The start up reality
It is an open secret that Italian production is mainly based  on small business. It is now known that these companies experienced many difficulties in obtaining financing from banks, at the onset of the crisis; the phenomenon of the credit crunch, and the unwillingness of lenders to loans made to businesses, are both expected to continue at least for the whole 2014. Even the newly-formed companies would face the same uncertainties and difficulties and above all the so-called innovative start up, to which the Ministry of Economic Development is devoting great attention in order to foster the growth of the Country.
If the older generation found  its jobs at the conclusion of studies, future generations will have to invent work. Many Nations are equipping themselves with ambitious intervention programs aimed at strengthening and modernizing their  innovation ecosystem, aware of the role played by innovative start up in the economic system. Italy adopted measures to encourage the creation and development of innovative start up with Law Decree 179/2012, promoting a renewed approach to public support for entrepreneurship. In fact, Italian legislator believes that for every new job in innovation, at least four additional jobs are created indirectly. Therefore the world of start up would become the driving force for growth in production and business of the Country, although, at least for the moment, not everyone seems to have knowledge of the instrument offered and of its enormous significance.
Therefore, the favourable system conditions to the emergence and the development of innovative start up would make a significant contribution to economic growth and to employment, especially the  youth one. In addition, a hospitable country for innovative companies, domestic or not, has a better chance to attract financial and human capital from abroad, increasing its competitiveness and attractiveness on the international markets. On the basis of these considerations and considering such growth prospects, the Law 221/2012 introduced into Italian regulation the definition of innovative enterprise, providing in favour of the latter new instruments  and measures to support the entire life cycle of company, from the incorporation up to the stages of growth, development and maturation. In addition to the exceptions to the current company law, the above mentioned regulation has provided for incentives for investment in venture capital and especially innovative instruments for raising capital , such as the equity crowdfunding.

The equity crowdfunding

Italian Legislator has envisaged  the equity crowdfunding as an instrument that can facilitate the development of innovative start up through rules and funding arrangements able to exploit the full potential of the web. The term “crowdfunding” indicates a system by which everyone can give sums of money, generally of any amount, to finance a project or initiatives of various kinds using some online platforms; through the funding to the chosen project, customers can acquire shares of the funded company and consequent economic and administrative rights within the same company.
In most of the Countries where  crowdfunding portals operate, the phenomenon has not been subject to a specific regulation, but typically it is ruled within the scope of existing disciplines. However, Italy is the first country in Europe to have an organic and specific legislation on equity crowdfunding. In fact, the government delegated to the Consob the task to regulate some aspects of the phenomenon with the main objective to create a reliable system that is able to protect even small investors and attract their confidence in investing. Consob adopted the new regulation on June 26th , 2013; however, regulating mechanism did not find  favour with those who did not evaluate the Consob regulation as a positive factor, but rather as yet another attempt to impose bureaucracy on  the system and check the portfolios of Italian people in a sector whose prerogatives should be slenderness  and ease of investment.

The investors, large or small, in order to decide whether to invest in financial instruments issued by innovative start up, are obliged to consult some platforms previously authorized and supervised by Consob that facilitate the collection of risk capital of innovative start up and that provide to investors information about start up and individual offers. These portals are entered in the register of Consob and are targets of a discipline softer than the one dictated to traditional intermediaries. However, these platforms cannot hold sums of money belonging to investors nor directly execute orders for subscription of the securities offered on its portals, but thay must transmit them to banks or to SIM (asset management companies). The platforms cannot carry out financial advice in relation to investors.

A particular form of protection is provided in respect to retail investors (i.e. those other than banks, investment firms, insurance companies) which must follow a true "path of conscious investment", by filling out an online questionnaire, by showing that they have taken note of the information provided and that they understood the features and risks of investing in innovative start up. Once the investor decides to invest in a start-up, the portal must transmit the order of participation in a bank or investment firm who will refine the underwriting of financial instruments and will collect the sums involved in an unavailable account in favour of the issuer.

In order to foster the development of crowdfunding and facilitate  access to finance for innovative start up, the Consob Regulation provides for an exemption from the application of the legislation on investment services (MiFID profiling) for investments that are overall below  500,00 € per each order issued  by individuals and € 5.000,00 per each order issued by companies. Currently, the Consob registry has three licensed operators and one firm of investment services.

Protections for consumers and characteristics of the investments.

It may take a while between the moment when investors participate in an offer on a portal and the time they will actually possess the financial instruments, and sometimes the offer may not be successful. According to the Consob Regulation is necessary that at the closing of the offer at least 5% of the securities offered has been signed by professional investors and that they comply with all other terms of the bid. It is appropriate for investors to take knowledge of the right of cancellation and that the portal provides the conditions for its exercise. In fact retail investors have the right to change their mind within 7 days from accession by a communication to the portal or within 7 days from the date when new information (new fact or reporting to a clerical error) are brought to the attention of investors. In both cases, the loans will be repaid.

The investment in innovative start up has special characteristics due to the fact that a start up is something completely new, with no results to be presented or dividends to be promised. First of all, it is not easy for a newly formed company to produce profits in the early years of life. In addition, the discipline of start up has placed a ban on the distribution of profits. Any profits will be reinvested in the company by increasing the value of the investment in the event that the start up will achieve positive results over time. However, those who invests in start-up will qualify for favourable tax treatment.

The Italian rules on equity crowdfunding allows investors to subscribe only equity capital of innovative start up; investors become partner of start up and then can participate in full economic risk inherent to all business ventures. The risk that the project will not be a successful business is even greater than the one belonging to  companies operating in a given sector for some time; it also affects the risk for investors to lose the entire investment. For potential investors would be advisable to diversify investments; in view of its high-risk, investment in innovative start up should be a small percentage of the overall portfolio invested in more traditional activities (securities, bonds, shares, mutual fund shares).
Particular attention should be paid to possible changes in corporate control. In this case, it would be appropriate to ensure that the start up bylaws  envisage in favour of the investors the right to withdraw or co-sale (so-called tag along) right, stating  terms and conditions applicable in the event of a change of control.

Despite the above, and for now only potential, critical issues of investment, the 2014 will be for Italy the year of the equity crowdfunding. The digits of crowdfunding in Italy begin to be important: in our country 54 crowdfunding platforms operate; in addition, the collection of social funds online for shared projects has passed the halfway point of the 30 million euro. The platforms have received 50,000 project ideas. It was published about a third of these, of which 35% were actually funded. Only in 2013 were collected U.S. $ 5 billion through crowdfunding platforms worldwide. Crowdfunding is a growing trend and can serve as a resource for start up and companies.

The favourable ecosystem can be a powerful impetus to the growth of capital-raising model that will complement the traditional mode of operation of venture capital funds or business angels. The first offerings begin to populate the currently active portals, arousing an increasing interest on the part of the public users. However, the real news concerns the possible extension to all small and medium-sized enterprises of equity crowdfunding and apparently the Ministry of Economic Development is planning to boost the audience of companies that can access to the web windows made available by managers of portals. Finally, it should be noted that at Consob website there is a special section in English. In fact Italy adopted an open equity crowdfunding model that allows all the investors of the European countries to invest through this new platform.

Avv. Gianluca Bellino