Crowdfunding provides a viable alternative source of funding for businesses
As of now, crowdfunding can also be extended to SMEs incorporated as LLCs
Crowdfunding: what is it all about?
Crowdfunding constitutes a viable alternative finance tool allowing businesses to raise widespread capital through a digital platform.
This capital raising mechanism allows those who have in mind to harden an already established business financially or are planning to give birth to a business project to highlight the project’s objectives online and thus bring in economic resources from external financiers who decide to invest through a unique platform.
Each investor, under the type of investment, will achieve different rights.
Crowdfunding: who are the participants?
Having clarified that this alternative finance tool, also known as a widespread capital raising mechanism, allows, through a digital platform, to contribute to the birth of a project, with different amounts of investment and other consequent rights, it is necessary to emphasize the subjects taking part in the mechanism.
Generally speaking, the provision of crowdfunding services involves three types of actors:
- the owner of the project to be funded
- the investors
- The intermediary organization is a crowdfunding service provider that connects project owners and investors online.
As for the latter point, crowdfunding operations are developed through the intermediation of a specialized digital platform, within which the promoter indicates (usually) an amount they would like to achieve to realize the project.
Tax aspects
Regarding the taxation aspect, it is noted that in the case of capital raising through crowdfunding, investments made through online portals will follow the same tax rules as those made through traditional channels.
As such, profits will be subject to a 26 percent withholding tax.
In addition, dedicated platforms must be operated by companies authorized by the Bank of Italy as financial institutions under Article 106 TUB and/or payment institutions.
Types of crowdfunding
There are different types of crowdfunding, each of which has other tax characteristics.
In this regard, suffice it to consider the following:
“reward crowdfunding” allows the company, usually an innovative start-up, to present a product to the market before starting its official production. From a tax point of view, through this type, companies secure cash flow in advance, and a certain number of already potentially interested consumers (who can be rewarded with shares or units of the company itself) under certain conditions could constitute a pre-sale of an object or service, and therefore VAT could be applied
“Equity crowdfunding,” through which investors purchase shares or quotas and the issuance of corporate equity. These are exempt transactions, and about transactions related to the purchase of shares or quotas or the allocation of corporate holdings, there will be no application of VAT
“Royalty crowdfunding” allows supporters to be awarded royalties, i.e., shares of the profits that the financed project will pay in the future as a quid pro quo for financial participation in the project. In this circumstance, the transaction is subject to the application of VAT.
So-called “social lending,” in this case crowdfunding, takes the form of alternative financing to bank credit. The granting of funding through this model involves the payment of an interest rate and the repayment of the borrowed sum. Under certain conditions, there is an exemption from the application of VAT.
Advantages of crowdfunding
This alternative finance tool is becoming increasingly popular among start-ups and small and medium-sized enterprises, as, in addition to being an alternative source of financing, including venture capital, crowdfunding can offer a variety of other advantages:
For example, crowdfunding makes it possible to:
- minimize business risks
- validate the effectiveness of a business idea
- get in touch with a large number of people, investors, entrepreneurs
- easily reach an unspecified number of individuals, therefore, representing a valuable marketing tool.
News about crowdfunding
As of September 2022, due to the enactment of L. 4 No. 127 of August 4, 2022, it is possible to finance through this mechanism even beyond national borders.
To strengthen the European business market, the new regulation removes previous constraints that hindered collective microfinancing across domestic borders.
In this sense, the crowdfunding market becomes cross-border and, as such, dramatically expands the pool of potential funders.
But that is not all.
The publication in the Official Gazette of Legislative Decree No. 10 last March 24, 2023, stipulated that to finance themselves through crowdfunding may also be LLCs.
While until now, access to this form of widespread capital raising was reserved purely for Spas, SMEs, and innovative start-ups, as of now, it is expected that limited liability companies will also be able to use it.
Therefore, the restriction in Article 2468 of the Civil Code, according to which the shareholdings of members of limited liability companies cannot be represented by shares or constitute the object of public offerings of financial products, has been waived.
