Professional and retail investors: definition and news 2023

investitori professionali e retail

The division of crowd investors into professional investors and retail investors is borrowed from the similar distinction that arose with regulations in traditional investments. In crowdfunding, however, the meaning of these labels has had important additional implications.

We use the verb in the past tense because with the entry into force of the EU Crowdfunding Regulation these labels will have to be replaced with those established to standardize regulations and nomenclature throughout the European Union and facilitate cross-border capital raising.

In both the Italian and new European versions, these distinctions serve to ensure adequate protection for investors by gauging each individual's financial skills and knowledge and providing the necessary assistance before allowing access to complex financial instruments and transactions.

Who are the professional investors

The definition of a "professional investor" established by Consob describes "a person who possesses the experience, knowledge and expertise necessary to make informed investment decisions and to properly assess the risks he or she takes."

Professional investors in turn fall into two categories:

  • by right (banks, insurance companies, investment funds, UCITS, stockbrokers, national governments, large companies that meet certain size requirements, and all "institutional" investors, i.e., those who operate with financial instruments as their main business);
  • upon request (individuals who have substantial assets, a portfolio of high-value financial instruments, and significant financial experience, all established by specific legal criteria).

A decisive point of the Consob regulation for equity crowdfunding established the requirement for companies engaged in crowdfunding campaigns to have at least one professional investor covering at least 5 percent of the capital raised in order for the campaign to be considered valid. This was a not obvious condition, desired by the financial authority in order to have a third-party "validator" of the sustainability and potential of the proposed crowdfunding business project.

Who are the retail investors

Retail investors are defined by Consob as "ordinary savers – even businesses, companies, or other entities – that do not qualify as professional clients." This is a definition by negation, which does not add particularly useful information; in fact, the basic concepts are given by the definition of professional investor.

Retail investor status currently prevents access to some particular crowdfunding investments, such as underwriting Bonds and Minibonds, unless certain asset and portfolio requirements for financial instruments are met.

Retail investors are the "small investors" who are key players in the phenomenon of "asset management," that is, entrusting savings to an intermediary who is to invest them and manage investments on behalf of the client. In recent years, with the multiplication of online investment apps and platforms, retail investors who seek to create a basic education on the subject and act independently have increased significantly. "Significantly" in relation to the starting point, but in absolute terms, the need and habit of turning to brokers and financial advisors still prevails.

This conclusion should be kept in mind, because the retail investor is the subject of a major misconception in the crowdfunding arena: many of the small business owners who are interested in raising capital through crowdfunding have in mind the myth of the undistinguished crowd of nonprofessional investors who have some savings set aside and from their home computers invest modest amounts of money on projects on crowdfunding platforms, guided by instinct, sympathy, and the little information they understand about business plans.

Here, this almost never happens. While it is true that crowdfunding, with its generally very low minimum investment sizes, offers investment opportunities even to ordinary people, it is also true and confirmed by the data that there is no phenomenon of scrolling on crowdfunding platforms looking for some interesting project on which to bet 200 euros "at random." The 2023 report of the Crowdinvesting Observatory of the Politecnico di Milano shows that there are no such phantom "serial investors", in fact most users invest on average only once.

When retail investors invest in crowdfunding, they often do so through the mediation of a professional entity, or they invest in projects and companies that they know closely and with which they already have a relationship of some kind. This is why it is critical, among other things, to know how to turn customers (and potential customers) into investors and to look for investors in the broader category of stakeholders.

The sophisticated investor: what's new in the EU crowdfunding regulation

After continuous delays and extensions, Italy too is finally ready to adopt the EU Crowdfunding Regulation, which was approved back in October 2020 but has only officially come into force in November 2023.

The content of this regulation, which we have already analyzed in another article, also includes numerous provisions aimed at increasing protections for investors. Crowdfunding platforms will be required to carefully scrutinize users' financial skills and knowledge and the ability of their assets to withstand any losses from their investments.

The Regulations thus introduce the figure of the "sophisticated investor", or "an investor who is aware of the risks involved in investing in the capital markets and has adequate resources to assume those risks without exposing himself to excessive financial consequences."

The requirements to fall under this definition are different for legal entities and individuals.

Legal entities must meet at least one of the following conditions:

  • own funds of at least 100,000 euros;
  • net revenue of at least 2 million euros;
  • balance sheets asset of at least 1 million euros.

Individuals, on the other hand, must possess at least two of the following characteristics:

  • personal gross income of at least 60,000 euros per tax year, or a portfolio of financial instruments, including cash deposits and financial assets, worth more than 100,000 euros;
  • current or previous work in the financial sector for at least one year in a professional position requiring knowledge of the transactions or services involved, or executive position for at least 12 months within legal entities that are sophisticated investors;
  • transactions of significant size in capital markets with an average frequency of 10 transactions per quarter in the previous four quarters.

Anche nel Regolamento europeo è previsto lo status di investitore sofisticato di diritto per alcuni soggetti, definiti “clienti professionali” ed elencati nell’allegato II della direttiva 2014/65/UE. In questo nuovo quadro normativo, perciò, “professionale” indica una categoria più ristretta di soggetti rispetto al passato.

The substance, however, is very similar. Except for one extremely significant detail: the EU Regulation does not require at least one professional, or rather, sophisticated investor to cover at least 5 percent of the raise in an equity crowdfunding campaign in order for it to be considered valid.

Another novelty, albeit of lesser magnitude, is that the subscription to Bonds and Minibonds in crowdfunding will also be open to non-sophisticated investors (i.e., retail).

Whether they are sophisticated or not, investors need to be reached and engaged with an adequate communication strategy that includes clear explanations of how crowdfunding works. This is a way to convey trust and transparency and to capture the attention of many individuals who are not yet familiar with this financial instrument.

This kind of communication must be part of a well-structured marketing and sales strategy, which is the strength of Turbo Crowd, the first crowdfunding marketing agency in Italy. To learn more, join our Facebook group and book a free initial consultation with us!

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