Crowdfunding regulation across Europe: is the Italian regime a model for the other countries?

1. Date Arial Regular 14pt

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The Italian approach
100
DEGREE OF
REGULATION
0
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A brief introduction to the Italian régime
LAW 221/2012
CONSOB
REGULATION
• Introduces the amendments to the T.U.F. (Italian
Consolidated Financial Law)
n. 18592
• Allows the collection of risk capital for Innovative
Start-ups (including those with a social vocation)
through an online funding portal
• Establishes the requisites for operating as a
funding portal
• Defines the funding portal as the entity which
carries out that activity professionally and is
registered in the relevant register held by
CONSOB
• Defines the information obligations
• Allows the subscription of financial instruments
on payment of total sums of less than euro 5
million
• Establishes the rules for the conduct of the
portals
• Establishes the need of a professional
investor subscription for part of the offer (at
least 5% of the total offer)
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Main amendments to the Italian Consolidated Financial
Law
Article 30, Law 221/2012
• Article 1, paragraph 5 novies: introduces the definition of an online
funding portal for the collection of capital for innovative start-ups
• Article 1, paragraph 5 decies: introduces the definition of an
innovative start-up
• Article 50-quinquies: sets out the rules for the online funding portals
to comply with for the collection of capital
• Article 100-ter: defines the object of the offers for the collection of
capital by means of online funding portals
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Types of funding portal for equity crowdfunding
AUTHORISED BY LAW
• Investment companies and banks authorised
to provide investment services
• No preliminary investigations
• Advance notice prior to commencement of
business
OTHERS
PORTALS
• Entities that carry out on a professional basis
the business of online funding portals
• Application for registration in the register
• Investigations by CONSOB as to satisfactory
meeting of the requisites of reputation and
professionalism AND PROFESSIONALISM
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Innovative start-ups: obligatory requisites in order to be
enrolled in the relevant public register
MAIN REQUISITE
Production or sale of INNOVATIVE
PRODUCTS and SERVICES having A
HIGH TECHNOLOGICAL VALUE
• The company must not have been operational for more than 48 months
• The principal place of business / center of interest must be in Italy
• The total value of annual production must not exceed euro 5 million,
from the second year of business
• Distribution of profits must be prohibited during the facilitated period
• The company must not be the result of mergers/demergers of other
companies
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The process for the collection of the information relating
to the offer and the issuer
FUNDING
PORTALS
must
provide
investors
with
certain
specific
INFORMATION by means of the relevant
“prospectus” and for each offer
• Indications of the specific risks associated with the offer
• Description of the issuer and the business project
• Information on the company bodies and their composition
• Description of the financial instruments offered
• Description of the clauses contained in the articles of association to safeguard
the investors
• Description of the general conditions of the offer
• Indications of the quota subscribed by professional investors
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Obligation to provide information to CONSOB every year
by March the 31st (Annex 2, CONSOB regulation)
FUNDING
PORTALS
must
provide
CONSOB with a report on the business and
on the organization's structure which
indicates
• The process of selection of the offers
• The consulting services provided to the start-ups (which could cause
conflicts of interest)
• If it will provide periodic information on the results of the start-up
• If it intends to value the financial instruments acquired or report the prices
on those exchanged (is it possible to create an alternative market?)
• If it intends to provide mechanisms for the periodic exchange of
information between start-up and investors
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The liability of the funding portal, art. 13, paragraph 1 of
CONSOB Regulation
Obligation of DILIGENCE pursuant to article
1176 of Italian Civil Code
The funding portal has to perform its activity with
diligence, correctness and transparency
avoiding any conflicts of interest that might arise in managing the funding portal and
negatively affecting the interests of investors or issuers and
ensuring parity of treatment of the recipients of the offers that have identical
conditions …
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The liability of the funding portal, art. 13, paragraph 2 of
the CONSOB Regulation
Is the FUNDING PORTAL also subject to a
“prospectus obligation” ?
The funding portal makes available to investors:
detailed, correct, and clear manner that is not misleading and that is without
omissions, and
all the information regarding the offer that is provided by the issuer so that the
investors may reasonably and fully understand the nature of the investment, the
type of financial instruments offered and the risks associated with these and take
the relevant investment decisions knowingly.
