Corporate bylaws for equity crowdfunding: requirements and clauses to be included

Doing an equity crowdfunding campaign requires a preliminary phase of paperwork to prepare the company to carry out the operation in compliance with current regulations and with the proper set-up to handle the entry of new shareholders.

While the other types of crowdfunding are much more bureaucratically and administratively agile, equity requires some extra attention. Starting with the corporate bylaws: did you know that it requires some ad hoc configurations for equity crowdfunding?

In fact, corporate bylaws must have certain specific contents in order to be compatible with a public raising of capital (in the case of LLCs) and to enable the safe and intelligent management of the entry of many new minority shareholders into the company (for both LLCs and Spas).

For many companies, before launching a campaign, it is necessary to amend the corporate charter, inserting clauses that make it possible for the holdings to be offered to the public and properly regulate the Management of the company after the entry of the new investors.

In this article we see The role of corporate charter for equity crowdfunding and clarify which clauses must be present or included before the campaign, which elements are mandatory and which are optional.

Public offering of shares: the rule that makes equity crowdfunding possible

Let's start with a regulatory basis. Today, all LLCs and SpAs of any size can do crowdfunding.

To understand why corporate bylaws assume such an important role in equity crowdfunding, we need to start with a principle of corporate law: LLCs are structurally “closed” companies”, designed for a limited number of members and controlled circulation of holdings, which are not meant to be offered to the public.

Equity crowdfunding, on the other hand, is based on an opposite mechanism: the Public investment proposal to a broad audience of potential investors online. This apparent contrast was resolved by the legislature through a specific regulatory exemption to allow LLCs to raise capital by crowdfunding.

L'Article 100-ter of the Consolidated Law on Finance (TUF). stipulates that certain companies may offer financial instruments to the public through authorized crowdfunding portals.

This rule stipulates that, through regulated online platforms, a company can propose to potential investors:

• shares, in the case of spas;
  
• quotas o other participatory instruments, in the case of LLCs

The exemption introduced by the TUF has thus opened the way for online capital raising even for companies that, in their original structure, were not designed for a public offering of equity investments.

But this possibility must be incorporated into the company's bylaws: according to the prevailing interpretation of legal doctrine, in fact, the possibility of making public offerings requires the company to explicitly decide to waive the prohibition in the Civil Code, and this choice is normally formalized in the company's articles of incorporation or bylaws. 

For this reason, at the opening of the company or before a campaign explicit provision for the Possibility of offering holdings through crowdfunding portals.

In this way, it is as if the LLC is “activating” the waiver, explicitly manifesting a willingness to consciously take advantage of it. 

There is no formal obligation to include this provision in the bylaws, but it is a step that has entered practice to avoid bureaucratic-legal complications during or following the transaction. This is not necessary, however, for spas, which already have a structure compatible with public capital raising.

The most interesting elements of the corporate bylaws for equity crowdfunding, however, are more operational clauses, which are also not formally mandatory but are actually essential to make the operation technically manageable. Many of them, moreover, are also useful for SpAs (particularly those on the distinction between categories of shares).

The practical role of corporate bylaws for equity crowdfunding

Many LLCs have bylaws drafted when the company was incorporated, often with the need to regulate only a restricted corporate structure. In these cases the bylaws may contain clauses that are not compatible with a public raising of capital or are not sufficient to ensure efficient control of the company.

Before starting an equity crowdfunding campaign, it is therefore a practice to conduct a verification of existing statutes and, if necessary, make an amendment by deed.

A crowdfunding campaign, in fact, can lead to the entry of Dozens or hundreds of new members, all of whom hold a corporate interest. Without an appropriate statutory structure, this situation can generate difficulties in governance and shareholder relations.

The equity crowdfunding investors acquire property rights-such as profit sharing-and, in some cases, administrative rights as well.

This generates some consequences:

• Increase in the number of rightsholders to be defined;
• Need to handle more complex corporate communications;
• possible coordination needs between founding members and new investors.

Bylaws as a tool for regulating governance

Through specific clauses the corporate bylaws may stipulate:

• The ways in which members can exercise their rights;
  
• The rules for transferring holdings;
  
• The organization of corporate bodies;
  
• Any special rights given to certain categories of units.

In the context of equity crowdfunding, these provisions become essential to ensure clarity and stability in governance.

Key statutory clauses for an equity crowdfunding campaign

Some clauses to be included in the corporate bylaws are necessary to carry out the collection, others serve to ensure orderly governance once the campaign is over. In either case, the bylaws must be consistent with the operation of Capital increase intended for platform investors.

Share transferability clauses

One of the most sensitive aspects concerns the circulation of corporate holdings.

