdfunding applies exclusively to companies with registered office in Italy or in a European Union country or in a country party to the Agreement on the European Economic Area, as long as they have a production site or a branch in Italy.
The European Commission has expressed its intention to submit a proposal concerning EU framework on crowd and peer to peer finance during the first months of 2018. To this end, a public consultation was launched focusing mainly on two themes:
- cross-border crowdfunding, which consists of carrying out crowdfunding activities outside the country’s borders, without requesting specific authorization in each European country; and
- implementation of an effective common risk management framework to mitigate the risks relating to investments in crowdfunding campaigns.
The Italian legislation on equity crowdfunding, in any event, does not prevent foreign companies from accessing the Italian portals. The condition of having an Italian fiscal code, previously required for the registration on an equity crowdfunding portal, further to a very recent regulatory intervention, is no longer required for foreign residents, therefore making easier for these operators the access the Italian market.
Italian crowdfunding legislation could be a useful platform and starting point to think about ICO regulation. The key issue is the regulation and management of cryptocurrencies, including the possibility of creating restricted accounts in which the transfers of cryptocurrencies are tracked via the blockchain platform. This would have the added benefit of facilitating the dialogue between the banking industry and blockchain technology helping Italian operators accelerate their Fintech presence. Tax and regulatory issues related to cryptocurrencies of course need to be assessed.
Stefania Lucchetti , Pietro Boccaccini and Alessandro Morleo
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