Alternative finance: crowdfunding and the challenges for regulators

by Claudia Milli*, Federico Riganti** and Teresa Rodríguez de las Heras Ballell***

ABSTRACT: The purpose of this research is toanalyse the characteristic and typologies of a specific type of Alternative Finance,e.g. crowdfunding. Furthermore, this research focus on the impact of the European Regulation No.1503/2020 on the Italian legal framework related to the crowdfunding instrument, paying attention to the influence of the Eu Regulation on supervisory authority power in Italy.

SUMMARY: 1. From Digital Finance to Alternative Finance. 2. Crowdfunding instrument: features and types. 3. Effects of the adoption of Regulation No.1503/2020 on the Italian crowdfunding regulatory framework. 3.1. The role of the Supervisory Authorities on crowdfunding platforms in the Italian legal system.  4. Conclusions.

1.The European Union has a strong interest in financial services provided through digital and technological ways. This digital transition, together with sustainability, is a top priority for the EU, which seems to be determined to take on a leadership role in the field. This is a cross-cutting revolution that affects every aspect of finance from banking and securities markets to insurance, from FinTech to Open Finance – passing through RegTech, DeFi and AI applications. The special attention paid to this topic nowadays by regulators and other stakeholders is a testament to the importance of finding new forms and paradigms that make financial transactions easier and more efficient. According to European institutions, digitization is essential for modernizing the European economy and establishing a new impetus. “Go Digital” is the new “mantra”!

In this light, the European Commission announced the Digital Finance Package and the FinTech Action Plan to drive the economy toward digital and tech landscapes. Rapidly developing technologies such as artificial intelligence, machine learning, cloud computing, and big data analytics seem to be becoming increasingly relevant to business and finance. Another crucial item of this setting is the one related to the necessity of simplifying retail payments through their digitalization. The digital and tech finance packages outline a long-term strategy for each EU Member State to achieve financial stability and consumer protection goals, which are key objectives for the EU. At the same time, the updated retail payments strategy intends to simplify retail transactions, becoming a new cornerstones of EU financial markets.

Notwithstanding the importance of Digital Finance, we must emphasize that a new form of advanced and technology-driven finance is pivotal for the industry: the so-called Alternative Finance that can be defined as the processes, channels, procedures and other mechanisms to provide financing to individuals and businesses without the involvement of traditional financial institutions that are properly regulated.

As mentioned by the World Bank[1], the term “alternative finance” refers to “financial products and services that are developing outside the traditional, regulated banking and capital market sectors via innovative and predominantly online channels, instruments and systems” in order to “address some of the most important priorities for the development of the financial sector”: reducing barriers to micro, small and medium size enterprises’ (MSMEs)[2] access to finance, expanding opportunities for consumer finance and increasing competition in financial services”.

Such a new form of finance is crucial, given that as confirmed by scholars and economic studies, small and medium businesses, despite their remarkable economic and social contributions, borrow an amount of credit from the banking sector that is seems inadequate for their survival and growth[3]. Therefore, and as stated in by the European Commission[4] also, Alternative Finance is extremely relevant since it “brings new funds to the market” as “advanced countries proved that alternative finance creates funding opportunities mostly for projects, which could not get funding through traditional channels (so, it expands the market, especially by securing more funding for small businesses)”. Moreover, it “can scale – as those new models are supported with digital technologies, it is easy to support many thousands of stakeholders” and it “encourages lower transaction costs – as more decisions are based on data, as Alternative Finance providers use digital technologies, they can operate at lower transaction costs (after reaching a minimum efficient scale)”.

The reasons why alternative (and digital) forms of finance are increasingly relevant today – and the reason why we pay attention today to this topic – are numerous and are based on gaining a competitive advantage in the financial system as we know it.

First, the costs of accessing the traditional financial system are considerable, even in a digitized scenario. In particular, both the costs of regulatory compliance (which represent an even more challenging topic to address in the face of the RegTech phenomenon, as it pertains to nearly every aspect of activity in the markets), and the costs that are associated with the uncertainty of phenomena that are not yet fully regulated, place a significant burden on private players, putting them in a position where they don’t always have a clear incentive to use the “traditional system”. Second, it is widely established that from a procedural point of view, access to bank credit, loans and financing from traditional financial institutions is particularly complex in times of crisis, especially for small and medium size companies. The mistrust towards ordinary and traditional players (banks, financial institutions, regulated entities etc.) is another important factor to be considered, as it makes up some of the elements of a system where there is an increasing shift towards intermediation that could create problems for the financial context.

On this landscape, many forms of alternative sources of financing and alternative mechanisms for raising funds have been adopted, one of the most important ones being, not least because of its public resonance, crowdfunding[5].

It is defined in the relevant regulation as “an established form of alternative finance for start-ups and small and medium-sized enterprises, typically relying on small investments”. In other words, “Crowdfunding represents an increasingly important type of intermediation where a service provider, without taking risk on its own, operates a digital platform open to the public to match or facilitate the matching of prospective investors or lenders with businesses that seek funding. Such funding could take the form of loans or the acquisition of transferable securities or of other admitted instruments for crowdfunding purposes” (see the first Whereas of the Regulation No.1503/2020, mentioned below).

Against this backdrop, this paper discusses and analyses the characteristic and typologies of a specific type of Alternative Finance,e.g. crowdfunding. Furthermore, this research focus on the impact of the European Regulation No.1503/2020 on the Italian legal framework related to the crowdfunding instrument, paying attention to the influence of the Eu Regulation on supervisory authority power in Italy.

