Consolidation in Sight in the Italian and European Crowdfunding Sector

The European Union’s recent regulatory crackdown, combined with the typical fragmentation of the Italian crowdinvesting market, will likely lead to a wave of consolidation and extraordinary operations in the crowdfunding sector. This would allow large and medium-sized platforms to obtain cost synergies, but also to withstand the competitive push deriving from European portals.

Of the 114 crowdinvesting portals registered in Italy, in fact, only 25 at the beginning of April have successfully completed the process necessary to continue operating, while among the new portals authorized in Europe there are 21 platforms that have already declared they want to work in Italy (French and Spanish in particular).

The Spanish company Urbanitae announced its entry into Italy at the end of March with the aim of financing 50 million in real estate equity projects in the first year of activity.

Regulatory settlement and implications for crowdfunding operators

In October 2020, the EU introduced European Regulation 2020/1503 , called ECSP (European Crowdfunding Service Provider), which establishes new elements regarding the authorization, organization and supervision of “crowdfunding service providers.” The regulation, which all platforms had to comply with by November 10th, 2023 , introduced more uniform rules at community level, and provides that:

All crowdfunding platforms comply with the new rules in terms of internal controls, governance, internal member suitability, as well as the due diligence process on new initiatives;

All key details of investments and initiatives are disclosed in a standardized prospectus called KIIS (Key Investment Information Sheet);

You have a European passport to operate in other EU countries;

Platforms will be able to offer mini-bonds to retail investors, while they will not be allowed to sell units of Collective Investment Undertakings;

Access to raising capital through equity crowdfunding should be extended to all types of companies (whereas previously it was reserved only for SMEs and innovative start-ups).
As regards the Italian market , Legislative Decree March 10th, 2023, n. 30 amended the Consolidated Law on Finance (TUF), dictating the principles for the creation of a uniform regulation for lending-based crowdfunding and investment-based crowdfunding at a local level.

Furthermore, in compliance with the harmonized regime dictated at European level, Consob and the Bank of Italy have been identified as competent national authorities and their respective supervisory responsibilities have been divided. In particular, the former deals with all authorization procedures and the supervision of the transparency and fairness of the portals, while the latter deals with the adequacy of capital, governance, risk mitigation and internal controls.

The entry into force of the regulation and its implementation in Italy was not without difficulties, both due to the more stringent requirements required by the competent national authorities and due to delays in the assignment of licenses .

According to some, the combination of these factors has in fact created, albeit indirectly, a more streamlined authorization process for foreign platforms, which can benefit from a “single passport” to also operate in the Italian market.

The benefits introduced by the European crowdfunding regulation, however, are clear and include greater transparency and protection of investors (especially non-professional ones), as well as the promotion of a single, cross-border market .

The problems raised by Italian operators concern the additional guarantees required by national bodies on the profile and eligibility of investors and the need to have a balance sheet certified by an auditor (which makes them financial intermediaries in all respects).

Added to this is the fact that the secondary market is not currently authorized in our country (which significantly reduces the liquidity of investments) nor the possibility for retail investors to subscribe to debt securities such as minibonds.

The dematerialization of LLC shares

In correlation with what has been described so far, the provisions introduced by Law 5 March 2024, n. 21 (so-called “DDL Capitali” ), envisaged to facilitate access to the capital market and reduce the costs linked to the issue and transfer of shareholdings in small and medium-sized enterprises , introduce the faculty to dematerialize the shares of limited liability companies, which fall into the category of SMEs, using the centralized management regime provided for by art. 83-bis et seq. of the TUF.

Therefore, SME LLCs are allowed to offer their shares to the public for subscription in accordance with the general legislation provided by the TUF or through equity crowdfunding portals.

In this regard, it is necessary to specify that the new regulation is limited only to innovative start-up LLCs and SMEs, resulting in the exclusion of large LLCs from the dematerialization system.

To determine which SMEs are included or not, reference is made to the definition in the “European Recommendation 2003/362/EC”, according to which a company, to be defined as an SME, must have an average number of employees during the financial year of less than 250 and one of the following conditions: annual net turnover not exceeding 50 million euros or total balance sheet not exceeding 43 million euros.

Given this, this exclusion could in practice lead to an obstacle to the initial aim of allowing the development of a secondary market of shares, in this case, for those limited companies that have a greater interest in accessing dematerialisation, given the greater number of shareholders and the better organizational capacity .

If these additional constraints partly risk breaking the competitive balance and therefore causing a loss of resources abroad, the additional requirements required of Italian platforms also represent an additional value and imply greater solidity and attractiveness for investors , even outside the ‘Italy. Another opportunity is represented by the removal of the requirement of a minimum of 5% of the collection invested by professional investors.

