Crowdfunding in Germany
Snapshots and future prospects
Almost two years after the regulations on crowdfunding in the German Capital Investment Act (Vermögensanlagegesetz – VermAnlG) came into force, both politics and academics have drawn first conclusions. To mention are in particular the current evaluation report of the German Federal Government (Bundesregierung), the Federal Government's response to a small inquiry in parliament (Kleine Anfrage) and two studies commissioned by the Federal Ministry of Finance. The following article summarizes the most important findings and guidelines for the future.
In the recent past, the issue of crowdfunding has been the subject of several informative publications. Particular mention should be made of the following:
- The Evaluation Report of the Federal Government on the new exemption provisions in sections 2a to 2c VermAnlG implemented by the Retail Investors Protection Act (Kleinanlegerschutzgesetz)
- The Response of the Federal Government to a Small Inquiry on the development of crowdfunding in Germany and related consumer protection
- A Study on the FinTech-Market in Germany commissioned by the Federal Ministry of Finance
- A Study on the Practical Experience with the Exemption Provisions in Sections 2a to 2c Capital Investment Act also commissioned by the Federal Ministry of Finance
In doing so, the subject of crowdfunding or swarm financing was comprehensively evaluated politically and academically for the first time. This article summarizes the key findings (mainly from the evaluation report of the Federal Government) and gives a first outlook into the future.
Strong growth of the German crowdfunding market
The total volume of the German crowdfunding market in 2015 amounted to approximately 272 million EUR, of which 189 million EUR were allocated to the largest sub-segment crowd lending, 47 million EUR to the second-largest sub-segment crowd investing and 36 million EUR to the donation and quid pro quo oriented segment of crowdfunding in the narrow sense.
Accurate empirically collected data exists specifically for the sub-segment of crowd investing. Accordingly, the German crowd investing market grew by an average of 220% per year between 2011 and 2015. Within this period, the corresponding internet service platforms were able to provide total funding in the amount of 110 million EUR, of which two-thirds (66 million EUR) were used to fund start-up companies and the remaining third (36 million EUR) to finance real estate projects. 86% of the investors invested less than 1,000 EUR, while 13.9% of the investors invested between 1,000 EUR and 10,000 EUR and only 0.1% of the investors invested more than 10,000 EUR. Almost 80% of all issuers could collect less than 500,000 EUR through crowd investing, with just under 2% taking in over 2.5 million EUR.
Relatively speaking, the German crowdfunding market has developed considerably over the past few years, which is also reflected in the European comparison: in 2015, Germany was ranked 3rd behind France (2nd place) and the UK (1st place). The difference to the overall volume of emissions on the market in Great Britain is, however, tremendous, since the British market share amounts to 81% of the European market and has a total emission volume of 4,412 million EUR.
No changes in the threshold for prospectus exemption
Although desired by the crowd investing industry, the Federal Government currently does not plan to raise the threshold from 2.5 million EUR to 5 million EUR. Not least because the majority of the projects have only collected less than 500,000 EUR.
Application of the threshold for all capital investments
At least temporarily, the Federal Government has also refused attempts to exempt other included forms of capital investments (shares, fiduciary interests, profit-sharing rights, registered bonds) from the requirement of a prospectus when offered via internet service platforms within the limits of 2.5 million EUR. However, the Federal Government has signaled that such platforms will soon be open for public offering of shares and bonds without a prospectus for a period of twelve months and up to a maximum limit of 1.0 million EUR. The background to this project is the planned EU Prospectus Regulation, which provides for a corresponding exemption.
No more privilege for real estate financing?
Real estate financing will continue to benefit from the exemption provision in section 2b VermAnlG in the future. The Federal Government had considered the abolition of this privilege in its evaluation report, however rejected this idea temporarily due to pressure from the industry.
No cross-border distribution of capital investments via EU passport
The Federal Government does not plan to introduce a so called EU passport for the distribution capital investments on the EU market, since that objective cannot be achieved by national law. The possibility of an EU passport exists only in areas which have been harmonized by EU law, but this is not the case for capital investments under the VermAnlG. The registration of an intermediary platform as a securities services provider instead of a financial intermediary pursuant to section 34f German Industrial Code (Gewerbeordnung – GewO) is also not permitted, since capital investments under the VermAnlG are not among the financial instruments allowed to be brokered across borders. However, the offering of capital investments in another Member State in accordance with the relevant provisions for the public offering of such capital investments shall remain unaffected.
New requirements for Key Investor Documents
In the interest of investors, the Federal Government wants to create more transparency for capital investments, as in future Key Investor Documents must address additional topics. These relate to information on the capital investment itself, but also on the companies involved in the issuing. In particular, the identity of the provider, the issuer and also the platform shall be highlighted. For the purpose of better cost transparency, all costs, commissions, fees and other services incurred by the issuer for the brokering of the capital investment must also be emphasized in the Key Investor Document. In order to improve the comparability of the Key Investor Documents, the required information must also be displayed in a fixed order. The overriding objective of these changes is to standardize Key Investor Documents more transparently to potential investors.
Competences of BaFin to verify Key Investor Documents
For the purpose of improving the quality of the Key Investor Documents with regard to the minimum information displayed and thus the transparency for investors, the Federal Government wants to grant the German Financial Supervisory Authority (BaFin) the competence to formally verify the Key Investor Documents. In the future, capital investment issuers under the VermAnlG will therefore be allowed to publish Key Investor Documents only after approval by BaFin, and may issue the corresponding public offer for the acquisition of the capital investment no earlier than one day after publication of the Key Investor Document. If an exception rule for crowdfunding or social projects is used, BaFin must give its decision on the authorization within ten working days. However, as with authorizations under the German Banking Act (Kreditwesengesetz – KWG), the period will only start to run when all relevant documents are made available to BaFin.
Avoidance of conflicts of interest
In the future, the Federal Government intends to prevent market participants from circumventing the limit on the total issue volume of 2.5 million EUR by involving several providers to sell the capital investments. For this reason, section 2a para. 1 VermAnlG will be amended to the effect that the calculation of the threshold value of 2.5 million EUR will be based on the sale price of all capital investments offered by the issuer.
In order to prevent conflicts of interest, issuers are no longer allowed to publicly offer their capital investments if their managers are simultaneously members of the management board of the internet platform providing the service or if there is a group relationship within the meaning of section 15 German Companies Act (Aktiengesetz – AktG) between the issuer and the internet platform.
The strong and continuous growth of the crowdfunding market in Germany shows that this alternative form of financing has become firmly established. This still applies, in particular, to start-ups, which may not receive initial funding in any other way. Increasingly, however, established companies and foreign market participants are also interested in the possibilities of crowdfunding. Whether crowdfunding, in particular in its manifestations as crowd lending and crowd investing, will prevail as a real alternative in medium-sized financing and thus develop into a significant threat for banks, is currently not foreseeable. However, such a development would be in line with the declared objective of the capital market union, as pursued by the EU Commission.
The planned prospectus exemption for shares and bonds with a volume of less than 1 million EUR by the Prospectus Regulation will accelerate further growth or at least contribute to the stabilization of the market. In any case, issuers must ensure not to be classified as deposit business within the meaning of the KWG. Accordingly, intermediary platforms would then be subject to authorization under the KWG for investment brokerage.
Overall, the legislator is satisfied with the rules on crowdfunding insofar as an appropriate balance between the interests of the companies seeking capital and the investors was achieved. The planned changes in the VermAnlG to increase the transparency of the offered capital investments will mean a certain increase in expenses for issuers, vendors and intermediary platforms, which, however, seems reasonable from a current perspective.