2. Crowdfunding is an alternative form of finance to traditional instruments for access to credit, especially for MSMEs. It raises resources on the basis of the direct relationship between supply and demand for credit, without making use of this typical feature of the banking system and in a totally disintermediated way.

It should be pointed out that the crowdfunding instrument can take various forms of which we will try to highlight the different characteristics[6].

Firstly, lending-based crowdfunding consists of the provision of funds to companies and individuals by a multitude of lenders using platforms and based on peer-to-peer lending systems[7], made possible by the development of technologies applied to finance in which digital platforms play an important role. In fact, they bring together those interested in lending money with those in need of financial resources.

For the lender, the interest underlying the use of such an instrument is primarily that of obtaining a remuneration for the loan disbursed, regardless of the purpose for which the financing was requested. The platform, in fact, enables the matching of loan requests and offers between creditors and debtors who do not know each other[8].

There are further crowdfunding instruments such as donation-based crowdfunding, reward-based crowdfunding, pre-selling crowdfunding[9] and equity crowdfunding.

In donation-based crowdfunding[10], funders make donations without expecting anything in return; in reward-based crowdfunding[11], the funded parties promise the funders a reward in kind (a product or a service). The characteristics of this type of crowdfunding include: funds given do not have to be repaid; the beneficiary simply delivers the service or the goods promised; orders are secured before the launch of a new product, and the crowdfunding campaign allows you to build your customer base as you raise funds; and, the obligation to deliver on your promises on schedule.

It is particularly suitable for products and services that either are innovative or garner high levels of consumer attention. Complicated concepts or products are less suitable for reward crowdfunding.

The main difference between donation crowdfunding and reward crowdfunding is that in the first case we have funding without consideration of any type, and, in the second case, funding with the expectation of obtaining a reward of non-monetary nature[12].

Furthermore, in pre-selling crowdfunding, the funded parties sell this product or service to the funders in advance.

Finally, equity crowdfunding takes the form of the direct purchase of risk capital shares by entities wishing to finance a project presented by young companies, mostly technologically advanced start-ups[13]; investors acquire the status of shareholders in the company and, therefore, share the business risk of the financed entities.

However, crowdfunding in general has some special features, which might influence its legal classification and treatment[14]. Investors are motivated not only by the expectation of a financial return, but also by non-financial rewards, such as personal satisfaction from influencing a campaign’s outcome and projects[15]. Investors in crowdfunding method assign more importance in their investment decisions on soft information rather than on financial statements[16].  

3.The Regulation (EU) No.1503/2020[17] (and its delegated regulations[18]) on crowdfunding service providers[19] for businesses introducesa new category of supervised intermediaries: specialised crowdfunding service operators.

Through the Regulation (EU) No.1503/2020, the European institutions have underlined the need to outline a set of rules for authorisation and supervision of the European Securities and Markets Authority, ensure protection for European investors through transparency rules on information disclosures, and deliver supervisory powers by ESMA[20] over crowdfunding service providers[21].

More specifically, the European Regulation provides an authorisation requirement[22] for other intermediaries (banks, investment firms, payment, and e-money institutions, and all the others financial intermediaries pursuant to Article 106 of the Italian Consolidated Law on Banking or Testo Unico Bancario) that intend to directly manage a crowdfundingplatform, in conjunction with the performance of their regular activities.

At a national level[23], Regulation (EU) No.1503/2020 was implemented by Legislative Decree No.30 of 10 March 2023, which made amendments to the Italian Consolidated Law on Finance(Testo Unico della Finanza).

Clearly, the new regulations are already having an impact on the sector, especially for existing lending-based crowdfunding platforms that have never before operated in a regulated environment and are currently in the process of adapting to this new regulatory framework.

First of all, the definition of crowdfunding services is introduced in Article 1, paragraph 5-novies of the Consolidated Law on Finance through a reference to Article 2(1) letter a) of Regulation (EU) No.1503/2020. This refers to a service that, by bringing together the financing interests of investors and project owners themselves through the use of a crowdfunding[24] platform, carries out the following activities: “(i) the facilitation of granting of loans; ii) the placing without a firm commitment basis, as referred to in point (7) of Section A of Annex I to Directive 2014/65/EU, of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders, as referred to in point (1) of that Section, in relation to those transferable securities and admitted instruments for crowdfunding purposes“.  

It should be pointed out that, with the adoption of Regulation No.1503/2020, Article 100-ter of the Consolidated Law on Finance, has been significantly rewritten with the addition of the Crowdfunding Offers section. The latter establishes that, by way of derogation from the provisions of the Italian Civil Code[25], stakes in limited liability companies may constitute the subject of an offer of financial products to the public, also through crowdfunding platforms, within the limits provided for by Regulation (EU) No.1503/2020. It follows that the new subject of crowdfunding offers are loans, securities (shares, bonds) and other allowed instruments for crowdfunding purposes, issued by project owners or special purpose vehicles (SPVs).

In any case, units of undertakings for collective investment (UCITS) cannot be placed on offer; on the other hand, initiatives involving indirect investments made through SPVs only possible in specific cases. There remains the possibility, which had already been considered of opting for the alternative regime of transferring the underwrite risk capital units, and thus the sale of the units by an underwriter or subsequent purchaser takes place by recording the transfer in the registers kept by intermediaries authorised to provide one or more of the investment services provided by the Consolidated Law of Finance[26].

