Crowdfunding has now found its first expression in German legislation with the enactment of the Retail Investor Protection Act (KASG), the first stage of which came into force on 10 July 2015. The KASG is an attempt by lawmakers to introduce greater regulation and transparency into the grey capital market. The legislative process and final wording of the Act demonstrate an attempt to find a middle way between collective consumer protection and promoting a start-up culture. As well as affecting providers of crowdfunding platforms, who will be required to operate more professionally in future, the Act is of particular importance for investors.
Changes to the German Capital Investment Act − extensions and exceptions
The legislative balancing act is particularly apparent with regard to the obligation to publish a prospectus according to the Capital Investment Act (VermAnlG).
The KASG extends the scope of the VermAnlG to include subordinated loans, profit participating loans and certain other investments (section 1 sub-section 2, VermAnlG). This extension is to be welcomed, since it removes the distinction between these categories and the silent participations and profit-sharing rights already covered by the VermAnlG, but section 2a of the VermAnlG – the main exception for crowdfunding – promptly reverses this harmonisation. The exceptions are limited to the newly introduced investments. However, there is no obvious justification for retaining a distinction between investments such as profit participating loans and silent participations.
Regardless of this contradiction, it should be noted that, in particular, profit participating loans and subordinated loans which are arranged exclusively in the context of investment advice or through investment brokerage via an Internet service platform enjoy various exemptions under section 2a of the VermAnlG. The exemptions relate in particular to the obligation to publish a prospectus, but also cover other requirements, such as preparation of a management report or auditing of the annual accounts under section 25 of the VermAnlG.
The requirements set out in section 2a of the VermAnlG are linked to the investment amount sought by an issuer. The sale price of all of an issuer’s investments offered by a provider may not exceed EUR 2.5 million. The VermAnlG also establishes upper investment limits for investors that are not corporations. Only investments amounting to a maximum of EUR 1,000 are permissible without further restrictions (section 2a sub- section 3 no. 1, VermAnlG). This amount rises to a maximum of EUR 10,000 based on disclosures to be provided by the investor, provided that the investor has freely disposable assets available in the form of cash deposits or financial instruments amounting to at least EUR 100,000 or the amount involved is no more than double their average monthly net income (see section 2a sub-section 3 nos. 2 and 3, VermAnlG). As such, this privilege requires that the Internet service platform is under an obligation to monitor compliance with these thresholds under corresponding law or regulations.
Finally, it should be noted that section 2a sub-section 4 of the VermAnlG establishes a ban on combining exemptions in cases where an issuer’s investment product qualifying for the existing exemption under section 2 sub- section 1 no. 3 of the VermAnlG is subject to a public offering or an investment product offered in this way has not yet been repaid in full.
Supplementary organisational and marketing requirements
Despite the exceptions provided, lawmakers’ desire for regulation and investor protection has also found expression in the VermAnlG. Section 2d of the VermAnlG provides for an investor’s right to cancel within two weeks as a counterweight to the exemption options described above.
The KASG also imposes specific requirements on the marketing of investment products. The ban on advertising on social networks contained in the draft bill has quite rightly not found its way into the Act, but the KASG does include explicit requirements related to advertising investment products and to the investment fact sheet. The level of regulation is so detailed in some regards that the VermAnlG specifies verbatim wording for warning notices along with typographic highlighting of these notices − reminiscent of the rules on advertising tobacco products. In the case of crowdfunding, which by its very nature relies on online communication and online distribution, the necessary confirmation that the investment fact sheet has been received and noted was the subject of much discussion. The legislation originally envisaged the investment fact sheet being printed out, signed and returned. This paper-based approach was largely scrapped during the legislative process. Provided that contract negotiations and formation of the contract take place exclusively via remote communication methods, then a purely electronic format for confirming that the specified warning information has been received and read is sufficient. More detailed requirements are contained in the corresponding legislation, which bears the “catchy” title Investment Fact Sheet Confirmation Regulation.
Assessment and outlook
Despite some inappropriate distinctions, the balance struck by lawmakers between consumer protection and reinforcing or at least enabling crowdfunding is a welcome one. Exemptions from the obligation to produce a prospectus and the fixed costs associated therewith are typically of crucial importance both for this type of financing and for companies seeking to raise capital. The impact of the KASG will be subject to further legislative review in 2016 − particularly in relation to the regulation of crowdfunding. Irrespective of the increased regulation put in place via the KASG, the topic will continue to raise numerous legal issues for practitioners, companies and investors. The liability of the platform and of the target company towards the investor is one area that involves a large number of further issues which have not been fully clarified.