What is crowd funding? When a group of people come together and pool their money via the internet, mostly through social-networking websites, to support the initiatives or business ventures of other organizations, such a process is called crowd funding or crowd financing. Small amounts of capital provided by a number of individuals are used to finance a new business venture. The internet helps in making this process can seamlessly fast and smooth.
There are a large number of crowd funding platforms with around 450 of them already being used actively.
CrowdCube and Seedrs are examples of internet platforms. CrowdCube gives individuals the option of investing small amounts and directly acquiring shares in start-up companies and Seedrs works as a nominated agent to invest in new businesses. Websites also work as crowd funding intermediaries between businesses which need investment and potential investors. Such websites include Kickstarter, Sellaband and Indiegogo. Thus, individuals ought to choose a platform with due diligence on the basis of the type of project they which they wish to launch.
With the growth of crowd funding countries are starting to enact legislations on it because crowd financing involves high risk as many new business ventures fail.
CROWDFUNDING LAW IN ITALY – the DecretoCrescita
The Italian Security and Exchange Commission (CONSOB), the body of the Italian government responsible for regulating Italian securities market, recently passed a decree which legalizes equity-based crowd funding.
DecretoCrescita is the law in Italy which includes the new equity-based crowd funding. This Act includes several sections on helping entrepreneurs getting access to capital and making it easier for them to go through the bankruptcy process. The CONSOB has just passed this law.
Focus on innovative start-ups
With a minimum threshold of 5 million euros for a 12 months period, the focus is not on any kind of small business but on start-ups involving innovation and technology, if they meet the following criteria:
- They must be high technology innovative startups – the purpose of the business should include the development and commercialization of high-tech value products or services.
- At least 51% of the company should comprise of natural persons, i.e. a subsidiary of another company cannot look for crowdfunding. A corporate investor must therefore have less than 49 percent stake in a venture which seeks crowdfunding.
- There shouldn’t be distribution of profits.
- It shouldn’t have been in existence for more than 4 years.
- Their yearly output should be below 5 million euros.
- The business venture should not have been created from an M&A transaction.
Businesses meeting the above criteria will have to get enlisted under a special registry which would then entitle them to tax benefits and legal advantages.
Crowd funding platforms from any European country
Now, equity crowd funding in Italy is available to all European countries. As long as the main area of business and domicile of any European company is of Italy, equity crowd funding will be permitted to it, irrespective of the nationality of its shareholders. So, nationality will not work as a limitation on any non-Italian European company. As long as a company meets certain essential competence and reputation requirements and gets registered with the CONSOB, it can provide crowd funding platforms.
As a double check, even when a CONSOB registered crowd funding platform offers to make an investment it can be finalized only after it has been overseen by a CONSOB registered broker-dealer. This has been done to comply with the anti-laundering laws and the European Union.
How will the investment be regulated?
MiFID is a law across the states of E.U. which provides for harmonized regulation of investment services. For the equity-based crowd funding laws the MiFID Directive has dictated that the subscriber’s investment profile ought to match his propensity to risk investments. However, it will provide for exemptions in small investments- up to 500euros per investment and up to 1000euros per year.
The companies have been granted permission to offer special shares which will be accompanied with limited voting rights against extra economic benefits. So, the professional investors, such as public entities, broker-dealers, investment firms, banks, regulated financial institutions and large undertakings will need to own 5% of a crowd funding firm after the crowd funding. This works both ways because it is compulsory for each crowd funding to have a 5% stake subscribed by such professional investors.
Currently, the equity-based crowd funding law has been enacted only for technology start-ups, not to non-technology businesses. By limiting the crowd funding to innovative start-ups companies which are in the phase of development get the chance to get their business ventures launched. So, the crowd funding law in Italy has been made with the view of boosting the new start-up companies.
A company must be incorporated in Italy to benefit from the law.
In India, equitycrowdfunding is not feasible for startups – they must mandatorily list on a stock exchange if they invite equity contribution from the public, which is an expensive and cumbersome affair for an early stage business. SEBI (the securities markets regulator in India) has, however, facilitated the creation of a dedicated platform for listing of small and medium enterprises – unfortunately, it has not worked due to various drawbacks (as pointed out here).