That said, the next question is whether the Italian legislator’s interpretation of the European Regulation No.1503/2020 and adoption into Italian law is an adequate reflection of the EU law or, in fact, an extension of the rules laid down therein. To this end, some provisions of the mentioned EU Regulation and Italian Legislative Decree No.30/2023 will be analysed.

At first glance, Legislative Decree No.30 appears to be in line with the limits of applicability of the new regulation set by Article 1 of the EU regulation including observance of the prudential safeguards as well as the content in the adopted Italian Law[27]. There is also true with reference to the adoption of new national legislation with authorisation and forms of supervision that can be exercised with crowdfunding service providers, as well as with customer information obligations (disclosure and transparency) that platform operators are required to fulfil in order to ensure adequate investor protection[28].

According to Regulation No.1503/2020, each applicant shall provide a description of its actual business continuity plan. This requirement is new compared to the existing Italian regime applicable to crowdfunding platforms[29].

With regard to the authorisation process, crowdfunding service providers already licensed locally under the Consob Regulation on Capital Raising via Online Portals[30] of 2013 are able to continue to provide the services covered by the Regulation until 10 November 2023 or until the authorisation pursuant to Article 12 of the Eu Regulation is granted.

Furthermore, Paragraph 2 of Article 1 of Legislative Decree No.30/2023 provides that Consob[31]  and the Bank of Italy[32], in their future regulations, may establish simplified authorisation procedures for operators which, on the date of entry into force of the European regulation, were already authorised under national law to provide crowdfunding services, as well as for banks, payment institutions, electronic money institutions and other supervised intermediaries which, on the same date, already provided such services.

The contents of Legislative Decree No.30 will be subject to a tough test case when crowdfunding services will be activated on a cross-border basis[33]. This is because the regulatory intent pursued by the European legislator to reduce cross-border barriers will compare the different disciplinary regimes of the Member States regarding the provision of the service in question, implemented in the manner of free provision.

3.1.Regulation No.1503/2020 contains numerous references to the relevant supervisory authorities for the financial sector and, consequently, they are included in Legislative Decree No.30/2023. This division of responsibilities between the Bank of Italy and Consob[34] is considered appropriate, given the aforementioned non-specific reference to overall national authority regulations.

Article 30 of the Eu Regulation states that competent authorities shall have, in accordance with national law, investigatory[35] and supervisory[36] powers.

At a national level, the supervision aspect is regulated by letter b) of the first paragraph of Article 1 of the Decree, which adds the new Article 4-sexies.1 to the Consolidated Law on Finance, wherein the first paragraph identifies Consob and the Bank of Italy as the relevant national authorities as per European regulation. Consob is responsible for ensuring compliance with the obligations imposed by the same regulation on transparency and adequate behaviour. Bank of Italy on the other hand, is responsible for risk containment, capital stability and the sound and prudent management of intermediaries. For these purposes, Consob and the Bank of Italy are called upon to adopt the relevant implementing provisions through internal regulations[37].

These regulatory provisions intend to establish a minimal level of legislation suitable for the type of operation concerned. This is confirmed by the sequence of the forms of control envisaged; which on the one hand, limit the size of viable investments, and on the other submit the activity carried out (through digital platforms[38]) to preventive supervision and transparency obligations. Regarding the latter, Article 23 of the Regulation No.1503/2023 provides that the relevant authorities may require advance notification of the key investment information sheet at least seven business days before it is made available to investors.

In the regulation currently under consultation, it is stipulated that the sheet must be provided to Consob[39] at the same time as it is made available to investors, without the need for a preventivenotification.

In addition, crowdfundingservice providers must send Consob on an annual basis a list of projects financed through the crowdfundingplatform, specifying the relevant information. This information must subsequently be provided to ESMA[40] by Consob for statistical processing by the end of February every year.

Legislative Decree No.30 explicitly states that it intends to limit its scope of application to the services governed by Regulation No.1503 and requires the Bank of Italy[41] to ensure compliance with the obligations imposed by the EU regulation on capital adequacy, corporate governance, administrative and accounting organisation, internal controls, remuneration systems, and the requirements of the crowdfunding service provider’s capital participants. On reflection, this entails similar types of control as those imposed on members of the credit sector.

These requirements are of a prudential nature, as per European regulation, but it is equally true that, in view of the characteristics of crowdfunding, there is no risk of systemic instability as a result of any difficulties or scenarios of necessary divestment of this activity by digital platforms[42].

In the event of subscriptions made through authorised intermediaries, the Bank of Italy will carry out the checks deemed necessary to fully ascertain critical situations on the basis of its supervisory powers.

Furthermore, the regulatory intent to give crowdfunding a particular function in promoting the development of Small and Medium Sized enterprises[43] is identified in the recognition of a special central role to limited liability companies, as potential collectors of funds made through platforms. In fact, it is envisaged that the execution of underwriting, purchases, and disposals of financial instruments referable to such companies does not require the stipulation of a written contract. In the phase of writing of the contract, it is important to specify that any charges borne by the underwriters, purchasers or disposers of the named instruments must be indicated in the offer portal, with a separate indication of the conditions applied by the intermediaries involved, failing which the latter’s creditor claims will cease to exist. Procedural simplification provisions have been introduced with respect to the deed of transfer of shares representing the capital of limited liability companies.

In reference to the extended interpretation of the European provisions on the part of the Italian legislator and the sector authorities, the Bank of Italy has opened a public consultation on the new provisions on the reporting of crowdfunding service providers for businesses.

