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Last October, Italian lawmakers passed legislation called Decreto Crescita (Growth Decree), which, among other things, legalized equity crowdfunding in the country.
Since then, the Commissione Nazionale per le Società e la Borsa (CONSOB), akin to the Securities and Exchange Commission in the U.S., has been working out the regulations around equity crowdfunding. On Friday, CONSOB released the final version of the regulations, which will go into effect on July 27th. To find out about the finalized version of the legislation, we got in touch once again with Daniela Castrataro, co-founder of twintangibles, who explained the changes to the law that took place over the past several months and walked us through the law. The first half of our discussion went up yesterday, and the second half is below.
Anton Root, Crowdsourcing.org: How has this law been received by small businesses in Italy? Are they upset that they cannot get in on equity crowdfunding?
Daniela Castrataro, twintangibles co-founder: This is hard to say, because there’s not great awareness around crowdfunding. Of course, innovative startups now know about this possibility, but other companies and small businesses are probably not really [aware] of it at the moment. They are discovering it, [however]. I have gotten questions from people, asking if they can do equity crowdfunding, and I had to say no, because they are not an innovative startup. But at the moment, awareness is low.
It’s actually a good thing that it’s only for innovative startups at the moment, because we’ll be able to test and see how it goes. The sample size is small – 1,000 companies is nothing – so I don’t know how much we’ll see of equity crowdfunding in Italy. But in any case, there hasn’t been a lot of reaction from SMEs so far.
You mentioned it’s not up to the CONSOB, so it’s the Italian parliament, essentially, that would be the one to amend the law?
Yes, it’s not something that the CONSOB can do, it can only act on the regulation.
Can you briefly go over the amounts of money that people can invest per offering, both accredited and unaccredited?
Each innovative startup can collect up to five million euros. According to the MIFID exemption, a person can invest a maximum of €500 per offer, and €1,000 per year. All the other investments have to be passed through banks and payment institutions to be accepted.
I also wanted to ask, what’s the reasoning behind the five percent of the investment having to be from professional investors and other financial institutions?
Yes, and startup incubators too, which is actually very good. They already know the startups and help them grow, and finance them through equity. The reasoning behind it is protecting investors. If there’s five percent put in by investors, it gives a guarantee that the investment is worthwhile. I’m glad that they moved this from something that had to come before [the crowd invested] to something that could be done after, because I think if it was done before, it could have stopped a lot of innovative startups from raising funds through crowdfunding.
But, at the same time, I find it a bit too much. [Crowdfunding] should be open to anyone who wants to invest, without obligations about professional investors. But, of course, again, this is a very new matter for Italy and Italian regulators, and the market. The five percent [part of the law] actually came from the comments on the regulation, so it was a requirement that the market [asked for]. It’s to protect the smaller investors and people who don’t have a lot of experience in this market.
It would have been fairly straightforward if the first five percent had to come from professional investors, but is there a time limit within which this has to happen? Can a company, for example, get 95 percent of the funds and then get the rest a year later?
There are no time constraints specified in the regulation. The regulation only states that the offering has to carry with it a set of information in order to be published, including the time within [which] investments have to be made. So I guess it's the same for all investors – if the offering is up for 6 months, all investors have to make their investments before that deadline. This is a guess rather than a certainty, the regulation doesn't say anything precise about it.
Can you also talk about the “tag-along right” and what that means for investors?
In a few words, it’s a way of guaranteeing investors a way out, should controlling shareholders send their shares to a third party after the offering.
Do they have to sell their shares at that point, or can they wait?
No, it’s not an obligation.
Along similar lines, are there discussions around a secondary market for crowdfunded shares? Will people who own a stake in one of these companies be able to sell or trade it?
At the moment, it’s unclear. There hasn’t been much said about a secondary market, it’s something that’s missing at the moment in the regulations. The innovative startups, in any case, cannot distribute profits for a certain period of time.
I wanted to move on to the requirement that platforms must ensure that investors understand the risks – how is this going to look like? Will it be like Terms of Service now, where people check a box that says they understand and agree?
It’s probably going to be the same. That’s what the regulations say, but of course we don’t have any equity-based portal operating. But yes, the portal operators must make sure the investors know they’re making a risky investment.
Are the portals also the ones required to check who is an accredited investor versus an unaccredited investor?
As far as I can see, there's nothing specific about this in the regulation. It only says that portal operators must adopt measures in order to ensure that investments made towards offerings are managed and registered in a rapid, efficient, and correct way. Then they have to be transmitted to the banks or broker dealers who have to conclude them. I guess this is not really an issue because professional investors are defined in the regulation as professional clients defined in previous CONSOB's and Ministry for the Economy's regulations. So I guess they will just auto-certify as such on the portal, and then their orders will be finalized by banks and broker dealers who will have to comply [with] MIFID requirements. In this case, the exemptions for smaller investments are: €500 per offer and €1,000 per year from individual investors; and €5,000 per offer and €10,000 per year from legal entities.
What’s been the reaction to these laws from portals and companies that do qualify as innovative startups?
The reaction from the market has been positive. People, as I said before, were a bit unhappy about MIFID exemptions applying only to very small investments, €500 per offer and €1,000 per year. And again, the biggest criticism is that this is only for innovative startups. But operators are emerging very rapidly. We have already seven or eight equity-based crowdfunding portals ready to be included in the register and start their operations. An actual response from innovative startups isn’t there – or at least I haven’t seen it. I think the only thing to do at this moment is to wait and see what will happen after the summer.
September and October, I think, will be very interesting months for crowdfunding. I’m sure by the end of the month, we will already have a good number of [officially-recognized] equity-based platforms in Italy, and I’m very curious to see how they will interpret the regulation. Because even if the CONSOB made an effort towards transparency and openness, still Italian bureaucracy is not easy to understand. It will be interesting to see how they will actually put into practice the regulation and shape crowdfunding platforms under these laws. And then, we’ll see the response of the startups. The fact that incubators can be professional investors can give a push to this whole thing because they are connected with innovative startups, so there could be something coming from there. But surely, there is still a lot of education to be done in this area in Italy. It’s hard to make predictions.