German Federal Government passes a new draft of the Retail Investors‘ Protection Act (Kleinanlegerschutzgesetz)
After facing much criticism for the initial draft of the German Retail Investors’ Protection Act, published on 18 July 2014 (we reported on this topic in our newsletter of 10 September 2014) the German federal government has changed the initial draft essentially and published a revised draft (hereinafter referred to as the “Draft”) on 10 November 2014.
In order to prevent the end of Crowdfunding in Germany the Draft provides for an explicit exception for this kind of funding. If certain conditions are met, the “Crowdfunding Exception” entails a lighter regulation, especially an exemption from the duty to publish a prospectus. However, compared to the initial draft, the Crowdfunding Exception in the current Draft provides for further restrictions. In other areas the individual needs of the Crowdfunding industry have been taken into account.
1 Further restrictions for the Investors
The most significant change affects the requirements for investors to make use of the Crowd-funding Exception. While the maximum investment per investor was limited to EUR 10.000 in the initial draft the Draft now contains further restrictions.
The total amount for each investor per investment product of one issuer (Start-up company, project initiator or similar) is restricted as follows:
- up to EUR 1.000: no restrictions
- more than EUR 1.000: cash deposits or financial instruments of the investor must exceed EUR 100.000 or maximum two monthly net incomes
- EUR 10.000 = absolute maximum investment per investor
Compared to the initial draft this regulation in the Draft is a significant limitation for Crowdfunding investments. Not only did the Draft not increase the allowed investment amount, but imposed additional restrictions on investments between EUR 1.000 and EUR 10.000.
Starting from an investment amount of EUR 1.000 a potential investor must supply a self-reporting (Selbstauskunft) to the platform. Due to this new requirement there is reason to fear a negative impact on conversion rates. It can be expected that a number of investors will stop the entire investment process, deterred by questions regarding their financial situation.
In this context the Draft does not contain a specific regulation if the platforms are obliged to verify the information provided in the self-reporting (Selbstauskunft). The current wording of the Draft is not precise in this regard. In our opinion, there are good reasons to argue that no such obligation for the platforms exists. However, it would be recommended, to implement a clarification in this regard in the further legislative procedure.
Further, the government´s reasoning regarding the Draft clarifies, that the self-reporting can be limited to the declaration to comply with the investment threshold. It is not required to request the total amount of assets or the exact net worth income from the investor.
However, it is disappointing, that the Draft does not stipulate a possibility for experienced investors (business angels) to invest amounts exceeding EUR 10.000. This was suggested by a wide range of comments to the initial draft. This is not comprehensible and means a grave downside for the Crowdfunding industry as well as business angels. It would have been a comprehensible approach, if the Draft had stipulated that experienced investors needed to supply a self-reporting of their financial standing in combination with a minimum investment amount of EUR 100.000.
2 Investment Products Information Leaflet (Vermögensanlagen-Informationsblatt)
The initial draft required for investments of more than EUR 250 that the investor must be provided with a so called Investment Products Information Leaflet (Vermögensanlagen-Informationsblatt – hereinafter referred to as “VIB”). This VIB needed to be signed and sent back to the company by ordinary mail. That meant printing the VIB, signing it und taking it to the post office. After a considerable criticism that anachronism was aborted.
Instead – according to the Draft – it shall be sufficient to print the VIB, sign it and send it back, which can be done via e-mail after scanning. Compared to the initial draft this constitutes a significant facilitation.
Still, it is not comprehensible, why the VIB must be signed at all. The investors’ protection can also be achieved by an online confirmation as it is common use e. g. regarding general terms and conditions. In particular, the VIB only constitutes a formalised summary of the investment product and does include a part of a contract like general terms and conditions. The requirement of an original signature on the VIB is therefore incomprehensible. In our opinion, an online confirmation would be sufficient.
The initial draft limited the possibilities to advertise investment products (Vermögensanlagen) to certain media, whose main topic is – at least inter alia – the presentation of economic topics. Furthermore, the advertisement had to be related to such presentation of economic topics.
The Draft keeps this general principle. However, the press shall be excluded. In effect, this means that advertisement for investment products is permitted in print media as well as their online editions. Advertising campaigns via Facebook, Twitter or similar social networks still shall remain prohibited in general.
This regulation still prevents Crowdfunding platforms from reaching the essential audience for Crowdfunding by approaching the broad public to shoulder funding of uprising enterprises by means of plenty of small investments.
Regarding peer-to-peer-Lending the Draft clarifies, that this kind of loans granted privately to private borrowers shall be excluded from the scope of the German Investment Products Act (VermAnlG) if a bank grants the loan initially and then offers parts of the credit claim permanently and repeatedly.
According to the intention of the Draft, business models established in Germany for peer-to-peer-Lending shall therefore remain outside the scope of the regulation. Nevertheless new business models and hybrid forms always have to be examined carefully whether the exception applies to them or not.
The following aspects remain unchanged in the Draft:
- Limitation to maximum investment of EUR 1 million per investor and offering
- Restriction of the Crowdfunding Exception to subordinated profit-participating loans (partiarische Nachrangdarlehen)
The maximum investment of EUR 1 million per offering in particular affects areas with an increased capital requirement, such as real estate Crowdfunding.
The legislator maintains the distinction between different forms of investment products (Vermögensanlagen). However, this intended distinction does not make sense. Plattforms should be free to offer all kinds of investment products including equity under the lighter Crowdfunding regulation.
Within the next few weeks consultations in the German Parliament, its committees and the Federal Council are required. The adoption of the law is not expected before the beginning of 2015. The law is expected to enter into force by mid-2015.
Further limitations of the investment opportunities in the area of Crowdfunding contradict the declared goal of the government to “consider the concerns of young enterprises funded by means of Crowdfunding”. By implementing further restrictions for investments starting at EUR 1.000, it becomes considerably more difficult for this new form of financing to establish itself in the market. Beyond that, the chosen path could have been taken more courageously.
From our point of view adjustments would be desirable in the following areas:
- enable investments of more than EUR 10.000 for business angels
- complete waiver of signing the VIB
- exception from the limitations of advertising also for social networks
- increase of maximum amount to over EUR 1 Mio
- expansion of Crowdfunding Exception to all kinds of investment products