Regarding the new Italian provisions, these include: the deadline for authorised providers to send regular reports on projects financed through platforms to the Bank of Italy is set for 25 January every year. More specifically, the Bank of Italy and Consob are identified as the Authorities responsible for receiving information on the authorisation use start dates, the interruption and restart of the provision of crowdfunding services, as well as any substantial change in authorisation conditions.

The contents of the communications to the Bank of Italy by crowdfunding service providers are defined, relating to existing outsourcing agreements, and are to be communicated on an annual basis[44].

As already said, EU Regulation No.1503/2020 devotes a set of provisions to specifying the functions assigned to the relevant authorities in the matter under consideration. These authorities assume a central role and, through their supervisory interventions, aim to ensure that the activity in question is properly carried out. In fact, they oversee the authorisation process, for which the receipt of complete information on the crowdfunding management methods by the providers of this service is correlated. This is done in order to be able to assess their internal organisation and the procedures in place as well as to ensure their compliance with the EU regulation[45].

On closer inspection, however, the European legislator has adopted a simplified authorisation procedure in this case, obviously entailing a downsizing of the typical function of authorities, which, however, is not the case in Italy. Indeed, at a European level, there is a configuration of a minimum set of supervisory and investigative powers, which should be conferred on the relevant authorities in accordance with national law[46]. It is therefore left up to the individual country to allocate the forms of intervention due to the different authorities that are assigned supervisory powers at an institutional level in the Member States.

The question arising in relation to the issuance of the new type of licence pursuant to Article 29 of the EU Regulation is connected to the provision that allows each Member State to designate the relevant authorities responsible for carrying out the functions and tasks provided for therein, with the necessary information immediately sent to ESMA[47].

4.The adoption of the European crowdfunding regulation is an important step towards the full realisation of a real Alternative Finance scenario, of the FinTech Action Plan[48] and the digitisation of finance in Europe.

The regulation offers considerable opportunities for companies that will be able to make use of a market both national and European. It also represents an opportunity for investors who will be able to have better profit margins and a wider diversification of their investments.

Specifically, in light of the above, we can state that one of the most important novelties consists of the European authorisation, granting European crowdfunding service providers the possibility of operating in other Member States, following submission to the relevant authority in the providers’ home country of a notification pursuant to Article 18 of the Eu Regulation No.1503/2020.

The provision of a uniform legal framework at a European level and the establishment of a European licence should, on the one hand, lead to an increase in cross-border activity and the entry into the Italian market by other EU operators but on the other hand, it could represent a risk to those Italian operators who do not apply for or fail to obtain the EU licence. In this context, particularly responsive arrangements without heavy obligations on service providers will be attractive to the market, leading to the possibility of national operators making use of services provided by platform operators from foreign countries[49].

As already stated, this Decree provides that Consob and the Bank of Italy are the relevant national authorities for the purposes of this EU Regulation, assigning, however, to these authorities functions that go well beyond the scope of intervention provided for in the European Union regulation. Giving the Bank of Italy the power to intervene (inspections, investigation, fines, suspensions of activity, license revocation) may seem excessive when we consider the real risk of systemic instability which may arise from this sector[50].

Authoritative literature[51] on the subject maintains, in this regard, that Legislative Decree No.30/2023 had to attribute equal importance with regard to the role of the Italian authorities in this sector because of the criterion of delimitation of areas of intervention that reflects the well-known principle of distinction by purpose.  

However, as crowdfunding services aimed at financing consumer projects are excluded from the scope of the EU Regulation, any activity carried out by peer-to-peer lending platforms or financing between private individuals will remain regulated at a national level. In this regard, it has to be noted that any consumer regulation applicable in Italy must be complied with by crowdfunding service providers[52].

In conclusion, some aspects of the adopted Italian legislation which would appear to go beyond and directly contradict the intentions and content of EU Regulation No.1503/2020 should, as soon as possible, be eliminated in order to avoid difficulties in its application. To this end and, taking into account that crowdfunding takes place in a Capital Market Union[53] context, new procedures should be created at a national level[54]. The mission of the authorities should also be changed, and Capital Market development should be introduced. If this does not happen in Italy, the fear of excessive controls by the relevant authorities and the risk this may represent in terms of competitiveness in relation to other European countries may also entail a disincentive to the digital platforms operators to apply for the license.

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[1] On this topic: https://openknowledge.worldbank.org/server/api/core/bitstreams/4d8e205f-6a93-5f4a-ae0f-e04c3ffb9b2f/content

[2] As confirmed by the same World Bank “MSMEs are critically important to economic development. MSMEs at the larger end of the size distribution (small and medium sizes) are important generators of employment, contributing to growth and dynamism, including entrepreneurial activities as they reach scale. Micro and small enterprises help to alleviate poverty, providing a way to generate income for people who might otherwise face unemployment or rely solely on subsistence agriculture. There is a persistent financing gap, however, for MSMEs which is not easily solved”.