However: «the information on the offer is not subject to approval by CONSOB. The
issuer is the sole party liable for the completeness and truthfulness of the data and
the information that it provides.» (Annex 3, CONSOB Regulation)
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Funding portals and standard rule of diligence
Is the CONSOB Regulation setting a
STANDARD RULE of due diligence for
FUNDING PORTALS?
• Verify the coherence of the business plan (internal resources, auditors)
• Verify the specific risks of the offer (legal and tax due diligence)
• Inform investors on the protections implemented against the risk of fraud
• Outline the structure of the offer
• Prepare the articles of association and rules of governance for the issuer
• Draft the best practices of behavior for the management of the investment after
the completion of the collection of funds
• Inform investors on the actions to be implemented if the issuers are not
complying with the funding portal rules (if any)
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Some practical examples of offers allowed by the Italian
régime (art. 26, paragraph 7 of Law 221)
AD HOC financial instruments can be
created by issuers to offer the investors only
certain RIGHTS
One could imagine financial instruments with:
•Voting rights limited to specific issues
•Voting rights that are not proportional to the holding itself
•Right to subordination in the losses
•Privilege in the distribution of profits (within the limits provided by Law 221)
•Right to withdraw connected with the occurrence of certain events concerning the
issuer
•Right of co-sale in the case of change of control
•Obligation to purchase the quotas on the part of the new majority shareholder
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Crowdfunding vs Crowdbanking ….
Art. 100 ter of Italian Consolidated Financial
Law requires CONSOB to establish rules to
secure the subscription of offers by
professional investors
As a result art. 24 of the CONSOB Regulation
•requires, as a condition subsequent to the closing of the
transaction, that at least 5% of the offered securities are subscribed
and paid by professional investors
•Banks, banking foundations and start-up incubators are included
amongst the professional investors category
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Breaches of the Regulation and relevant penalties (arts.
22 et seq)
BREACHES
PENALTIES
• Offers regarding a NON innovative
start-up
• Falsification of the signature of the
investor
• Appropriation of third party monies
• Suspension of business (max of 90 days),
for breach of rules of conduct (chapter III
of the Regulation)
• Holding of financial instruments of
third parties
• Cancellation from the register for the more
serious violations
• Transmission to CONSOB of false
information
• Fines from euro 500,00 to euro 25.000,00
• Transmission of orders that have not
been authorized by the investor
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The services offered (before and after the completion of
the investment)
CONSOB Regulation suggests BEST
PRACTICES concerning the services
following the investment completion
• Make available to investors all the documentation and information
received from the issuer with a certain frequency
• Allow investors to present questions to the management and to receive
answers in a dedicated context
• Timely inform members of the terms to exercise their rights, as resulting
from the signed documentation
• Set the pricing of the title
• Create an alternative market for exchanges (MTF) ?
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The services offered (before and after the completion of
the investment): what do foreign platforms do?
CROWDCUBE: prepares THE LEGAL AND
CORPORATE DOCUMENTATION
in
collaboration with the lawyers acting for the
majority shareholder
SYMBID: has created the inner circle, a
media space where the entrepreneur and
investors EXCHANGE INFORMATION after
the collection of funds is complete
SEEDRS: carries out a DUE DILIGENCE on
the offering company and REPRESENTS all
the investors in their relations with the
founding members
ALTERNATIVA:
offers
crowdsourcing
services (before) and crowdtrading services
(after) in the form of an MTF MARKET
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Where does Italy stand compared to other countries?
