No. 55 - The role of venture capital in the development of small and medium-sized enterprises: how adequate is Italian legislation?

The paper analyses whether company law is able to regulate relations between venture capitalists and business entrepreneurs and, in particular, to reconcile efficiently the ‘agency costs’ and information asymmetries that are particularly evident in the case of venture-backed companies. Taking as starting point the suggestions of economic literature regarding the optimum structure of the relationship between venture capitalist and entrepreneur, the author considers whether this model could be imported into the Italian legal system; what instruments are available to the parties in existing company law and to what extent do they offer assurance to the financier. The four main instruments highlighted by economic analysis are considered: stage financing; the use of hybrid capital-debt instruments, notably convertible preference shares; the presence of directors appointed by the financier on the board of the venture-backed company and the use of covenants; exit clauses. The conclusion is that the use of these instruments in Italian legislation raises a number of problems and this shortcoming may, alongside other factors, be the cause of the limited development of venture capital in Italy. The difficulties encountered can be largely ascribed to the lack of flexible regulations for venture capital companies with a small number of shareholders and can be overcome when the delegated legislation on the reform of company law (Law 366/2001) is implemented if the legislator takes advantage of all the possibilities offered by the delegated powers.