Online capital raising: risks of “equity crowdfunding.”

More and more often it is heard about capital raisings, in equity and debt, carried out by companies and privates, using crowdfunding platforms or peer to peer loans. The use of these instruments should be careful because in Italy there are several rules governing online capital raising , the violation of which can lead to responsibilities, even of criminal nature.

Therefore, it is useful to clarify the above regulations and, in particular, the conditions and limits for accessing these innovative investment instruments.
The word crowdfunding is a neologism born from the necessity to identify a new and developing phenomenon. It represents the case where a number of people (the “crowd”) funds business projects or other activities through online portals, investing sums of money and sometimes receiving a reward in exchange.

Crowdfunding is defined “equity-based” when, after an online investment, the investor is paid with shareholdings that give him patrimonial and administrative rights.

In the European and International framework, Italy has been a pioneer in equity crowdfunding (1) regulation, as an innovative way of funding companies, differing from traditional channels for the prevalent participation of non-professional investors (so called “crowdfunders”) and for the use of online platforms, where supply and demand meet.

In particular, for each equity crowdfunding operation there are a issuing company, an investor and a portal operator, which cooperate into an online platform -so called “virtual square”- whose exclusive purpose is the facilitation of the raise of capitals from the “crowd” (2).

 The current possibility to access equity crowdfunding, and, therefore, the capital raising, through online campaigns, on authorized portals, is recognized to the following issuers:

1. small and medium size enterprises (3) (here in after, SMEs) constituted as Shares-based Companies or Limited Liability Partnerships, regardless of their date of constitution, the innovativeness of their corporate purpose and their business (4). Innovative startups (5) and innovative SMEs are also included in this definition (6);
2. undertakings for collective investment (so-called “UCIs”) and the other corporations that mainly int in SMEs.

The financial instruments potentially offered in these online portals are: equity instruments (shares and quotas (7)), quotas of UICs that invest mainly in SMEs and obligations or other debt instruments (8).

The Italian legal system provides, towards investors (ante closing) or investor partners (post-closing), specific instruments of protection, among them:


1. the right of revocation of the acceptance of the offer , in case of “new fact” or “material error” about information on the web platform;
2.  the right of withdrawing the acceptance, without any expense, to exercise through communication to the operator, within seven days from the date of the same acceptation.
3. the right of withdrawal from the company and the tag along rights (i.e. the right to sell their participation in case of the business partners, who have the control of the issuer, decide to transfer it to third parties). 

Investors have the right to obtain (and must take) appropriate information about the type of the investment offered by the issuing companies and they must fill out a questionnaire, to demonstrate their understanding of the essential features and the main risks connected to the investment.

The preparation of the offer, by the issuer, is completed by (i) the preparation of an information document containing the specific risks related to the transaction; (ii) the opening of a current account and (iii) the delivery of the information (slides, business plan, etc.) to the operator. At the end of this operation, the operator is required to publish the offer on its portal for the entire raising period, established in the capital increase resolution.

The portals are delegated to provide investors information on each offer, through special forms that can also be presented by multimedia tools (images, videos, presentations, etc.), by which the promoters of the initiative must describe the company, its business idea, the people who make it up and the projects they intend to carry out with the investment as well as the economic and financial situation of the issuing company.

The investor subscribes the offer by signing the subscription order and by executing a bank transfer in favor of an account specifically set up by the issuer for each transaction. The transaction will be completed if a specific quota (at least 5%) of the financial instruments offered is subscribed by professional investors or by other special categories of investors (10), acting as a guarantee for the initiative promoted. 

After the conclusion of the investment, the investor will take on the role of shareholder or lender, in the first case, with the registration of the resolution to increase the share capital in the Register of Companies (11).

As mentioned in the introduction, those who use this innovative financing and investment instrument may incur in civil liability and/or other risks, including criminal ones.

In particular, pecuniary administrative (from € 500 to € 25,000) and prohibitory (suspension and removal from the register) penalties are envisaged for the gestor of the portals, if there are elements that presume the existence of breach of law or of general or specific provisions from the Consob (12).

