In July of 2013, Italy was the first European country to enact crowdfunding regulations. Despite being an early adopter, to date very few businesses have successfully raised capital using the online portals established by the rules. Now a year and a half later, the Italian government released a new law designed to make equity crowdfunding accessible to more of Italy’s SMEs. Lawmakers hope the changes will improve access to finance for small businesses while encouraging innovation.
Experts aren’t sure the new regulations will help more businesses reach their goals. “While the decree is positive in terms of supporting SMEs, its scope is narrow,” Monica Curti, a Moody’s vice president, and author of a report on the recent change said in a statement. “Only 7,000 out of a total 3.7 million SMEs are potentially eligible under the new rules,” – a figure that translates to less than 0.2 percent.
When it goes into effect in the next 60 days, Decree No. 3, the official name of the new crowdfunding law, will limit access of these funds to only “innovative SMEs.” The Italian government’s definition of innovation is strict. To qualify, businesses must have less than €50 million ($53 million) in annual turnover and allocate a certain proportion of its spending on research, development and innovation, while a proportion of its employees would need to meet certain academic criteria. In the new report titled, “The Extension of Equity Crowdfunding to Innovative SMEs is Only Mildly Positive for Italian ABS SME Securitization,” the rating agency notes most businesses will not meet the high standard of technology intensiveness created by the decree. In 2012, just 10 percent of Italian manufacturing companies met the new technology criteria. Business attempting to meet the standards of the regulations may find it difficult, “innovative SMEs” will need to have above-average research and development expenditures.
Access to funding through the traditional means of bank lending and capital markets has been tough across the board for Europe’s SMEs. Italian SME faces the additional challenge of particularly hard economic conditions. Italy bore the full brunt of the fallout from the 2008 financial crisis. According to research from the University of Cambridge and EY in 2013, loans to non-financial corporations fell by €50 million ($53 million). Crowdfunding has helped lead Europe’s crowdfunding boom. Generally thought of as many of individuals contributing small amounts, the segment now attracts investors looking for high return. Equity-based crowdfunding grew to €82.5 million, the University of Cambridge EY study revealed.
The rest of Europe may be experiencing a boom in alternative finance, but Italy risks being left behind. By the end of 2015, non-traditional borrowing could top €7 billion (nearly $8 billion), more than doubling its 2014 value of €3 billion, the research shows. The United Kingdom, France and Germany dominate the alt-finance market. Italy, however, slipped from the Top 10, falling to 17th place with just over €8 million ($8.5 million) in 2014.
The Moody’s forecast of the impact of Italy’s new crowdfunding legislation is not all negative, however. Italian SMEs will benefit from a push to create a cross-border alt-finance market, which would make it easier for Italian businesses to seek funding from nations will more robust, less narrow alternative finance markets. But achieving a pan-European market is no easy feat. Some doubt the ability to create cohesive legislation that will address the multifaceted needs of all of the EU’s 28 member states. Moody’s Curti believes overall the new rules are positive, but the impact will be limited by the constricted eligibility criteria.