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Crowdfuture 2013

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

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

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  • 1. Date Arial Regular 14pt
  • 2. Private & Confidential osborneclarke.com The Italian approach 100 DEGREE OF REGULATION 0 2
  • 3. Private & Confidential osborneclarke.com 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) 3
  • 4. Private & Confidential osborneclarke.com 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 4
  • 5. Private & Confidential osborneclarke.com 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 5
  • 6. Private & Confidential osborneclarke.com 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 6
  • 7. Private & Confidential osborneclarke.com 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 7
  • 8. Private & Confidential osborneclarke.com 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 8
  • 9. Private & Confidential osborneclarke.com 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 … 9
  • 10. Private & Confidential osborneclarke.com 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) 10
  • 11. Private & Confidential osborneclarke.com 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) 11
  • 12. Private & Confidential osborneclarke.com 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 12
  • 13. Private & Confidential osborneclarke.com 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 13
  • 14. Private & Confidential osborneclarke.com 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 14
  • 15. Private & Confidential osborneclarke.com 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) ? 15
  • 16. osborneclarke.com Private & Confidential 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 16
  • 17. Private & Confidential osborneclarke.com Where does Italy stand compared to other countries? SOONER TIMING OF THE REGULATION LATER 17
  • 18. Private & Confidential osborneclarke.com 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 18
  • 19. Private & Confidential osborneclarke.com 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 19
  • 20. Private & Confidential osborneclarke.com 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) 20
  • 21. Private & Confidential osborneclarke.com 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 21
  • 22. Private & Confidential osborneclarke.com 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 22
  • 23. Private & Confidential osborneclarke.com 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 23
  • 24. Private & Confidential osborneclarke.com 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) 24
  • 25. Private & Confidential osborneclarke.com 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 25
  • 26. Private & Confidential osborneclarke.com 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 26
  • 27. Private & Confidential osborneclarke.com 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 27
  • 28. osborneclarke.com Private & Confidential To read more on this topic 28
  • 29. Grazie Thank you Osborne Clarke Umberto Piattelli Partner, Milan umberto.piattelli@osborneclarke.com Paste end slide graphics over this grey box in slide deck