Equity-based crowdfunding refers to the financing by individuals who invest their money in the equity of a company, through the purchase of part of its shares or quotas. The mechanism on which equity crowdfunding is based is much simpler than the regulated and unregulated markets of the stock exchanges and the procedure tends to have much lower costs. Typically, the operators of digital platforms hosting crowdfunding projects ask for a percentage of the capital raised. Interestingly, the equity-based model can also be used to provide credentials for bank loans or public funding. Crowdfunding, in this case, can be a first step towards obtaining funding from entities such as venture capital firms, or to pave the way to traditional financial markets through an IPO (Initial Public Offering).
The health of equity crowdfunding in Italy
Equity crowdfunding in Italy continues its ascent, despite the crisis caused by the Covid-19 pandemic. Starteed, a consultancy specialising in crowdfunding campaigns and platforms, has photographed the state of the sector in a recently published report on Crowdfunding in Italy.
The survey reveals that in 2020, despite the crisis, crowdfunding has proven to be a resilient tool ready to bridge the gaps still existing between the real economy and traditional funding channels. According to the data collected, in 2020 crowdfunding campaigns in Italy (Donation & Reward, Equity and Lending) raised €333,077,587. In particular, equity crowdfunding - with a total annual fundraising of €122,468,132 - contributed 37% to the health of the sector. Compared to the previous period, the Italian equity sector grew by 95% in 2020, totalling in just one year almost half of the amount raised since 2014.
Latest trends
There are a number of notable trends emerging in the sector. In particular:
the average number of participants in campaigns has fallen from 137 to 119, but the amount invested has increased (average investment rose from €3,300 to €4,700);
the average size of campaigns increased, from €435 to €560,000, and the weight of campaigns above €500,000 increased, raising more than €42 million compared to €321,500 in 2019;
the number of investment vehicles has grown, which is probably due to the fact that people are less inclined to risk and more interested in diversification possibilities;
real estate crowdfunding in particular has grown. As reported in the 5th report on crowdinvesting by the Politecnico di Milano, in the first six months of 2020 the sector reached a value of about 908 million euros, of which 159 million were invested through equity portals and 749 million through lending portals.
The Italian one is an expanding market; having grown from €5 million in 2016 to over €60 million in 2019, crowdfunding in Italy is at the levels of France and Germany but is still far from those of the UK (over €400 million). It is also a relatively concentrated sector that is characterised by an intensification of partnerships between private operators and platforms.
Who is equity crowdfunding aimed at in Italy?
Equity crowdfunding proposes a digital distribution channel that allows investing in a simple, less onerous way and is accessible to a wide audience. Among these is the target of affluent individuals, very large in number and poorly served by private banking due to high marginal management costs.
Crowdfunding is also popular with millennials, who by nature are used to moving with ease on online platforms.
Those who invest in innovative start-ups and SMEs through this type of platform also enjoy tax advantages (up to 50% tax deduction). Obviously, all this is within a system regulated by the Mifid regulation (the platform is responsible for verifying the appropriateness of the client's investment), albeit with a very simplified procedure.
The new generation of equity crowdfunding
In order to become to all intents and purposes reliable and lasting counterparts to private equity, Italian crowdinvesting platforms need to invest in developing certain functionalities.
First of all, each platform needs to set up a team of professionals to oversee the investment selection process, with the task of providing specialist support to clients, ensuring regular monitoring of the investment and producing clear and transparent reporting.
It is also important that platforms are able to establish strong connections with the funded companies in order to guarantee the investor that the initiatives are consistent with the plans presented.
Finally, the success of equity crowdfunding can only be based on a harmonised regulatory framework to protect investors, as guaranteed by the implementation of the regulation launched by the EU that introduces higher standards of transparency to protect investors.