Is it possible for large investors and small shareholders to live together in innovative development projects such as those carried out by many start-ups? One of the tools that could facilitate this process is equity crowdfunding.
According to research conducted by the Crowdinvesting Observatory of the School of Management of the Politecnico di Milano, of the almost 500 companies that had raised money through equity crowdfunding campaigns by 31 December 2020, only 88 had also raised funds from institutional investors (venture capital, Sgr, Sim...). Of these, in fact, only 31 saw professional investors co-investing with individuals during the campaign and 17 opened the door to professional financial investors or corporate entities following reserved capital increases after the end of the crowdfunding campaigns.
The main reason why large investors are often not interested in companies that have closed an equity crowdfunding campaign is the fear that having many fractional investors can create critical issues in the management of the company. Fortunately, there are now tools available to crowdfunding start-ups that facilitate simple and straightforward governance. The purpose of these tools is to attract those institutional investors, private investors and wealthy individuals who do not view favourably the extension of voting rights to micro investors.
What corporate vehicles are and how they work
One of the ways of bringing together large investors and small shareholders in equity crowdfunding operations is to group micro investors into ad-hoc companies whose ultimate goal is to invest in the project in question. Within the vehicle company there may be a distinction of share classes, but often these are purely financial investments with no possibility of governance.
In spite of what one might think, this solution is also very popular with micro-investors, who are still left with the right of ownership. Small investors also continue to benefit from the tax incentives because investing in the vehicle is the same as investing in the company and the reliefs are the same.
In addition, small investors have now often realised that giving up their voting rights makes the company more attractive to institutional investors, who - by investing large amounts of capital - guarantee a greater prospect of growth and return on investment, which translates into more attractive exit possibilities.
Types of corporate vehicles
There may be different types of vehicle companies which, although they share the same aims, operate in different ways. Generally, they can be divided into two macro-categories:
Simple Investment Companies (SIS). Simple investment companies (SIS) are special types of company whose characteristics are defined by specific Bank of Italy regulations. They represent a corporate vehicle, constituted in the form of a fixed-capital investment company (SICAF), which enables capital to be raised from investors for the purpose of making investments in start-ups or SMEs. The criteria for setting up a SIS are determined by the Bank of Italy, which only authorises its establishment after receiving a specific opinion from Consob.
Special Purpose Acquisition Company (SPAC). These are always special purpose vehicles which aim to raise capital for investment in one or more existing operating companies, but in this case the target companies may be identified after the placement of the shareholdings. In this case, therefore, investors entrust their capital to the vehicle company, relying on the sole asset of the cash raised through the initial public offering.
In both cases, vehicle companies are particularly suitable to support the development process of young start-ups and provide an additional guarantee to investors if the target company of the crowdfunding campaign does not achieve the expected business results.
The success of these instruments demonstrates that equity crowdfunding is in no way incompatible with institutional investment. On the contrary, large investors and small shareholders can participate together or in later stages of raising funds to the great satisfaction of all parties involved.
The coexistence of large and small investors in the same fundraising campaign shows not only that equity crowdfunding is now a very successful way of raising capital but also that it has become a showcase for professional investors.