Future prospects and challenges

In a fragmented and polarized market like the Italian one, in which a few players are responsible for the majority of fundraising (eg, Mamacrowd alone covered 60% of the equity crowdfunding market in 2023), the main successful options for platforms of smaller dimensions pass through the diversification of the range of products and services offered, to be achieved through specific initiatives and the offer of innovative products .

In this sense, new opportunities could derive from the introduction of Security Token Offering (STO) mechanisms , which allow the investor to keep the securities himself through the issuance of a token (representative of the capital share) based on technology blockchain.

Tokenization offers undeniable advantages to the platform and to the investor: the latter, in fact, has the possibility of accessing alternative forms of investment, which are more liquid, highly profitable and with more streamlined and rapid bureaucratic processes. Naturally, we add to this the technological enablement for a possible secondary market of quotas .

Among the opportunities for business growth and diversification, a specific mention must also be made regarding the possibility of formalizing partnerships . A well-known example is that between Ener2Crowd and Walliance , which offers investors a new asset class by combining the energy proposal with the real estate one such as green redevelopment of buildings.

Regarding inorganic growth, it is reasonable to expect a new wave of extraordinary operations further favored by recent regulatory developments . As already described, the new constraints could in fact make it impossible for some platforms to operate, since they would not have the financial resources and means necessary to comply with the new rules and procedures.

The introduction of ESCP constraints, combined with the polarization and fragmentation of the current market, creates favorable terrain for a natural process of consolidation, coinciding with the growing maturation of the crowdfunding sector. Funding flows from Venture Capital funds, interest in M&A transactions, hybrid business models and partnerships confirm these trends.

The aggregative phenomenon

Looking at the European context, the Dutch market can be taken as a point of reference , positioning itself in first place according to the CMRI (Crowdfunding Market Readiness Index), developed by the Crowdfunding Research Center of the University of Agder.

This index takes into consideration various parameters, including the number of active platforms in the area based on the population, the volume of investment per capita, the average number of investors and the general level of awareness of citizens regarding crowdfunding. The other positions on the podium are occupied respectively by Norway and Denmark, while Italy occupies the twelfth and penultimate place (followed only by Poland).

It is precisely by looking at recent market developments in the Netherlands that we can observe a representative case study and potentially precursor of trends also arriving in the Italian market: it is a merger into a ” super platform ” of three crowdfunding players, which took place in end of November 2023. The Dutch Kapitaal op Maat , Max Crowdfund , and Capital Circle have in fact announced their desire to unite to operate in multiple European countries and different business areas, leveraging the single ECSP license obtained by Kapitaal op Maat. The new group thus obtains 20,000 registered users and a total collection of over 200 million euros.

The trend towards the creation of “super platforms” could materialize well beyond a single isolated case: according to the European Crowdfunding Market Report 2023 of the University of Agder, in fact, only a minority of platforms of all models have carried out mergers and acquisitions in the past , but a greater share of them instead plans to be involved in M&A activities in the future (specifically, 42% of equity platforms and 53% of lending platforms).

The aggregation phenomenon has apparently already begun in Italy too, with the best-known cases involving the acquisition of Trusters by CrowdFundMe and the French Lymo Finance by Walliance. The aggregation of Opstart and BackToWork is also very recent, with the acquisition of 60% of the latter by the former in a card-for-card operation that aggregates around 60,000 users and more than 600 campaigns launched.

Other operations have involved large financial companies investing in stakes of various sizes in Crowdfunding portals: Azimut in Mamacrowd , Intesa Sanpaolo in BackToWork and Credit Agricole in Ener2Crowd.

The harmonization of legislation could also lead to the formation of so-called “super platforms” in Italy to leverage a single license and the adoption of economies of scale, even with a European dimension that looks beyond national borders.

The European Union as a whole is also becoming more attractive to overseas players, with platforms that already operate in other geographies and can now acquire a single license to operate in all member states, whereas in the past they would have had to follow rules and authorization processes specific for each state.

By way of example, we can mention the US companies Wefunder (which received the green light to operate in the EU in 2023) and Republic. The latter has created a trans-continental super-platform thanks to the 2021 acquisition of Seedrs , an English platform whose Irish branch was recently authorized under the ECSP.

Conclusions

In conclusion, it is expected that in the coming months the transformative process of the crowdfunding market will continue with a further push towards the consolidation and formation of super-platforms with a potentially pan-European scale.

On the one hand, greater concentration risks transforming small players into fundraising platforms, with standardized processes to manage the volume of transactions and increase commission revenues by the larger players, who control the majority.

On the other hand, a growing fragmentation into highly specialized niches by geography, type of user, financing model and type of operation is expected, in the direction of an increasing modularity of the platform in order to satisfy the unique needs of the different types of investors.

Since these market developments are simultaneously likely, we can expect a standardization of operational processes within platforms on universal needs such as fraud protection, tax clarity and education, and strong competition at the level of specific use cases , type of transactions and investors.

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(Featured image by hpgruesen via Pixabay)

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