What do you need to know to invest in equity crowdfunding?
Equity crowdfunding is a type of investment that commits private capital, even with small or very small amounts, in the financing of entrepreneurial realities such as small or medium-sized enterprises (SMEs) and startups.
The term crowd indicates the possibility that such investments are made simultaneously by a multitude of savers. Investments can only be made through specific online portals authorized by Consob
The characteristics of equity crowdfunding
Investing in equity crowdfunding means adhering to entrepreneurial projects far from speculative finance and with deep roots in the real economy. The variety of companies and projects that can be financed also offers investors an excellent tool to diversify their portfolios, with good chances of returns in the medium to long term.
Becoming partners of startups and SMEs
Joining an equity crowdfunding campaign involves subscribing to shares in the share capital of the company you choose to support. In simple words, whoever invests buys shares in the company, becoming a full partner.
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How to invest in equity crowdfunding
Starting to invest in equity crowdfunding is very simple even for those who are not accustomed to managing a portfolio of investments.
First of all, it should be noted that the amounts to be invested can be quite low (a few hundred euros), thus limiting the risk associated with the investment itself.
In the regulations there are no minimum investments to be respected, even if in practice it may happen that the promoter of the campaign indicates a minimum.
The investment can be made directly without the aid of a financial intermediary, simply by choosing a project from those present on the numerous portals authorized by the financial authority of the base country. Once the investment has been made, the investor also retains the right of withdrawal: he can reconsider within seven days and the sums committed will be entirely returned.
What kind of investment is equity crowdfunding?
As we have seen, equity crowdfunding is a form of investment aimed at unlisted companies.
Investment in unlisted startups and SMEs has specific characteristics that define, at the same time, its potential and risks.
In terms of potential, it should certainly be noted that equity crowdfunding investments generally guarantee high potential returns. As in any other form of investment, there are also risks, mainly linked to younger companies with a less consolidated business. For this reason, it is always good practice to diversify your investments as much as possible in order to minimize the risk of losses.
It should also be considered that investment in equity crowdfunding presupposes the expectation of medium to long-term earnings. Finally, this is a type of illiquid investment, i.e., lacking the ability to make the company shares acquired immediately sellable (and therefore liquidable). In the absence of a structured secondary market, the liquidation of quotas is often entrusted to exit clauses. However, much is being done from this point of view and there are already important signs for the creation of secondary markets able to facilitate the purchase and sale of shares.
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How to earn with equity crowdfunding
As mentioned, investing in equity crowdfunding is very simple and at the same time safe, as this form of investment is subject to strict specific regulations.
We have already seen that equity crowdfunding investments generate returns in the medium to long term, but how can you earn by investing in the entrepreneurial projects of SMEs and startups?
There are basically three ways to profit from an equity crowdfunding investment, let’s see them in detail.
Dividend distribution (Italian regulation) This is a form of remuneration that is only possible for those who have invested in small and medium-sized enterprises: SMEs, in fact, at the time of the closure of the balance sheet, have the right to proceed to the distribution of profits.
The same possibility is not given to start-ups, which are obliged not to distribute any profits as long as they maintain this status, i.e., within a maximum of five years from registration in the appropriate section of the Register of Companies.
Capital gains (Italian regulation) In the event of the sale of the company in which one has invested, or of majority stakes in it, investors can sell their shares at a higher price than the purchase price, thus realizing capital gains, recently deducted by the “Decreto Sostegni Bis”.
Listing on the stock exchange (Italian regulation) In the absence of a structured secondary market for equity crowdfunding, the listing of the financed company on the stock exchange represents the opportunity to proceed with a classic purchase and sale of shares, allowing also in this case to realize capital gains and therefore obtain a positive return on the initial investment.
Italian Consob Regulation
Italy was the first European country to adopt specific regulations on equity crowdfunding.
The Italian productive fabric is in fact dotted with small and medium-sized companies that often have difficulty in accessing credit through traditional channels. For this reason, equity crowdfunding was immediately seen as an alternative channel of financing particularly suitable for Italian businesses.
Equity crowdfunding investments have been authorized for the first time by the decree 179/2012, which recalled the need for a specific regulation whose realization has been entrusted to Consob. On June 26, 2013 the Regulation on equity crowdfunding has been officially launched, whose main purpose is to protect investors by providing them with elements of transparency and awareness about the investment operations, as well as a series of protections to guarantee even less experienced investors.
What does the Italian Consob Regulation on equity crowdfunding provide for?
First of all, the Regulation establishes that any investment proposal in equity crowdfunding can only be made through online portals supervised and authorized by Consob, and for this reason registered in a special list available on the Authority’s website.
For each investment proposal, the platforms are also required to provide information sheets on the company being financed, the costs, the objectives of the collection and the risks associated with it.
The Regulation also envisages that the economic transaction for the investment does not take place directly on the portals, but must be completed through a bank or an investment company, which must then comply with further information obligations towards the investor.
Finally, the portals are entrusted with the task of checking that at the moment of closing of the offers all the conditions indicated in the information notice have been respected and that at least 5% of the sums come from professional investors, as foreseen by the Regulations.
Starting in 2019, the Budget Law introduced some novelties that resulted in some changes to the Equity Crowdfunding Regulation. In particular, SMEs were given the opportunity to issue bonds and mini-bonds through authorized portals.
Tax breaks (Italian regulation)
Investment in equity crowdfunding can also be particularly advantageous thanks to the indirect earnings from which investors can benefit. This is the case, for example, of the numerous tax breaks provided in favour of those who invest.
Recently, the facilitation measures have been further reinforced, reflecting the importance recognized to the innovation sector, with innovative startups and SMEs, and to small and medium-sized businesses in general.
For example, the tax deduction for equity crowdfunding investments has been increased from 30% to 50% with a maximum deductible amount of €100,000 for investments in startups and €300,000 for those intended for SMEs.
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