SOONER
TIMING OF THE
REGULATION
LATER
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USA
Dedicated regulation: YES (equity)
JOBS Act
Waiting for SEC and FINRA
regulation
Main principles set forth under the JOBS Act
• Funding portals must be registered with SEC and FINRA
• Offers threshold equal to 1 million USD per offer per year
• Single offer threshold equal to
2.000,00 USD or 5% of salary up to 100.000,00 USD earnings per year
10% of salary above 100.000,00 USD earnings per year
• Drafting of a specific prospectus to inform investors
• Limits crowdfunding offer to domestic issuers
• One year lock-up period for the sale of the securities by the investors
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UK
Dedicated regulation: COMING SOON
FCA to issue a draft regulation soon
Enforcement expected in April 2014
Current Status:
Equity based crowdfunding
• Funding portals must be registered with FCA or an FCA authorized firm must
approve the financial promotion
• Conducting a regulated activity without authorization is a criminal offence
• No prospectus is required if the offer is below 5 million EUR per year
Lending based crowdfunding
• Not treated as a regulated activity, but subject to regulation from 1 April 2014
• To be regulated by FCA
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FRANCE
Dedicated regulation: NOT YET
September 30, a draft regulation has
been issued for consultation period
(ending November 15)
Main features of the draft regulation
• Regulation dealing with equity and lending based crowdfunding platforms
• Creation of a new category of advisers operating as portals offering equity and
debt instruments
• Equity offers allowed to a maximum of 300.000,00 EUR per issuer per year
• Debt offers allowed to a maximum of 300.000,00 EUR per issuer per year, if the
loan is made by more than 20 lenders
• Exemption from payment services rules applicable to portals managing up to 3
ml euro per months (no Passport to operate in other EU countries)
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SPAIN
Dedicated regulation: NO
Not known if and when a regulation will be
issued
Current Status:
Equity based crowdfunding
• Funding portals must be registered with CNMV, or are allowed to operate under
Royal Decree 217/2008 on the legal régime for investment services firms, as a
collective investment scheme
Lending based crowdfunding
• Lending portals acts as financial intermediary and are subject to Act 2/2009
regulating consumer contracting loans
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GERMANY
Dedicated regulation: NO
Not known if and when a regulation will be
issued
Current Status:
Equity based crowdfunding
• Funding portals must be registered with BaFin
• Exemptions from registration for funding portal offering only silent-partnerships
• Prospectus required if the offer is above 100.000,00 EUR per year
Lending based crowdfunding
• Funding portals must obtain a license under the German Trade, Commerce and
Industry Regulation Act
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THE NETHERLANDS
Dedicated regulation: NO
Not known if and when a regulation will be
issued
Current Status:
Equity based crowdfunding
• Funding portals must be registered with AFM
• Issuer’s offer of instrument is subject to FSA regulation, if exemptions are not
applicable
Lending based crowdfunding
• Funding portals must be registered with AFM and are subject to FSA regulation
and consumer credit licence
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SWITZERLAND
Dedicated regulation: NO
Not known if and when a regulation will be
issued
Current Status:
Equity based crowdfunding
• Funding portals must be registered with FINMA if holding funds
• Under Swiss legislation it is unclear if the Banking Act applies to offer of securities
Lending based crowdfunding
• Funding portals are outside the scope of CISA if some restrictions apply to their
activity (avoid accepting funds from investors and granting loans to company)
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BELGIUM
Dedicated regulation: NO
Not known if and when a regulation will be
issued
Current Status:
Equity based crowdfunding
• Funding portals cannot offer securities to retail investors
• Still under discussion if equity crowdfunding is a financial regulated business
(probably yes)
• Prospectus required if the offer is above 100.000,00 EUR per year
Lending based crowdfunding
• Banking Act and Consumer credit legislation applicable to lending platforms
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Can we see any common guidelines?
Equity based regulation: NO
Lending based regulation: NO
Equity based crowdfunding
•Funding portals are usually required to REGISTER with the NATIONAL
FINANCIAL AUTHORITIES in order to be allowed to offer securities
•Prospectus THRESHOLD varying materially
•UNCERTAINTY on laws and regulations applicable
•Multilateral Trading Facilities are subject to financial authorities licensing
Lending based crowdfunding
•Banking and consumer credit legislation applicable to lending platforms
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Exploring the added value of potential EU action
CONSULTATION DOCUMENT
3 OCTOBER, 2013
CROWDFUNDING IN THE EU
Scope of consultation
•UNCERTAINTY on laws and regulation applicable in Member States
•EU action, including soft-law measures to promote Crowdfunding in Europe
•Effort to develop ALTERNATIVE forms of financing
•200 platforms operating across Europe in 2012
•Protection from FRAUD
•Risk of Dilution and difficulties in exercising shareholder rights for the investors
•IPR protections for issuers
•Anti money LAUNDERING protection
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To read more on this topic
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29. Grazie
Thank you
Osborne Clarke
Umberto Piattelli
Partner,
Milan
umberto.piattelli@osborneclarke.com
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