Crowdfunding: market’s creativity anticipates regulation

Maria Teresa Cometto —  August 12, 2013 — Leave a comment

   We Italians are very proud because Italy is the first country to have issued specific rules about equity-based crowdfunding. Consob, the Italian authority on financial markets that is the equivalent of the US Sec (Securities and Exchange Commission), has just issued the rules and also an explanation of them for the general public (here is the news release in English). On the contrary in the US, more one year after Congress passed the JOBS (Jump-start our business startups) Act, the SEC hasn’t proposed any regulation about crowdfunding, probably because the Commission doesn’t like it or is afraid I’s harmful to non sophisticated individual investors.

   Also the Italian regulation was required by a new law about startups, which was proposed by Monti’s administration and approved last December, just before the political elections changed again the administration, replacing Monti with the current prime minister Letta. The law was a good starting point, but it had a lot of restrictions focused on fostering only “innovative” new companies, which were defined as not older than 4 year old and engaged in a high-tech business. Many critics pointed out that a lot of interesting Italian startups that are currently growing couldn’t get any benefit from the law because they didn’t have the required features.

   Now the same kind of criticism can be applied to the crowdfunding rules. They are meant to protect the non sophisticated individual investors, but in doing so they are very strict and complex: they will not attract “crowds” to invest in startups, said Marco Bicocchi Pichi, an entrepreneur, business angle and board member of the Italia Startup association.

   Consob rightly warns investors that they can lose everything they put into a startup, and it goes even so far as to mention the risk of scams lined to online investing. To prevent scams, Consob will make sure that crowdfunding platforms are managed by “legit” operators: there will be a list of them, and the public is invited to check it before committing to any investment. So far, there are no authorized platforms.

   However, the “animal spirits” of entrepreneurs and investors do not stay idle; and in the European financial market there are already countries – UK and the Netherlands – were crowdfunding works, even without specific rules. So Italian investors, including the small and non sophisticated ones – are already receiving proposals to get involved in startups. Is this “dangerous”? What can that mean?

   It is dangerous according to Brian Cohen, the chairman of the New York Angels, who thinks it’s not wise to expose the general public to the same risks that angel investors take:  angel investing is a “contact sport”, according to him, because those who practice it can get hurt and bleed, lose a lot of money due to the high rate of failure of startups and because it takes a long time, even 10 years, before they can sell the shares. Instead Fred Wilson of Union Square Ventures thinks that “the more ways entrepreneurs can raise money, the better it is for entrepreneurship, company creation” (see Chapter 16 – “DIY Funding” in Tech and the City).

   In reality, also in the U.S. entrepreneurs and investors are finding ways to use crowdfunding even without specific rules. They turn to “Do-it-Yourself I.P.O.s”, taking advantage of one of three federal securities exemptions, as this article explains.

   As usual, market’s creativity anticipates regulation. Let’s hope it will be for the good and that regulation will not strangle that creativity.

Maria Teresa Cometto

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