It is provided the removal of the gestor from the register in case of:

1. counterfeiting of the investor's signature on the contract or other documentation;
2. acquisition, even temporarily, of the availability of amounts or possession of financial instruments of third parties;
3. communication or transmission to the investor or to Consob of untrue information or documents;
4. transmission of orders concerning the subscription of financial instruments not authorized by the investor;
5. failure to communicate the exercise of the right of withdrawal by the investor;
6. repetition of behaviours that have led to a suspension measure;
7. any other violation of specific rules of conduct.

The same issuing company may incur in liability in the phase preceding to the conclusion of the contract, if the information provided through the portals are misleading or inaccurate (13), and, as such, unsuitable to provide to investors sufficient elements to consider whether or not to finance the crowdfunding project (configuring, in my opinion, a sort of "qualified social contact" liability), and in the phase following the conclusion of the contract, in the event that it fails to comply with the obligations provided for therein.

The investor may incur in risks of fraud, such as, for example, identity theft, false accounting, money laundering, privacy violation, related to equity crowdfunding and to the use of funds raised through web platforms.

In conclusion, equity crowdfunding is characterized by profiles of complexity. Therefore, it becomes essential for those who interface with it, both on the demand side and on the supply side, to avail themselves of professional support for the management of every aspect of this operation (from corporate to fiscal ones).

Pubblished by: Avv. Olga Aldinio 

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 (1) Equity crowdfunding was introduced in the Italian Legal System by article 30 of Law Decree no. 179/2012 (here in after, “Decreto Crescita Bis”).

(2) See art. 5-novies of Legislative Decree no. 58/1998, the so-called "T.U.F.".

(3) SMEs are defined as companies that, according to their most recent annual or consolidated financial statements, meet at least two of the following three criteria: (i) average number of employees during the financial year less than 250; (ii) balance sheet total not exceeding €43,000,000; and (iii) annual net turnover not exceeding €50,000,000 (see Article 2(1)(f) of Regulation (EU) No. 2017/1129 of June 14, 2017).

(4) See art. 1, paragraph 70, of Law no. 232/2016 ("Budget Law 2017"), which provided to "small and medium-sized enterprises" the pre-existing references to innovative start-ups and innovative SMEs (see also art. 57, paragraph 1, of Law Decree no. 50/2017, so-called "Corrective Decree").

(5) See art. 25, paragraphs 2 and 4 of the Decreto Crescita Bis for the definition of innovative start-ups and start-ups with a social mission. In particular, the corporate purpose, exclusive or prevalent, of the innovative start-up must consist in the development, production and marketing of innovative products or services with technological value.

(6) Innovative SMEs are defined by Article 4, paragraph 1, of Decree-Law No. 3/2015, converted with amendments by Law No. 33/2015.

(7) The quotas of Limited Liability Partnership, as an exception to the provisions of art. 2468, paragraph 1, of the Italian Civil Code, as well as the shares of Shares- based Company, may be offered to the public, also through the abovementioned portals (see art. 26 of Law Decree no. 221/2012, so-called "Growth Decree 2.0", converted into Law no. 221/2012).

(8) In particular, the subscription of bonds or debt securities is reserved to professional investors, pursuant to art. 100-ter of the Consolidated Finance Act and must be carried out in a section of the portal that is different from the one in which share capital is raised.

(9) See "Le operazioni di finanziamento," Francesco Galgano, 2018, p. 1593.

(10) Bank foundations, investors supporting small and medium-sized enterprises, etc. (See "Equity crowdfunding alla luce delle ultime modifiche normative e regolamentari: un’opportunità per lo sviluppo delle aziende " Fondazione Nazionale dei Commercialisti, April 15, 2019, p. 10).

(11) Shareholders-investors may be granted, according to the offer, shares with patrimonial rights but no voting rights or with voting rights that are not proportional to the shareholding or limited to particular topics etc. (See "Le operazioni di finanziamento bancario", Francesco Galgano, 2018, p. 1597).

(12) See art. 30, paragraph 6, of Law Decree no. 179/2012 and articles 22 and 23 of Consob Regulation no. 18592/2013.

(13) See Article 9 of Regulation (EU) 2020/1503 of October 7, 2020.