Equity Investing online Guide


Equity Crowdfunding

What is Equity Investing? What about Equity Crowdfunding? To begin this discussion, we need to start with crowdfunding. Crowdfunding is a particular type of alternative financing that allows entrepreneurs who have projects and needs, but - respectively - do not have all the funds to realize or satisfy them, to try to access the economic resources of third parties through specific online platforms, going to offer their supporters rewards of a financial or non-financial nature.

Equity Crowdfunding, on the other hand, is a form of investment that allows investors to finance start-ups and SMEs set up as corporations: through platforms and online portals authorised by Consob, a financial contribution is made in exchange for equity stakes in the same companies with equity and administrative rights.

The equity-based model therefore provides that the financing is in the form of venture capital and that the investor becomes a full partner of the company proposing the business project.

For security reasons, it has been established that the management of portals is reserved for two categories of subjects: subjects authorized by Consob, registered in a special register kept by the same Authority or banks and investment firms (SIM), already authorized to provide investment services.

Italian regulation of Equity Crowdfunding

Italy was the first country in the European Union to adopt a specific body of law to regulate the phenomenon of Equity Crowdfunding through the enactment of Decree-Law No. 179 of 18 October 2012 (the so-called "Growth Decree bis") and the completion of Consob Regulation No. 18592 of 26 June 2013.

With the subsequent Decree-Law of 24 January 2015 n.3 (so called "Investment Compact") the possibility to raise venture capital online through authorized platforms, is also extended to Innovative SMEs and, with the Budget Law 2019, to all SMEs.

The proposing company through an implementation of a paid capital increase, by issuing new shareholdings, offers the subscription of the same to third parties by means of online portals.

Further reading: Regulation on online venture capital funding, Consob.

Obligations of the operator

The Consob Regulation of 26 June 2013 no. 18592 and subsequent amendments and additions, has regulated the obligations that each operator, the owner of the portal, is required to comply with in the performance of its activities.

Doorway S.r.l., through its authorized portal

Operates with diligence, fairness and transparency in order to avoid any conflicts of interest that could negatively affect the interests of investors and bidding companies.

In accordance with the Consob Regulation on the obligations of the operator of the portal, it makes available to investorsprofessional investors in a detailed, fair, clear, non-misleading manner and without omissions, all information regarding the offer that is provided by the offeror. All of this is so that they can reasonably and fully understand the nature of the investment, the type of financial instruments being offered and the risks associated with them, and make investment decisions in an informed manner.

Recalls the attention ofprofessional investors, as per Consob regulation, to the desirability that investments in high-risk financial assets are appropriately related to their financial capabilities.

Assures that the information provided through the portal is up-to-date and accessible for the twelve months following the closing of the offer and for five years thereafter at the request of interested parties.

For further details on the individual obligations of Doorway S.r.l., please refer to Title III of the Consob Regulation, articles 13, 14, 15, 17, 18, 19, 20 and 21.

Risk

Risk of loss of invested capital

The regulation of the Equity Crowdfunding allows you to subscribe only equity instruments of equity of startups and SMEs, it is therefore risky investments because when you buy "equity securities" you become a partner of the offering companies and you participate in the economic risk associated with the conduct of business, this implies the possibility for investors to lose the entire invested capital.

It is therefore advisable to invest only the sums for which it is believed that it can bear the full loss.

In addition, with reference to the investor's entire portfolio, diversification is always a wise rule: in view of its high riskiness, investing in Equity Crowdfunding should represent a limited percentage of the overall portfolio.

Illiquidity risk

The financial instrument of participation in the capital of a startup or an SME is not traded on regulated markets where a large part of the supply and demand for securities is channelled.

These instruments therefore have a higher degree of illiquidity as they may encounter various difficulties when sold:

  • Difficulty to find a counterparty interested in the purchase;
  • Difficulty to negotiate a transfer price that represents the actual value.

Liquidity facilitated by Doorway's "Private Deals" section

The risk of illiquidity is linked to the prohibition to exchange equity instruments in venture capital of startups and SMEs on regulated markets and to the fact that there is no so-called "secondary market" organized in which it is possible to make the purchase and sale once the instruments have been subscribed through the direct heading.

The offer of Equity Crowdfunding portals can in fact be a 'subscription only' offer, i.e. newly issued financial instruments.

Remains the possibility of buying and selling between private individuals, in compliance with the rules established for individual cases.

