Date Arial Regular 14pt

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The Italian approach

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DEGREE OF REGULATION

0100

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A brief introduction to the Italian régime

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• Introduces the amendments to the T.U.F. (Italian Consolidated Financial Law)

• Allows the collection of risk capital for Innovative Start-ups (including those with a social vocation) through an online 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

• Allows the subscription of financial instruments on payment of total sums of less than euro 5 million

• Establishes the requisites for operating as a funding portal

• Establishes the rules for the conduct of the portals

• Defines the information obligations

• Establishes the need of a professional investor subscription for part of the offer (at least 5% of the total offer)

LAW 221/2012

CONSOB REGULATION

n. 18592

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Main amendments to the Italian Consolidated Financial Law

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• 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

Article 30, Law 221/2012

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Types of funding portal for equity crowdfunding

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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

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• 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

MAIN REQUISITE

Production or sale of INNOVATIVE PRODUCTS and SERVICES having A HIGH TECHNOLOGICAL VALUE

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The process for the collection of the information relating to the offer and the issuer

• 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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FUNDING PORTALS must provide investors with certain specific INFORMATION by means of the relevant “prospectus” and for each offer

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Obligation to provide information to CONSOB every year by March the 31st (Annex 2, CONSOB regulation)

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• 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

FUNDING PORTALS must provide CONSOB with a report on the business and on the organization's structure which indicates

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The liability of the funding portal, art. 13, paragraph 1 of CONSOB Regulation

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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Obligation of DILIGENCE pursuant to article 1176 of Italian Civil Code

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The liability of the funding portal, art. 13, paragraph 2 of the CONSOB Regulation

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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Is the FUNDING PORTAL also subject to a “prospectus obligation” ?

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Funding portals and standard rule of diligence

• 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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Is the CONSOB Regulation setting a STANDARD RULE of due diligence for FUNDING PORTALS?

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Some practical examples of offers allowed by the Italian régime (art. 26, paragraph 7 of Law 221)

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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

AD HOC financial instruments can be created by issuers to offer the investors only certain RIGHTS

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Crowdfunding vs Crowdbanking ….

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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

Art. 100 ter of Italian Consolidated Financial Law requires CONSOB to establish rules to secure the subscription of offers by professional investors

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Breaches of the Regulation and relevant penalties (arts. 22 et seq)

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• Offers regarding a NON innovative start-up

• Falsification of the signature of the investor

• Appropriation of third party monies

• Holding of financial instruments of third parties

• Transmission to CONSOB of false information

• Transmission of orders that have not been authorized by the investor

• Suspension of business (max of 90 days), for breach of rules of conduct (chapter III of the Regulation)

• Cancellation from the register for the more serious violations

• Fines from euro 500,00 to euro 25.000,00

PENALTIES

BREACHES

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The services offered (before and after the completion of the investment)

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• 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) ?

CONSOB Regulation suggests BEST PRACTICES concerning the services following the investment completion

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The services offered (before and after the completion of the investment): what do foreign platforms do?

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CROWDCUBE: prepares THE LEGAL AND CORPORATE DOCUMENTATION in collaboration with the lawyers acting for the majority shareholder

SEEDRS: carries out a DUE DILIGENCE on the offering company and REPRESENTS all the investors in their relations with the founding members

SYMBID: has created the inner circle, a media space where the entrepreneur and investors EXCHANGE INFORMATION after the collection of funds is complete

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?

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TIMING OF THE REGULATION

SOONER LATER

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USA

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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Dedicated regulation: YES (equity)JOBS Act Waiting for SEC and FINRA regulation

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UK

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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Dedicated regulation: COMING SOONFCA to issue a draft regulation soon Enforcement expected in April 2014

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FRANCE

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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Dedicated regulation: NOT YETSeptember 30, a draft regulation has been issued for consultation period (ending November 15)

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SPAIN

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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Dedicated regulation: NONot known if and when a regulation will be issued

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GERMANY

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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Dedicated regulation: NONot known if and when a regulation will be issued

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THE NETHERLANDS

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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Dedicated regulation: NONot known if and when a regulation will be issued

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SWITZERLAND

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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Dedicated regulation: NONot known if and when a regulation will be issued

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BELGIUM

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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Dedicated regulation: NONot known if and when a regulation will be issued

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Can we see any common guidelines?

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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Equity based regulation: NO

Lending based regulation: NO

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Exploring the added value of potential EU action

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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CONSULTATION DOCUMENT3 OCTOBER, 2013CROWDFUNDING IN THE EU

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To read more on this topic

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GrazieThank you

Osborne ClarkeUmberto PiattelliPartner, Milanumberto.piattelli@osborneclarke.com