[3] See L. Lu, Promoting SME Finance in the Context of the Fintech Revolution: A Case Study of the UK’s Practice and Regulation (March 1, 2018), in Banking and Finance Law Review, 2018, pp. 317-343, available at SSRN: https://ssrn.com/abstract=3144767. The same Author confirms that “The alternative finance market aided by fintech offers a feasible solution to the SME financing puzzle for three reasons. First of all, the latest information technologies have lent alternative lenders an obvious competitive advantage in terms of saving costs and improving business efficiency. Traditionally, financial institutions have relied on an extensive branch network to operate their businesses, which requires heavy investments in properties, personnel, and IT systems. (..) Secondly, alternative lenders are largely able to mitigate the problem of information asymmetry in the loan-making process. One reason for banks’ unwillingness to lend to SMEs is that they are unable to gather enough information to evaluate the creditworthiness of these borrowers, as a large proportion of them cannot provide a record of trading history or fail to offer valid collateral to secure a loan. However, fintech platforms are in a better position than conventional lenders to check the credit background of potential borrowers, as they are equipped with big data technology and artificial intelligence. Fintech allows online lenders to design bespoke risk models to calculate a great number of variables relating to business borrowers and their owners, including their gender, age, marital status, educational level, working years, company size, monthly payment, loan amount, debt-to-income ratio, and delinquency history. The use of big data gives online lending platforms the power to accurately evaluate the size of the credit risk relating to SME borrowers. (..) Thirdly, compared with traditional banks, fintech lenders can draw on more diverse sources of funding to expand their loan businesses quickly. Most commercial banks regard the money of their depositors as the primary source of funding, though an increasing number of financial institutions have started to raise funds from the interbank market and money-market funds. By contrast, online P2P lending platforms have no geographical limitations, for they can obtain funds from individual investors, institutional investors, and government agencies from different parts of the world (..)”.

[4] See https://ec.europa.eu/research/participants/documents/downloadPublic?documentIds=080166e5cec08e77&appId=PPGMS

[5] Cf on this regard: U. PIATTELLI, Il crowdfunding in Italia. Una regolamentazione all’avanguardia o un’occasione mancata?, Torino, 2013; P. CUZZOLA, La disciplina italiana dell’equity crowdfunding: varianti tipologiche, responsabilità e valore dell’informazione tra problema e sistema in Il diritto dell’economia, 2020, 3, pp. 489 ss.; A. LAUDONIO, La folla e l’impresa: prime riflessioni sul crowdfunding, in Rivista ODC, 2014, 1, pp. 1 ss. For a look at foreign doctrine, see, ex multis, A. PARHANKANGAS, C. MASON E ‪H. LANDSTRÖM, Crowdfunding. An introduction, in AA.VV., Handbook of Research on Crowdfunding, 2019, Cheltenham, pp. 1 ss.; A. SCHWIENBACHER, B. LARRALDE, Crowdfunding of small entrepreneurial ventures, 2010, link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699183; L. DE MOOR, H. KIM, A comparative study on the regulatory framework of crowdfunding, in The Journal of Small Business Innovation, 2016, 1, pp. 1 ss.

[6] See V. DE STASIO, Il crowdfunding, in AA.VV., Il Testo Unico finanziario, a cura di G. Cera, M. Presti, Bologna, 2020, pp. 2325 ss., nonché V. MANZI, Il fenomeno del crowdfunding e del social lending: caratteristiche operative e profili contrattuali, in AA.VV., I contratti dei risparmiatori, a cura di F. Capriglione, Milano, 2013, pp. 394 ss.; E. NOGAROTTO, “Social lending”: un “trade-off” tra digitalizzazione e riserva di attività, in Riv. trim dir. econ., 2022, pp. 161 ss.

[7] Lending crowdfunding in Italy lends itself to the conclusion of loan contracts, governed by Art. 1813 et seq. of the Civil Code. In essence, the intermediation performs the typical function of reconciling supply and demand, without this entailing any disbursement or assumption of responsibility for the return of sums lent to the financed party. In fact, in the case of fund-raising through on-line portals, the lenders hand over a certain amount of money to the financed company and the company undertakes to return an equal amount. The contract concluded between the project owner and the investor, therefore, even though it is imbued with an innovative character due essentially to the instrument used to implement it, finds its regulation in the civil code, and specifically in the typical figure of the loan.

[8] E. BANI, Le piattaforme di peer to peer lending: la nuova frontiera dell’intermediazione creditizia, in FINTECH. Introduzione ai profili giuridici di un mercato unico tecnologico dei servizi finanziari, Volume II, 2019.

[9] On the regulation in Europe of non-financial/non-investment crowdfunding, please see E. MACCHIAVELLO, C. VALENTI, Beyond the ECSPR and Financial-return: The Regulation of Donation and Reward-based Crowdfunding in the EU, in E Macchiavello (ed), Regulation on European Crowdfunding Service Providers for Business: A Commentary (Edward Elgar 2022) 619, ff.

[10] See on this regard: N. SALIDO-ANDRÉS, M. REY-GARCÍA, L. I. ALVAREZ-GONZÁLEZ, R. VÁZQUEZ-CASIELLES, Determinants of success of donation-based crowdfunding through digital platforms: The influence of offline factors, in CIRIEC-España, Revista de Economía Pública, Social y Cooperativa, Nº 95/2019, pp. 119-14 and N. VULKAN, T. ÅSTEBRO, M. F. SIERRA, Equity crowdfunding: A new phenomena, in Journal of Business Venturing Insights, Volume 5, 2016, Pages 37-49.