On October 10, 2019, the Commission Resolution on the Amendment of Consob Regulation no. 18592 of June 26, 2012 on the raising of capital through online portals to comply with the changes introduced by the 2019 Budget Law was published. In particular, Art. 25-bis "Electronic bulletin board", in order to facilitate the demobilization of the investment made through crowdfunding platforms, on the model of what has already been implemented in other EU Member States and in coordination with the proposals under discussion at European level, introduces a provision aimed at enabling portal operators to set up - as part of their main activity - an electronic bulletin board for the publication of expressions of interest in the purchase and sale of financial instruments, which have been the subject of bids successfully concluded as part of a crowdfunding campaign carried out on their portal.

Doorway in this regard, we provide a section called "Private Deals" where the registered investor can inform other investors of his intention to sell all or part of his shareholding in one or more companies in which he has invested through the Platform. It is not possible for an investor to give notice through this section of his or her intention to dispose of holdings other than those of companies that have campaigned on the Platform, nor to give any other type of information.

This section is only visible to investors registered on the Platform who have made at least one investment on the Platform, or to those users registered on the portal who have not participated in a campaign but have nevertheless completed the MiFID appropriateness questionnaire, and is a mere "bulletin board" that can only be used by such persons and is simply made available on the Doorway portal, without Doorway having any further operations other than making it available to the aforementioned persons.

To learn more about: Resolution no. 21110, Amendments to Consob Regulation no. 18592 of 26 June 2013 on raising risk capital through online portals and subsequent amendments and additions (Crowdfunding Regulation) to adapt to the changes introduced by the 2019 Financial Statements Law.

Investor Education

Doorway aims to ensure that investors understand the characteristics and risks involved in investing in venture capital for startups and SMEs. A sort of financial education for those who wish to invest in this type of company.

In this regard, prior to investing, each investor is obliged to review the information made available by the portal and the investor education materials provided by Consob.

Once the investor education has been completed, in order to finalise the investment, the investor is also required to complete the MiFID questionnaire, which will acknowledge the investor's compliance with knowingly trading on the Platform.

A score that does not comply with the risk level of the offers on the portal does not preclude the investor from investing.

For more details: Consob presentation: Equity Crowdfunding, what you absolutely need to know before investing in an innovative startup through online portals.

Fiscal benefits

Innovative start-ups and innovative SMEs.

Article 29 of Decree Law no. 179 of 18/10/2012 (converted into Law no. 17/12/2012) provides for favorable rules that allow IRPEF taxpayers and IRES taxpayers to deduct or deduct the amounts invested in innovative startups and to obtain various tax benefits.

The favorable tax discipline provided for IRPEF or IRES taxpayers investing in innovative startups has been modified and made permanent since 2017 (art. 1 Law 232/2016; press release MEF 2/10/2017) and authorized by the European Commission (SA 47184 18/09/2017).

As a result of the Decree of 7 May 2019 of the MEF implementing the indications referred to in the European Commission's authorisation of 17 December 2018, the tax benefits of equity crowdfunding are also extended to investments made in innovative SMEs.

In particular, the legislation on tax benefits provides:

  • For individuals subject to IRPEF, a deduction from gross taxation equal to 30% of the amounts invested in the share capital of startups or innovative SMEs, the maximum deductible investment may not exceed the amount of €1,000,000, for each tax period facilitated, for a maximum achievable savings of €300,000 per year. For partners of general and limited partnerships, the amount for which the deduction is allowed is determined in proportion to their respective shares in the profits.

If the deduction exceeds the gross tax, the excess can be deducted within the following 3 years.

  • For individuals subject to IRES a deduction from income equal to 30% of the amounts invested in the share capital of startups or innovative SMEs; the maximum deductible investment cannot exceed, in each tax period, the maximum amount of €1,800,000 and results in a maximum annual IRES saving of €129,600 (considering the IRES rate of 24%).

If the deduction exceeds the total declared income, the excess may be added to the amount deductible from the total income in the following tax periods, but not beyond the third, up to the amount of the deduction.

Indirect investments, i.e. made through the SPV, also benefit from the above tax benefits relating to equity crowdfunding.

Table summarizing tax benefits
  Deductions Maximum investment amount
Natural persons (Individuals subject to IRPEF) 30% investment in startups and innovative SMEs 1,000,000 euro per year
Legal persons (Subjects taxable IRES) 30% investment in innovative startups and SMEs 1,800,000 euros per year