Equity crowdfunding and regulation: implications for the real estate sector in Italy
| Date | 10 January 2020 |
| Pages | 353-368 |
| Published date | 10 January 2020 |
| DOI | https://doi.org/10.1108/JFRC-08-2018-0109 |
| Author | Enrico Battisti,Fabio Creta,Nicola Miglietta |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Equity crowdfunding and
regulation: implications for the
real estate sector in Italy
Enrico Battisti,Fabio Creta and Nicola Miglietta
Dipartimento di Management, Universita degli Studi di Torino, Torino, Italy
Abstract
Purpose –This paper gathers initial evidence about the nature and features of the equity crowdfunding
model in Italy, especially in terms of regulations. The purpose of this study is to examine how equity
crowdfundingmight support the real estate sector in Italy.
Design/methodology/approach –To explore the recent initiatives in the development of FinTech in
Italy, especiallyreferring to equity crowdfunding’sinstrument, a qualitative perspective is used. In particular,
this paper relies on primary data from regulations and secondary data from the public domain, which are
examinedin relation to the current literature.
Findings –The results of this study show that equitycrowdfunding represents a funding method that is
rapidly increasingin Italy, despite rather rigid regulation. Amongthe various sectors involved, the real estate
sector could benefitfrom the crowdfunding models and, specifically, from the equity one. The developmentof
new real estate equity crowdfundingportals that allow diversification of investment (by reducing the typical
entry barriersfor real estate investment) could guaranteegreater investment transparency andsimplicity.
Practical implications –Real estate crowdfunding can be a simple way to invest in the real estate
industry. Thanks to the use of technology, specifically internet-based platforms, this typeof crowdfunding
allows for small investors, as well as professional investors, to access an asset class otherwise not open to
small investmenttickets and improve the diversification of investments.
Originality/value –Although recent literature has examined the concept of crowdfunding and
highlighted different models, aspects and campaigns, no prior studies, to the authors’knowledge, have
explicitly and jointlyinvestigated, also based on the state of art of regulation, the equity crowdfundingmodel
and the real estate sectorin Italy.
Keywords Regulation, Crowdfunding, Equity crowdfunding, Real estate crowdfunding,
Real estate sector
Paper type General review
1. Introduction
FinTech (Financial Technology) concerns the digitization of the banking and financial
system through technology that makes the system itself more efficient (Freedman, 2006;
Banca d’Italia, 2017;Campanella et al.,2017;Ferrari, 2017;Philippon, 2017;Ziegler et al.,
2018). Fintech is articulated through a wide range of technological solutions applied to
finance, such as crowdfunding, peer-to-peer lending, payment management, data collection
and digital currencies or crypto currencies. Starting in 2010, crowdfunding has emerged as
an innovative method for financing new ventures by allowing individual founders of for-
profit, social or cultural projects to request funding via small sums from multiple people
(Mollick, 2014) rather than raising large amounts from a limited number of large investors
and/or backers (Belleflamme et al., 2014). This usually happens without the contribution of
common financial intermediaries,but through the use of the Internet (Mollick, 2014).
Real estate
sector in Italy
353
Received10 August 2018
Revised6 June 2019
9 October2019
Accepted20 December 2019
Journalof Financial Regulation
andCompliance
Vol.28 No. 3, 2020
pp. 353-368
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2018-0109
The current issue and full text archive of this journal is available on Emerald Insight at:
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Taking inspiration from the principles of crowdsourcing (Kleemann et al., 2008) and
micro-finance (Morduch,1999), crowdfunding can be defined as a community-based funding
method (Agrawal et al.,2015). Indeed, crowdfunding incorporates advantages that go
beyond the funding collected,including feedback on ideas under development (Gerber etal.,
2012), project validation (Frydrych et al.,2014) and interaction between different
stakeholders (Mollick and Kuppuswamy, 2014). Crowdfunding represents, therefore, a new
financial and social phenomenon (Previati et al.,2015) and a new form of entrepreneurial
finance (Hornuf and Schwienbacher,2018) that is spreading (Giudici et al.,2012) all over the
world and changing the capitalmarket space (Beaulieu et al.,2015).
In general terms, the crowdfundingmarket has developed at triple digital rates in recent
years (Barbi and Bigelli, 2017) and research interest in crowdfunding has been steadily
increasing, even if this interest is still limited (Short et al.,2017) and the literature is
relatively novel. In particular, many scholars have defined the different types/models of
crowdfunding (Giudici et al., 2012;Harrison, 2013;Beaulieu, 2015), and it is generally
possible to highlight five standard-based models: donation-based, equity-based, reward-
based, royalty-based and lending-based. Briefly, “equity”involves the purchase of an
investor share in the company; “lending”consists of a loan from individuals or institutional
intermediaries that will be repaid together with interest in a pre-established period of time;
“reward”implies a non-monetaryreward, such as a product or service based on the amount
invested in the financial campaign; “royalty”implies a monetary reward in terms of shares
of the project’s future earnings; and “donation”implies a monetary transfer to finance
projects with social implications. Compared to other types of crowdfunding, the equity
model is a relatively new phenomenon(Lukkarinen et al., 2016).
Equity-based crowdfunding is a model that consists of funding from individuals who
invest their money in the capital of a company by purchasing part of its shares (Pais et al.,
2014;Cultera, 2015;Quaranta, 2017). Equity-based venture financing through an online
crowd has developed swiftly (Moritz et al.,2015). Some studies have focused on different
aspects connected to this type of financing source (Lukkarinen et al., 2016;Vulkan et al.,
2016;Miglietta et al.,2019), but quantitative and qualitative research on this type of
crowdfunding is still scarce (Hornuf and Schwienbacher, 2018). To the best of our
knowledge, no prior studies have explicitly and jointly investigated, based alsoon the state
of art of regulation, the equity crowdfunding model and real estate, which historically
represents one of the most important sectors in Italy.Until a few years ago, the only option
to enter into the real estate market was to have large capital and buy property. In the actual
crowdfunding scenario, there are instead specialised platforms that allow an investor to
participate in the real estate market even with small amounts of capital and diversify the
portfolio with an investment that has always been considered safe and profitable. In this
sense, real estate crowdfunding is a process, whereby real estate investors and project
owners raise and aggregate small amounts of capital from an extensive group of investors
through the use of technology(Montgomery et al., 2018).
Based on these considerations, this paper seeks to gather initial evidence about the
nature and features of the equity crowdfunding model in Italy, especially in terms of
regulations. Specifically,the aim of this study is to examine how equity crowdfunding might
support the real estate sectorin Italy. To achieve the research’s purpose, this paper relieson
primary data from regulations (in the USA, the European Union (EU) and Italy) and
secondary data from the public domain, which are examined in relation to the current
literature.
The contribution of thispaper is twofold. First, through a general revision of regulations,
we extend the literature examining a specific crowdfunding model (equity) to fill the
JFRC
28,3
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