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Protections Offered to Investors Under Italy's Equity Crowdfunding Law
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editorial

Protections Offered to Investors Under Italy's Equity Crowdfunding Law

Editor's Note: Alessandro Lerro, a lawyer, writes in to explain how the recently-passed Italian crowdfunding laws protect investors. 

The broad protections offered to investors in the Italian equity crowdfunding law show Italian legislators’ main interest in the new regulation. It could be a useful example for other countries considering national crowdfunding rules around the world.

Indeed, investors’ protection is perhaps excessive, but equity crowdfunding is a risky business, and this legal framework is acceptable enough for all the industry stakeholders.

Related:
- A Look at Italy's Recent Crowdfunding Laws [Part I] and [Part II] 
- 2013CF-L'Industry Report sul Crowdfunding [Italian Version]

The 2012 equity crowdfunding law, recently implemented by CONSOB (essentially the Italian Security and Exchange Commission) Regulation N. 18592, offers a complete framework applicable to any crowdfunder, regardless of his or her nationality, domicile or place of business, provided that the crowdfunder is investing through an equity crowdfunding platform based in Italy.

Also, the target company may have varied origins: for example, we can have an English company incorporating a startup in Italy and offering its equity on the web; crowdfunding may be open through a Canadian platform based in Italy; crowdfunders might come from the U.S., China, Australia, Brazil or wherever in the world. Every crowdfunder enjoys the same protection regardless of his or her nationality.

The equity crowdfunding law aims to grant investors the maximum protection available through a number of rules and principles, among which:

  • crowdfunding platforms must be registered with CONSOB and meet some reputation and competence requirements;
  • a minimum 5 percent stake of each crowdfunding raise has to be subscribed by a professional investor by the end of the offer (professional investors are those defined in the CONSOB regulation);
  • any existing shareholders agreement must be notified to investors;
  • CONSOB has the supervision of any crowdfunding activity and is entitle to impose penalties.

Beside those general rules, equity crowdfunding is based on the principle that any investment offered ought to be finalized through a CONSOB-registered broker-dealer, to comply with the E.U. Markets in Financial Instruments Directive (MIFID), provided that the subscriber’s investment profile matches his proclivity to risk investments.

While the JOBS Act gives an investment cap, the Italian law sets no personal investment limit for investors. Nevertheless, for small investments (up to 500€ per investment and €1000 per year, for individuals; ten times these amounts for companies) a simplified process is provided:

  1. the broker-dealer rule does not apply, thus the platform is allowed to accept the investment without the assistance of a broker-dealer;
  2. the MIFID procedure does not apply, thus there is no subscriber’s profiling and proclivity to risk assessment.

Investors shall also fill out some questionnaires giving evidence that they understand the risks of equity investments and that their personal estate will be not compromised.

Moreover, investors are granted a set of rights to exit the investment in the following cases:

  1. Retail investors, bank foundations, and registered incubators are granted a seven days withdrawal right under rule 13.5 of the CONSOB Regulation: they can just change their mind and withdraw without giving any reason or explanation, and at no cost. This right ought to be granted and secured by the crowdfunding platform, which will require target companies to accept that investment contracts remain suspended for a 7 days term.

    In the European legal framework, this kind of withdrawal right recalls consumer protection (i.e. Directive 2011/83/EU); nevertheless, here it is not limited to consumers.

  2. Retail investors, bank foundations, and registered incubators are entitled to waive the investment under rule 25.2 of the CONSOB Regulation, if something new happens or a material mistake is discovered that influences the investment decision. Such prerequisite must occur after the investment, but before the offer is closed. The waiver is allowed for a maximum 7 days term from the relevant news. Other professional investors – as defined within the CONSOB Regulation – are not entitled to such waiver.

  3. The third protection is offered by rule 24.1.a): retail investors are entitled to either a withdrawal right or a tag along right, if the founding shareholders sell the business or anyhow waive the control of the company. Companies must enact such rights in their statutes before being admitted to crowdfunding.

    The statutes must allow the aforementioned rights for the whole term in which the company benefits from the innovative start up status and for no less then three years. >Professional investors, as well as bank foundations and registered incubators are excluded from this protection and need to eventually negotiate their own shareholders agreements.

  4. Outside the equity crowdfunding law there is a further protection, dictated by the Consumers Code: any investment contract stipulated by a consumer through the web is subject to a 14 days suspension. During this term, any consumer is entitled to a withdrawal right without giving any reason or explanation. Any violation or disruption of consumers’ rights might be fined and will be ground for the invalidity of the investment contract under the Consumer Code.

Should a withdrawal right be exercised, the crowdfunding platform ought to promptly reimburse the investment, though the platform is not a party to the investment contract. It is one of several services that crowdfunding platform could start offering thanks to the equity crowdfunding law.

Interestingly, transaction costs (i.e. credit card commissions, wire costs, etc.), that could have a notable impact on platforms’ accounts, are subject to different regulations:

  • should the withdrawal right be exercised under the Consumer Code (within 14 days), the crowdfunding platform is entitled to deduct costs;
  • should the withdrawal right be based on rule 13.5 CONSOB Regulation (within 7 days), no cost deduction is allowed and the full amount paid by the investor shall be reimbursed;
  • nothing is stated for the waiver under rule 24.1.a) of the CONSOB Regulation.

Investors’ protection might appear excessive, but the parties involved, including target companies and platforms, require a clear set of rules. Indeed, the initial equity crowdfunding experiences demonstrate that the lack of regulation does not make crowdfunding easier.

A well-regulated system can be a big advantage in developing an equity crowdfunding culture, building trust, and approaching the balance of the interests involved.

Alessandro M. Lerro is an Italian lawyer, dealing with new technologies, venture capital, M&A and crowdfunding. He is a regular author, blogger and speaker in workshops and seminars. You can find him on Twitter @alessandrolerro; for more on crowdfunding laws in Italy, check out www.lerro.it.

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