In recent years, Crowdfunding has increasingly established itself as a method for financing innovative entrepreneurial projects.
As suggested by the etymology of the term, it's a process in which multiple people contribute sums of money to finance and support entrepreneurial projects with the goal of obtaining a return in exchange.
The success of this innovative financing method lies in its ability to engage a potentially large number of investors who, through the use of dedicated online platforms, have the opportunity to invest even small amounts of money in projects they deem valuable and potentially lucrative.
Investors have the chance to personally and independently assess the quality of the investment and, utilizing online platforms, complete the purchase order within seconds.
In Italy, unlike many European countries, crowdfunding operates within specific regulations. Decree Law 179/2012 introduced crowdfunding for the first time as a useful tool for financing startups and innovative SMEs.
Consob Regulation No. 18592 of June 26, 2013, titled "Regulation on Capital Raising through Online Portals," provides the organic framework for crowdfunding, particularly equity crowdfunding, which, as we will see, differs from the other method known as lending crowdfunding.
Subsequently, the 2017 budget law extended this instrument to all small and medium-sized enterprises formed as limited liability companies (S.r.l.), not just startups and innovative SMEs.
Crowdfunding instruments fall into two main categories:
There's also a third category called reward crowdfunding, which is less relevant for companies aiming to develop entrepreneurial projects.
Equity crowdfunding, regulated within the Consob regulation, allows small and large investors to purchase ownership shares of companies through authorized online portals.
Thanks to equity crowdfunding, limited liability companies have been given the opportunity to offer shares to the general public, deviating from Article 2468 c.1 of the Civil Code. This was a significant innovation, as previously, only joint-stock companies could offer shares to the public.
With equity crowdfunding, a registered user on the online portal can become a shareholder in a proposing company through a small investment. As a risky capital investment, returns come from the difference between the purchase price and the potential selling price, plus any dividends. The investor's gain derives from the (positive) difference.
The other method is represented by lending crowdfunding. In this case, unlike equity crowdfunding, the investor doesn't acquire ownership shares in the proposing company but acts as a financier. The relationship between the financier and the company is regulated by a loan agreement, with all the obligations that apply to the debtor.
The financier, an online portal user, expects a definite return on the invested capital along with interest. The interest rate is determined based on the project's risk and the proposing entity.
Lending crowdfunding is widely used, especially in the real estate sector.
Equity crowdfunding offers potentially unlimited returns to investors, whereas lending crowdfunding provides a fixed and predetermined return at the time of subscribing to the financing contract. Particularly for innovative startups and companies with high growth potential, equity crowdfunding is a very appealing way to finance entrepreneurial projects, especially if the ultimate goal is going public.
For equity crowdfunding, evaluating the company's value and making statutory modifications to establish at least two different categories of shareholders with distinct powers and rights are necessary.
Before proceeding with an equity crowdfunding campaign, it's crucial to provide investors with all the necessary information to fully evaluate the entrepreneurial project.
In addition to preparatory corporate documents for launching the campaign (CVs of shareholders, financial documents, etc.), two documents are primarily vital for the success of an equity crowdfunding campaign:
The business plan should summarize the entrepreneurial idea into a document, highlighting the strengths and challenges of the proposed business model. It should emphasize elements that make the project capable of generating profitability and the economic-financial assumptions it's based upon.
The pre-money company valuation is the report that explains the reasons behind the monetary value assigned to the company offering its shares to a group of interested investors.
Assigning a monetary value to the company is crucial because it determines the percentage of capital offered for subscription to investors. Engaging in an equity crowdfunding campaign without a pre-money valuation of the company is risky as it could overestimate the percentage of ownership that an investor would receive in exchange for their contribution.
On the other hand, the pre-money valuation mitigates the information gap between the investor and the company. By studying the valuation, the investor gains a comprehensive understanding of the process leading to the determination of the company's value, enabling a more informed investment decision.
Since its introduction, crowdfunding has been recognized as a financing tool for enterprises with boundless potential. Its main strength lies in its speed and the ease with which companies can access liquidity in the market as an alternative to the banking channel, which can often be rigid and laden with barriers, especially for newly established innovative startups.
With equity crowdfunding, investors can, through a few simple digitized steps, invest in the projects they find most interesting without involving banks or notaries. Additionally, when investing in startups and innovative SMEs, they can deduct 30% (and in some cases, 50%) of the contributed amount.
For years, our firm has been providing companies with advice on seeking new sources of financing. This includes crowdfunding, which stands out as a very interesting financing method, especially for startups and innovative SMEs.
In the field of crowdfunding operations, our firm's assistance consists in connecting companies with the best partner platforms in the market and preparing all the preparatory documentation for a crowdfunding campaign.
In particular, we handle the statutory modifications required to launch a campaign, the creation of the business plan, and the pre-money company valuation.