Consob (the Italian Securities Commission) has published a first draft of the equity crowdfunding regulation, following up on a specific law issued by Government Monti last year, that legalizes the matter, giving the commission mandate to issue promptly the regulation. Once it will be completed and adopted, ‘innovative startups’ (as defined by the law) and ‘social innovation startups’, will be able to raise capital on the Internet: conducting mini-IPOs online on authorized portals, in order to raise up the the maximum limit of 5 million euro.
The regulation sets criteria, operational issues and caractheristics that such portals and their managers shall have. The way they should operate and rules of engagement with investors. Additionally, it defines issues to which issuing startups will have to comply to, information to be provided and rules for completing a fundraising campaign. In issuing the regulation, Consob aims to balance the need for setting conditions that will allow the market to develop (for example in terms of compliance and cost for crowdfund managers) with the necessity to protect investors. It is a delicate issue by itself, even more if we consider that in Italy equity crowdfunding is limited to innovative startups, an high-risk type of investment that will be mostly offered to a large number of non-professional investors.
It must be pointed out that the law – in order to reduce the overall market risk – has requested that startup must have on board a professional investor to access crowdfunding. It is furtherly specified that at least 5% of the same financial instrument offered to crowdfund investors must be subscribed by a professional investor: a bank foundation, a financial company specialized in innovation and autorized incubators. It has been also provided a statutory requirement for startups to raise money in crowdfunding on a tag-along right in favour of crowdfund shares, if the majority stake (owned by founders) want to sell their shareholding.
Finally, it has been decided that portals will have to transmit purchase orders to Banks or financial institutions that are authorized to operate on the stock markets. All of these mechanics aim to soften risk and build a safer investment environment. It will be relevant not only the reputation of the portal and the quality of the startups raising capital, but also the track record of professional investors that play in this space.
In order to operate a crowdfunding platform, the managment company will have to comply to specific criteria in terms of criminal record and professional track record of managers and shareholders involved. Article 14 specifies the obligations of correctness for portal managers which will have to operate with diligence and transparency, avoiding potential conflicts of interests that could have a negative impact on investors and startups. The regulator has chosen to build investor protections on three levels of mandatory information: about the portal, the investment in innovative startups and the specific offering, for which it has been defined and annexed standard model.
All documentation will be digital, such as all authorization procedures and information flows. Portal managers will have to setup and maintain their respective platforms and making them accessible, providing clear and correct information about the offering, while avoiding promoting specific campaigns. The manager will have to keep all information updated and available for at least one year from the offering, while keeping 5 years of digital records.
From the moment of a subscription to the time when the order is completed, if additional relevant information arises about the issuer or the offer, or if some material mistake is identified, the portal will have to promtly inform investors, that will have a 7 day period to eventually cancel their orders. Portals will be allowed to use multimedia information for investors, that will have to specifically declare of having understood all information before actually being able to subscribe. Also, Consob will create a specific ‘investor education’ section on its website.
It has been US President Barak Obama to put crowdfunding into the spotlight with his JOBS Act, also taking notice of what has been going on on the Internet in the past few years, particularly in America. “Today, you can only turn to a limited number of investors – including banks and wealthy individuals, to raise capital.” Said Obama. “Legislation eight decades old, make it impossible to invest for the rest. But a lot has changed in the past 80 years, and it’s time we change our laws.”
We must give credit for Economic Development Minister Passera and his ‘Restart Italy’ task force to introduce in Italy, among the first globally a new financial instrument that in the next years will allow tens of thousands of companies to start all over the world, generating hundreds of thousands new jobs.
The Internet is bringing democratization of finance, allowing entrepreneurs to raise capital directly online and if Consob will keep up the quality and speed of work in executing the regulation, it would be possible to see the first equity crowdfunding campaings in Italy before next summer.
The law could be perfected, however it is here, and it is being implemented right now. In a few months there will be no more excuses for entrepreneurial talents that believe to have the ideas and capabilities to really build a successful startup in Italy. Most of crowdfunding campaigns, are resolved within the social networks of the issuer and its founders. More than ever the team will be a key success factor, along with an attractive solution and execution plan. Because will be startups that will have to build consensus online around their offerings.
If all of this works out, 2013 might be remembered in the future as the ‘year of startups’ and a new idea in our country: focusing on growth, entrepreneurship and competitiveness while believing in a different future, which includes in the picture new innovative leading companies. Born, built and funded out of Italy.