Lessons from Italy's Dive into Equity Crowdfunding

Alessandro M. Lerro |

Italy was the first country to enact retail equity crowdfunding regulations, but unfortunately, it resulted in some mistakes. It took an upside-down approach to legislation, which created problems.

Indeed, the first two years didn’t generate a high volume (just €3.3 million, and 12 deals funded, with €375.000 being the average deal), but some precious lessons were learned about the market and investors’ behavior.

Italian regulations 1.0 was properly designed for retail investors, expected to invest small amounts online. Instead, we found out that the average investment is €9,600, a size fitting sophisticated investors indeed. Though wealthy, they apparently aren’t acting under a professional VC/angel approach nor building shareholdings wallets, as 96.8% of them invested in one deal only (data from Crowdfunding Observatory, Politecnico di Milano School of Management); but this figure might depend on the offer, though still too small.

The interest from investors is strong, and deals have been carefully selected by the portals, as demonstrated by a monster 44% success rate. That’s big news for a country where VCs and angels invest less than €100 million per year.

One of the main bugs has been fixed by the legislators, who have started enlarging the categories of companies that can use crowdfunding for finance: innovative start-ups generate jobs and economic development, but it’s difficult and risky to evaluate them. Although tools remain reserved for companies dealing with innovation, now seasoned small medium enterprises and investing vehicles have been allowed to raise capital online as well.

The other main bug has just been fixed by CONSOB, the Italian securities and exchange commission, with a new regulation published on February 25th.

In the European regulatory framework (subject to the so-called MIFID regulation), when providing investment services, intermediaries must ask the potential client to provide information regarding their knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded. This is to enable the investment firm to assess whether the investment service or product envisaged is appropriate for the client, and eventually warn the client.

The bug in Italian regulations was that crowdfunding portals needed a bank or an investment company (i.e. a registered broker-dealer) to provide this assessment, bringing the investment execution offline.

Now, CONSOB’s new regulation allows registered portals to assess themselves whether an investment is appropriate, keeping the client engaged online in a fully digital process.

Thus, while in the USA all eyes are on FINRA and SEC’s final Title III private offering rules, Italy is launching its equity crowdfunding 2.0; focus is still on the real crowd, but investment will be much easier for professional and sophisticated investors.

Alessandro M. Lerro is an Italian financial attorney specialized in innovation and new technologies.

Chairman of the Italian Equity Crowdfunding Association, Member of KoreConX Advisory Board, Lerro is one of the most well known crowdfunding experts and a leading European lawyer in this area.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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