CROWDFUNDING STARTUP: what it is and how it works.

Crowdfunding is an alternative source of funding that makes use of the web, and of the virtual environment, in order to put ideas in contact with other ideas, projects, people or groups of people and capital.

It is a process by which groups of people (investors) finance a business project or different types of initiatives, using internet sites (crowdfunding platforms, crowdfunding portals) and for which they receive in some cases an economic return.

In recent years this type of financing has became very common between the Start Ups and innovative SMES, as a matter of fact, there are many active crowdfunding platforms in Italy and at international level which are currently online.

CROWDFUNDING INNOVATIVE STARTUPS: What are the start-up? 

The innovative start-ups are small Italian companies (s.p.a., s.r.l. or cooperatives) which operate in the field of innovative, technological or social areas.

The “Growth Decree" establishes the requirements to be met by these companies and it provides several regulatory reliefs aiming at facilitating their widespread and development:

- The company is less than 5 years old;

- It has its headquarters in Italy or in another EU Country or in one of the States which signed the Agreement on the European Economic Area provided that the same has a production site / branch in Italy;

- It has an annual turnover of less than EUR 5 million;

- It is not listed on a regulated market or a multilateral trading platform;

The Shares are not traded on a regulated market or in negotiation platform;

- It does not distribute or has distributed profits in any way;

- It has as exclusive or main company object the development, production and trade of innovative and technological products / services;

- It is not formed as the result of a merger or spin-offs.

The innovative startups must be registered in a special section of the Register of Companies to offer its financial instruments. The registration at the territorially competent Chamber of Commerce is free and it shall be effected upon request sent on line containing a declaration of self-certification of possession of the legal requirements stated above.

CROWDFUNDING STARTUP: the crowdfunding models 

Among the most used models:

- Donation. In this type of model the investor makes a cash donation without receiving anything in return (aimed more at social and civil sector and the non-profit initiatives);

- Reward. This model provides a reward / premium for the investor which almost never it is a sum of money, but most often commensurate to the contribution made or sometimes even lower to that;

- Social Lending is characterised by the provision of direct / personal loans between private individuals on Internet, without involving any financial intermediary such as banks. This kind of platforms connects those who need to collect the money with those who have an interest in lending it, allowing the last ones to obtain in exchange a return on the investment in the form of an interest;

- Equity crowdfunding, allows investors through authorised web platforms, to fund innovative projects and companies, obtaining in exchange the possibility to hold investments in the equity capital of the company founded (eg shares or units), which represent an equity investment with any additional administrative and property rights related to them.

This crowdfunding model is not only the most widespread in Italy, but also the only one that has been regulated by Consob, in order to create an easy and reliable framework for investors (Regulation of 06/26/2013 and Growth Decree BIS).

CROWDFUNDING STARTUP: possible risks, offences and scams 

The fundamental role of equity crowdfunding portals is to ensure that investors can fully understand the features and risks of the proposed investments, reading the related information contained in the portal.

Considering the sensitivity of the information managed on Innovative Start-Ups and the offers made by them, the equity crowdfunding portals must necessarily be handled by authorised parties, namely by:

On balance we conclude that the Italian law on the Equity Crowdfunding is among the most risky ones from an economic point of view, since the investor (with his money) fully bear the economic risk which characterises all business initiatives, also exposing himself to a possible financial scams which are common online.

Before deciding whether to invest in a particular project, through this kind of platforms (which are likely to be susceptible to risk of offences or scams), therefore it is always good to be aware of all the aspects that characterise the operation that regard the rights and obligations that follow the investment choice.

The Investment in the innovative Start-Ups has in fact special features and higher economic risks as compared with a traditional investment. Since this kind of investment has not a history, it can offers an idea and a plan to make it but nothing concrete related to dividends.

The decision whether to investor not is generally based, on the personal way to appreciate, even emotionally, a given project rather than on economical and rational elements.

For these reasons and for the inner complexity of this sector, it is always appropriate and advisable to ask for an expert advice before making the choice and deciding the kind of investment, thus preventing any offence or financial scams.

Please contact us if you want to receive further information about Italian and international crowdfunding portals.