[11] D. LEONE, M.C. PIETRONUDO, H. GABTENI, M.R. CARLI, Reward-based crowdfunding for building a valuable circular business model, in Journal of Business Research, Volume 157, 2023, 113562. BURZE YASAR, IŞIL SEVILAY YILMAZ, N2URULLAH HATIPOĞLU, ASLIHAN SALIH, Stretching the success in reward-based crowdfunding, in Journal of Business Research, Volume 152, 2022, Pages 205-220. See also: W. CHEN, A systematic literature review of reward-based crowdfunding, in Developments in entrepreneurial finance and technology, (edited by), D.B: AUDRETESH, M- BELITSKI, R. MARKSIM, R. CAIAZZA, 2022. See, for the charitable purpose: N. SALIDO-ANDRES, M. REY-GARCIA, L. I. ALVAREZ-GONZALEZ, R.VAZQUEZ-CASIELLES, Mapping the Field of Donation-Based Crowdfunding for Charitable Causes: Systematic Review and Conceptual Framework, International Society for Third-Sector Research, 30 March 2020.

[12] E. MACCHIAVELLO, C. VALENTI, Beyond the ECSPR and Financial-Return: the Regulation of Donation and Reward-Based Crowdfunding in the EU (April 16, 2022), in E Macchiavello (ed), Regulation on European crowdfunding service providers for business: a commentary, Elgar commentaries in financial law series, 2022. The Author underlines that in exchange for the funding, the beneficiary might provide very different kind of rewards: a simple thank, the insertion of the funders’ name in the credits of the movie or song financed, a preview of the same with the directors and actors, stc.

[13] Cf on this regard: E. FREGONARA, Start up innovativa. Uno sguardo all’evoluzione del sistema societario e delle forme di finanziamento, Milano, 2013 and A. ADIUTORI, Strumenti finanziari nelle start up e P.M.I. innovative, in AA.VV., Start up e P.M.I. innovative, opera diretta da O. Cagnasso e A. Mambriani, p. 799 ss. See also the considerations contained in the OECD survey published in February 2015: New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments, secondo cui «the 2008-09 global financial crisis profoundly changed the business environment for SMEs and entrepreneurs, and access to finance was particularly affected. In many OECD countries, the crisis exacerbated the financial constraints typically experienced by SMEs, mainly as a result of information asymmetries in financial markets, and financial resources dried up for the most dynamic enterprises».

[14]E. MACCHIAVELLO, Investment-Based Crowdfunding Platforms and Their Regulation, in ED MARTINO, H Nabilou, AM Pacces (eds), Research Handbook on Comparative Financial Regulation, Edward Elgar, May 2, 2023.

[15] A. LUKKARINEN, Equity Crowdfunding: Principles and Investor Behaviour, in Shneor, Zhao, Flåten, (n. 1) 96, ff.

[16] E. MACCHIAVELLO, Investment-Based Crowdfunding Platforms and Their Regulation, op. cit.

[17] For a general content analysis of the Regulation (EU) No.1503/2020 see U. PIATTELLI, The new European Regulation on Crowdfunding, in Il Nuovo Diritto delle Società, 3/2021. For a first analysis of the proposal of the Regulation, see: E. MACCHIAVELLO, La proposta della Commissione Europea di un Regolamento in materia di crowdfunding, in Diritto Bancario, marzo 2018.

[18] Delegated Regulations numbers 2111 to 2123, all dated 13 July 2022, which include technical rules for the operation of crowdfunding service providers on, among others, the following aspects: conflict of interest obligations, authorisation requirements and modalities, exchange of information between competent authorities, entry test and verification of knowledge and loss-absorbing capacity for potential investors, measures and procedures for the business continuity plan, key investment information sheet. For the history of the Italian regulations see: U. PIATTELLI, S. CARUSO, The impact of the ECSPR on the crowdfunding legal framework in Italy, in (edited by Eugenia Macchiavello) Regulation of European Crowdfunding Service Providers for business, Elgar commentaries in financial laws, 2023.

[19] For an in-depth study on the definition and functioning of the instrument under comment, see E. MACCHIAVELLO, Introduction to the crowdfunding regulation, in (edited by Eugenia Macchiavello) Regulation of European Crowdfunding Service Providers for business, Elgar commentaries in financial laws, 2023.

[20] Article 29 of the Regulation (EU) No. 1503/2020.

[21] Cf. V. STEFANELLI, G. BENEDETTA FERILLI, V. BOSCIA, Exploring the lending business crowdfunding to support SMEs’ financing decisions, in Journal of Innovation & Knowledge, Volume 7, Issue 4, 2022, 100278.

[22] For a deep analysis of the authorisation procedure, see: T. ASCHENBECK, L. ENGLER, Authorisation procedure, scope of authorisation and register (Arts 12-14), in (edited by Eugenia Macchiavello) Regulation of European Crowdfunding Service Providers for business, Elgar commentaries in financial laws, 2023, pages 197–228.

[23] The first regulation in Italy of the so-called equity-based crowdfunding dates back some ten years ago: with Law Decree No. 179/2012, the so-called Growth Decree bis- Decreto Crescita bis, the regulation of innovative start-ups was introduced in our legal system, which provided – initially only for them – for a system of  collective financing, regulated in the primary source through the inclusion of new rules in the Legislative Decree No.58/1998, the Consolidated Law on Finance and, at the secondary legislation level, with the subsequent issuance of a Consob regulation No.18592 of 26 June 2013, (Legislative Decree no. 58/1998), Consolidated Law on Finance and, at the level of secondary legislation, with the subsequent issuance of a Consob regulation, No.018592 of 26 June 2013, which has undergone continuous and important amendments over the years. The possibility of raising venture capital – and later also debt instruments – through portals was first extended to all innovative SMEs (d.l. 3/2015, converted into l. 33/2015) and, with the 2017 Budget Law- Legge di Bilancio, further offered to all SMEs, including non-innovative ones (d.l. 50/2017, converted into l. 96/2017).

