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Equity crowdfunding: what it is, how it works and which are the platforms for startups and SMEs

Equity crowdfunding is a way of investing in innovative start-ups and SMEs in Italy in exchange for shares in the company. It is a way to finance them and support the real economy of the country. Until about ten years ago there was no talk of it in Italy, nor was there any legislation regulating it, but today it is becoming an increasingly widespread practice even amongst those who are not financial experts but want to explore investment options other than the traditional ones.

In the term equity crowdfunding we find  the word “crowd” which partly describes the logic behind this mechanism. In fact, there is a crowd of investors who decide to finance innovative start-ups and small and medium-sized enterprises and can do so through authorised online portals: platforms that in Italy, as in the rest of the world, are increasingly numerous and specialised.

Equity Crowdfunding: how it works

When you choose to invest in a company through equity crowdfunding, you do so because you firmly believe that it has what it takes to become a successful business, capable of becoming a key player in its market in a short space of time. This is because, to all intents and purposes, you become the owner of part of their capital and therefore a partner. When and if, this company is successful, what happens is that the shares you have bought are worth more than you paid for them, so you can make a profit by selling them, or you can choose to collect dividends. Another scenario to consider is the negative one in which the company you have bet on fails to break through. In this case you risk losing all or part of, your investment. The risk is there and those approaching Equity Crowdfunding must take into account the high mortality rate of start-ups, trusting instead in the instinct of the platform they have chosen to invest in.

Equity Crowdfunding: a bit of history

As we said, about ten years ago Equity Crowdfunding in Italy was not a feasible thing to do because there was a regulation since this which came about  in 2013. This time, however, we can’t complain about being at the bottom of the European queue because we are the first country in the world to have introduced a regulation on Equity Crowdfunding with a law and a subsequent regulation. It already existed in the US but with strong limitations. In the beginning there were too many constraints and few people were able to take advantage of this opportunity, both on the business side and on the potential investor’s side. When the regulation was changed the market started to grow and has not stopped yet.

In 2020, equity crowdfunding fundraising held steady and even increased slightly compared to 2019, despite the uncertainties due to the pandemic. This was until the second quarter, then in the third quarter there was a boom, a record collection of over 47 million and 61 successfully funded campaigns and with the fourth quarter the total 2020 collection became 103 million euros: +57% compared to the 65 million collected in 2019. If we look at the growth of funded campaigns, we notice that they grew at a lower rate (there were 159 compared to 139, a +14%), so the average collection of each campaign strongly increased (from €472,000 to €648,000).

What the legislation says in Italy and worldwide

First of all to innovative startups and then also to non-innovative SMEs, Italy was the first to grant a regulation to raise capital from the crowd with the entry into force of DL 50/2017.  The regulation and Italian legislative framework date back to 2013 and are made up from  25 articles encapsulated in the “Risk capital raising by innovative companies and startups through online portals“. It is a set of rules issued by the National Commission for Companies and the Stock Exchange (Consob), “daughters” of the “Decreto crescita bis”, DL 179/2012.

In the United States, Equity Crowdfunding was regulated in 2016 and in this case the “crowd” were actually all the people and not just accredited investors. Later on, an affirmative nod also came from the European Union, which decided to allow equity and lending crowdfunding platforms dedicated to businesses to get a European passport. This means giving them the opportunity to solicit public savings and finance businesses in all EU member states.

Equity Crowdfunding: how it works

When deciding to invest in a startup or a company with Equity Crowdfunding it is very important to choose the platform with which to do it so which in turn will also help us select who to give funding to. You have to look at the business model, the scalability of the company, the team and the motivation. To proceed, it is necessary to register with an authorised brokerage portal registered on the Consob website. At this point you can see all the campaigns in progress and decide which one to finance by looking at the information provided by the platform, the description, the goals achieved, the future goals. 

It will be the task of the portal to provide the investor with all the useful documentation, to make him fill out the master data and read the information documents in order to verify that he has the necessary requirements to make an investment with a certain level of risk. If you are eligible, you can proceed with the investment.

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