- In September 2015, the new Austrian Act on Alternative Financings (Alternativfinanzierungsgesetz – AltFG) entered into force. The AltFG was intended to set out a new legal framework for crowdfunding in Austria.
- The AltFG provided for certain easements for SMEs when seeking financing via alternative financing instruments on the capital market.
- Alternative financing instruments include inter alia shares, bonds, participation rights and subordinated loans.
- The law also eliminated uncertainties as to whether alternative financing instruments could be offered by SMEs without having to publish a full capital markets or investments prospectus under the Austrian Capital Markets Act (Kapitalmarktgesetz – KMG).
Subordinated loans as a form of alternative financing
- Subordinated loans (also to retail investors) have become an increasingly strong form of alternative financing in Austria in recent years, even before the AltFG entered into force.
- This was partly based on administrative practice by the Austrian Financial Market Authority (Finanzmarktaufsicht – FMA). The FMA had issued a brief stating that when issuing subordinated loans, companies would not be considered to be taking deposits from the public. This clarified uncertainty as to whether companies would, by taking out subordinated loans, also conduct (licensable) banking business.
New regional court judgement strikes blow to new legislation
- In a very recent judgment of 10 June 2016, published on 27 June 2016, the Regional Court of Graz ruled that certain forms of subordinated loans are not appropriate tools to be offered to retail investors. The judgment has not yet become legally binding.
- The subordinated loan in question was granted by retail investors to a Graz-based energy and photovoltaics company. The agreement contained a clause – common for subordinated loans of this type – stating that the creditor (ie, the retail investor) would be subordinated in case of insolvency of the borrower (ie, the issuer) as a shareholder would be. Outside of insolvency, the creditor would be subordinated to all unsubordinated claims of third parties against the borrower.
- As the legal proceedings were initiated by a consumer protection association, such clauses would generally not be permitted when offering alternative financing instruments to retail investors – provided that the ruling becomes legally binding.
- The Regional Court of Graz held in particular that:
- the subordination clause results in a significant deviation from the general Austrian civil law rules on loans;
- the clause may result in a total loss by the investor;
- the subordination clause would result in a shift of the entire general business risk of the borrowers to the retail investors without the investors participating in an upside scenario;
- such mismatch needs to be objectively justified; and
- justification of the clause in question cannot be seen solely in subordinated loans being a recognised form of alternative financing instrument under the AltFG. In the opinion of the court, the subordinated loan could be structured so that the investors would also participate in an upside of the borrower's business performance.
- It remains to be seen whether the Austrian Supreme Court will follow this line of argumentation.
- The judgement disregards the fact that subordinated loans are per se a risky form of investment. There are many other forms of investments that are risky and may result in a total loss by an investor. Unlike other clauses in general T&Cs that are regularly the subject of consumer protection case law, the subordination clause is a key feature of a subordinated loan and not an ancillary clause that contains grossly disadvantageous provisions that would warrant regulation by the courts.
- If subordinated loans become subject to a stricter regulation, it would seem more appropriate to apply an increased standard of care on information obligations of an issuer, instead of declaring that a particular form of investment is generally not suitable for retail investors.