The Consob regulation is still applicable -under a transitional regime- but for a short period of time and precisely until 10 November 2023 (as provided for by Article 1 EU Reg.2022/1988 of 12 July 2022, where the European Commission, exercising the option provided for by paragraph 3 of Art. 48 of EU reg. 2020/1503, extended the transitional period contemplated in paragraph 1 of the same regulation for the platforms authorised before 10 November 2021): from that time, in fact, it will be replaced by the regulation of European matrix to which the decree in comment implements.

[24] Article 2(1) letter a) of Regulation (EU) No.1503/2020 defines the “crowdfunding service” as the “matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of any of the following activities”.

[25] See Article 2468, paragraph 1.

[26] Specifically, Letter f) replaces Article 190-quater of the Consolidated Law on Finance, containing the administrative sanctions on crowdfunding services in the event of non-compliance with the provisions referred to in Article 39(1) of the European Regulation.

[27] See F. CAPRIGLIONE, Brevi considerazioni sul crowdfunding, in Rivista trimestrale di diritto dell’economia, 2/23 and U. PIATTELLI, S. CARUSO, The impact of the ESCPR on the Crowdfunding legal framework in Italy, op. cit.

[28] This is clearly observed by F. CAPRIGLIONE in F. CAPRIGLIONE, Brevi considerazioni sul crowdfunding, op.cit..

[29] Ibidem, page 705.

[30] Regolamento sulla raccolta di capitali tramite portali online; adopted by Resolution No.18592 of 26 June 2013.

[31] For an analysis of Consob powers in general see: V. FERRARO, CONSOB and the Administrative and Inspection Supervision of Securities Markets. A Case Study on the Interaction between European and Italian Law, (2023), 29, European Public Law, Issue 3, pp. 289-330.

[32] For an analysis of the power of Bank of Italy in general see: F.I. LESSAMBO, The Bank of Italy (Banca d’Italia), in Fintech Regulation and Supervision Challenges within the Banking Industry. Palgrave Macmillan Studies in Banking and Financial Institutions, Palgrave Macmillan, Cham, 2023. More specifically, the Decree No.100/2021 (issued by the Italian Ministry of Economy and Finance), implementing the delegated act envisaged under Decree Law No.34/2019- Decreto Crescita, sets out the FinTech Committee rules and experimentation. In this purpose, the Bank of Italy has created a Fintech Channel through which operators can dialogue easily and informally with it.

[33] In application of Article 18 of EU Regulation No.1503/2020.

[34] Memorandum of Understanding between the Bank of Italy and Consob 19 June 2023. In particular, a press release dated 20 June 2023, Consob and the Bank of Italy informed of the signing of a memorandum of understanding on crowdfunding that defines the areas of cooperation between the two Authorities considering Regulation (EU) 2020/1503 and Legislative Decree No.30/2023.

Regulation (EU) No.1503/2020 introduced harmonized regulations at European level for entities intending to provide crowdfunding services, while Legislative Decree No.30/2023 assigned regulatory, informational, inspection and sanctioning powers over such entities to the Bank of Italy and Consob.

The Decree also introduces (amending Article 190-quarter IFA) the administrative fine from EUR 500.00 to EUR 500,000.00, or up to 5% of turnover when this amount exceeds EUR 500,000.00, for crowdfunding service providers in breach of: requirements set out by the Regulation as referred to in Article 39(1) or by the related delegated acts and regulatory technical standards; national requirements to marketing communications that will be identified by Consob in its own regulation. The same sanctions will apply to subjects that provide crowdfunding services outside the scope of the Regulation, in the event that they fail to publish on their websites and to include in the information made available to customers regarding the service provided the following warning: “This crowdfunding service is not subject to authorization or supervision by the Bank of Italy or Consob”.

[35] Investigatory powers: “(a)to require crowdfunding service providers and third parties designated to perform functions in relation to the provision of crowdfunding services, and the natural or legal persons that control them or are controlled by them, to provide information and documents; (b)to require auditors and managers of the crowdfunding service providers, and of third parties designated to perform functions in relation to the provision of crowdfunding services, to provide information;

(c)to carry out on-site inspections or investigations at sites other than the private residences of natural persons (…)”.

[36] Supervisory powers: “(a)to suspend a crowdfunding offer for a maximum of 10 consecutive working days on any single occasion where there are reasonable grounds for suspecting that this Regulation has been infringed; (b)to prohibit or suspend marketing communications, or to require a crowdfunding service provider or a third party designated to perform functions in relation to the provision of crowdfunding services to cease or suspend marketing communications(…); (c)to prohibit a crowdfunding offer where they find that this Regulation has been infringed or where there are reasonable grounds for suspecting that it would be infringed; (d)to suspend, or to require a crowdfunding service provider to suspend, the provision of crowdfunding services for a maximum of 10 consecutive working days (…); (e) to prohibit the provision of crowdfunding services where they find that this Regulation has been infringed; (f)to make public the fact that a crowdfunding service provider or a third party designated to perform functions in relation to the provision of crowdfunding services is failing to comply with its obligations; (g) to disclose, or to require a crowdfunding service provider or a third party designated to perform functions in relation to the provision of crowdfunding services to disclose (…); (h)to suspend, or to require a crowdfunding service provider or a third party designated to perform functions(…)”.