In the articles of incorporation of LLCs, it is quite common to find clauses restricting the sale of shares, for example, rigid rights of first refusal in favor of other shareholders, approval obligations on the part of the directors or the shareholders' meeting, and limits on sale to outside parties.

These clauses serve to keep the membership stable, but may conflict with the logic of crowdfunding, where stakes are purchased by many investors. 

Rules too rigid and designed for a few members could:

• make it impossible to resell the shares and therefore unattractive to invest in equity crowdfunding, which itself is already illiquid;
• make it complex to coordinate a large number of partners in case of sale of the company or acquisition by a fund;
• Overloading the administration with management burdens.

For this reason, prior to an equity crowdfunding campaign, it is important to check that the rules for transferring shares do not make it impossible or excessively complex to dispose of holdings, do not hinder future extraordinary transactions (e.g., exits), and are compatible with managing a plurality of shareholders.

Drag along and tag along clauses

For the regulation of extraordinary circulation of shares, the most commonly used clauses in the bylaws of companies that want to do equity crowdfunding are the Drag along and tag along clauses, particularly typical of startup investment transactions.

These clauses govern what happens if the company is sold.

La drag along clause allows majority shareholders to force minority shareholders to sell their holdings on the same terms if a buyer interested in buying the entire company comes along.

La tag along clause, on the other hand, protects minority shareholders by allowing them to sell their shares along with the majority shareholders if the latter decide to dispose of their holdings.

In the presence of many minority shareholders, these clauses can avoid blocking situations in the company's sale transactions.

Clauses on capital increase

Each equity crowdfunding campaign is based on a capital increase of the company. Investors subscribe for new units or shares issued under this transaction.

Therefore, the bylaws must allow for a resolution to increase capital compatible with online collection. Among the most relevant elements are:

• the ability to deliberate Capital increases for new members;
  
• The definition of how to subscribe to equity investments;
  
• Any delegation of authority to directors to manage the operation.

In crowdfunding, the use of the’divisible capital increase. This mechanism allows the company to issue new shares up to a certain maximum amount, without the entire transaction having to be fully subscribed to become effective.

In this way, the collection can close even if the maximum amount is not reached, as long as the minimum threshold for the campaign is exceeded.

Share categories and miscellaneous rights

Another element that needs to be regulated in the statute concerns the creation of Categories of holdings with different rights.

In almost all equity crowdfunding transactions, the company decides to give crowd investors different rights from those of the founding partners, for example:

• Specific property rights;
  
• limitations on administrative rights;
  
• Specific priorities in profit distribution or liquidation.

The creation of categories of units or shares with different rights must be provided for in the articles of incorporation and clearly regulated, so as to avoid ambiguity about the rights to which investors are entitled and to make sure to Do not lose control over the governance of the company.

Investor representation

One of the most widely used tools to simplify management for many members is the provision of a form of investor representation.

When a campaign involves a large number of minority shareholders, it can become complex to manage corporate communications, meeting calls and votes on strategic decisions.

For this reason, bylaws or shareholders' agreements may provide that investors be represented by a joint representative or by a person appointed to exercise certain rights on their behalf.

This system makes it possible to simplify decision-making processes, avoid difficult-to-manage assemblies, and maintain a more orderly dialogue between companies and investors.

Coordination between bylaws and shareholders' agreements

Not all rules governing the relationship between members necessarily need to be included in the bylaws.

In many cases certain provisions are established through shareholders' agreements, i.e., private agreements among shareholders that regulate certain aspects of corporate governance.

Bylaws and shareholders' agreements thus serve complementary functions:

• the statute contains the official corporate rules that apply to all members;
  
• shareholders' agreements govern specific agreements among certain categories of members.
  

In the equity crowdfunding context, it is quite common for some rules, such as those related to exit management or investor representation, to be defined through shareholders' agreements rather than directly in the bylaws.

This distinction allows the corporation to maintain relatively streamlined bylaws, leaving more flexibility for shareholder agreements. Of course, bylaws and shareholder agreements must always be consistent with each other.

How to amend bylaws before launching a campaign

When a company decides to raise capital through equity crowdfunding, one of the most important preliminary steps is the verification of corporate charter. It is not always necessary to change it, but a check should always be done, following the list of requirements and clauses we have just provided.

The first step is to analyze the company's current bylaws to see if they contain provisions that could create problems in the campaign.

If the bylaws are to be amended, the transaction must be approved by the shareholders' meeting and formalized by deed. The amendment to the bylaws is then filed with the Registrar of Companies, thus becoming part of the official rules of the company.

It is helpful to consult with legal counsel, possibly specializing in crowdfunding, to get support in amendments to the bylaws.