[37] E. FREGONARA, L’attuazione del regolamento europeo in materia di crowdfunding, in diritto bancario, 6 aprile 2023.

[38] On the regulation of digital platform, see: D. VALIANTE, Regulating Digital Platforms: the European Experience with Financial Return Crowdfunding, in European Company and Financial Law Review, vol. 19, no. 5, 2022, pp. 854-894.

[39] On 2 March 2023, Consob published for consultation the regulation for the adjustment to the Eu Regulation 1503/2020 at the level of secondary legislation. Although the Consob Regulation refers almost entirely to the rules of the Eu Regulation and the EU Delegated Regulations (e.g., with reference to the authorisation procedure, the disclosure documents, the classification of sophisticated and non-sophisticated investors, and the safeguards to protect the latter), it defines certain detailed aspects for the proper conduct of the administrative procedures falling within Consob’s competence (including, for example, the division responsible for initiating the authorisation procedure and the provision of a time limit for the conclusion of the procedure for the withdrawal of authorisation). Furthermore, in order to allow for the proper performance of supervision by Consob, the draft regulation also provides for the obligation of crowdfundingservice providers, authorised by Consob, to promptly transmit to the Authority the dates of the start of use of the authorisation, of the interruption and restart of the provision of crowdfundingservices, as well as any substantial modification of the authorisation conditions.

The consultation ended on 17 March, but to date neither the results nor the final version of the Consob Regulation have been made public.

[40] About the role of ESMA and the interaction with National Competent Authorities, see: D. VALIANTE, Regulating Digital Platforms: the European Experience with Financial Return Crowdfunding, op. cit..

[41] On 17 May 2023, the Bank of Italy, within its sphere of competence, also launched a public consultation on the subject of supervisory guidelines prepared specifically for specialised providers of crowdfundingservices for businesses, other than banks, SIMs, IPs, IMELs and financial intermediaries under Article 106 of the Consolidated Banking Act.

Compliance with the guidelines is not mandatory. In the event that measures other than those set forth in the Guidelines are adopted, specialised providers are required to notify the Bank of Italy thereof at the time of submission of the application for authorisation and, thereafter, as part of the information provided on a periodic basis to the supervisory authority through the submission of the organisational structure report.

With the guidelines, the Bank of Italy has filled in some aspects of the European regulations, which referred only to general principles, in order to favour the uniform and correct application of the new rules in accordance with the canons of sound and prudent management, covering the following macro-areas, based on a principle of proportionality: corporate governance system and internal controls; risk management and internal control system, outsourcing, suitability of exponents, and finally, due diligence on project owners.

[42] See on this point the analysis of F. CAPRIGLIONE, Brevi considerazioni sul crowdfunding, op. cit..

[43] On this purpose see the first Whereas of the Regulation No.1503/2020 “Crowdfunding is increasingly an established form of alternative finance for start-ups and small and medium-sized enterprises (SMEs), typically relying on small investments. Crowdfunding represents an increasingly important type of intermediation where a crowdfunding service provider, without taking on own risk, operates a digital platform open to the public in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding. Such funding could take the form of loans or the acquisition of transferable securities or of other admitted instruments for crowdfunding purposes. It is therefore appropriate to include within the scope of this Regulation both lending-based crowdfunding and investment-based crowdfunding, since those types of crowdfunding can be structured as comparable funding alternatives”.

[44] Moreover, in this evaluation are included the acquisition of shareholdings equal to or exceeding 20% of the capital or voting rights in the provider itself or involving the possibility of exercising control over the provider, and the evaluation of company representatives.

[45] Recital No.34 of the EU Regulation No.1503/2020.

[46] Recital No.62 of the EU Regulation No.1503/2020.

[47] See for more considerations on this matter: U. PIATTELLI, S. CARUSO, The impact of the ESCPR on the Crowdfunding legal framework in Italy, op. cit.

[48] European Commission, FinTech Action Plan: For a more competitive and innovative European financial sector, (Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions), COM, 2018, 109, final, 2-3.

[49] Cf. F. CAPRIGLIONE, Brevi considerazioni sul crowdfunding, op.cit.

[50] Ibidem.

[51] Ibidem.

[52] U. PIATTELLI, S. CARUSO, The impact of the ESCPR on the Crowdfunding legal framework in Italy, op. cit.

[53] The European Commission has thrown its support behind crowdfunding as an essential component for assisting Capital Markets Union (CMU). In a 3 May 2023 report, the Commission says that broadening access to finance for innovative companies, start-ups and other unlisted firms – including SMEs – is at the heart of the continent’s CMU Action Plan. Find the report on the Eu Commission site: https://ec.europa.eu/

[54] It is evident how the typology of the limited liability company has interacted as a central element for the further development of crowdfunding, because it both identifies the corporate structure most widely used within the Italian economic system and is generally used for smaller investments, which usually identify the ones suitable for the form of operation concerned.

Author

* Claudia Milli is Phd Student in Economics, Management and Accounting at Parthenope University of Naples.

** Federico Riganti is Assistant Professor of Economic Law and Financial Markets Regulation at the Department of Management, University of Turin.

*** Teresa Rodríguez de las Heras Ballell is Associate Professor of Commercial Law at University Carlos III of Madrid, Spain.

Though the considerations expressed in the paper are shared by the Authors, Par. 1 and 2 should be attributed to Federico Riganti and Teresa Rodríguez de las Heras Ballell; Par. 3 and 3.1. should be attributed to Claudia Milli; Par. 4 should be attributed to all the Authors.