New provisions of the German Capital Investment Act (Vermögensanlagengesetz – VermAnlG) (the “Act”) relating to crowdfunding will become effective on 21 July 2019. The amendments will have a significant impact on the crowdfunding industry. The benefits are inter alia (i) exemptions from the obligation to publish a prospectus for crowdfunding instruments will also include profit participation rights (Genussrechte), (ii) thresholds for the crowdfunding exemptions will be raised from EUR 2.5m to EUR 6m and, (iii) crowdfunding exemptions will include investments from corporate entities which meet certain criteria. Additionally, on 21 July 2019, the EU Prospectus Regulation will enter into effect in the Member States of the European Union, which will expand or simplify exemptions from the requirement to publish a prospectus, include new provisions for prospectus disclosure and introduce a new universal registration document (“URD”) for frequent issuers. The German Prospectus Act will be amended accordingly.
Growth of the crowdfunding industry in Germany
According to the latest statistics from Crowdinvest Marktreport 2018, the German crowdfunding market has grown by 49.5% to a volume of EUR 297.3 million in the energy, private equity and real estate sectors in 2018. The largest market development has taken place in the real estate investment sector, whose investment volume increased by 63.2% to EUR 210.7 million. The new and amended provisions of the Act could result in the German crowdfunding market becoming even more attractive to issuers.
Since July 2015, the offering of crowdfunding instruments (i.e., financial instruments which do not qualify as a security) which are publicly offered through online service platforms may be exempted from the obligation to publish a prospectus if they meet certain criteria. Section 2a of the Act allows small and medium-sized companies to raise capital in a relatively uncomplicated and fast way in order to start or expand their business or to start new projects. To qualify for the exemption from publishing a prospectus, issuers will have to comply with specific requirements, such as producing a capital investment fact sheet (Vermögensanlagen-Informationsblatt – VIB).
Key changes in a nutshell
- Increased investment opportunities. Exemptions for crowdfunding will be extended to profit participation rights (Genussrechte). As a result, investors will be able to invest in financial instruments which participate in profits of the company’s assets. Previously, profit participation rights (Genussrechte) have not been covered by crowdfunding exemptions.As a result, the crowdfunding instruments will include:i. profit-participating loans (partiarische Darlehen),ii. subordinated loans (Nachrangdarlehen),iii. profit participation rights (Genussrechte) and, iv. other investments which provide for interest and repayment of capital or other proceeds for the lending of capital (sonstige Anlagen).
- Higher investment threshold. The threshold for crowdfunding exemptions will be raised from EUR 2.5 million to EUR 6 million during a 12-month period. Also, unsold or not fully repaid assets will not be taken into consideration in the 12-month period calculation.
- Increased per investor investment threshold. The per investor investment threshold will be raised from EUR 10,000 to EUR 25,000. This allows (individual) investors to invest up to 150% more than previously permitted in crowdfunding projects.
- Crowdfunding exemptions will include corporate entities. The per investor investment thresholds will not apply to corporate entities (Kapitalgesellschaften) and certain limited liability partnerships with a limited liability company as general partner (GmbH & Co. KG).
- Disclosure of conflict of interest. Capital investment fact sheets (Vermögensanlagen-Informationsblatt – VIB) shall further include information about the absence of entangled interests between the issuer and the crowdfunding platform operator, where the exemption on publishing prospectuses is used. In addition, crowdfunding will not be permitted for public offerings if such entangled interests exist between the issuer and the operator of the crowdfunding platform.
- Capital investment fact sheet (Vermögensanlagen-Informationsblatt – VIB). The disclosure requirements in the capital investment fact sheet will be supplemented by information on contractual collateral or collateral in rem for real estate investments. Furthermore, an additional minimum disclosure is required in the capital investment fact sheet in the event that the issuer uses the prospectus exemptions of section 2a VermAnlG. These will require disclosure of the sales price of all of the issuer’s investments offered, sold and fully redeemed during the previous 12-month period. Thus, the BaFin and investors receive information about the track record on the market during the last year.
Crowdfunding in the EU
The regulation of crowdfunding has also come into focus at the level of the European Union (“EU”). In March 2018, the European Commission (COM(2018)113 final, 2018/0048 (COD)) published a proposal for a regulation on crowdfunding service providers which will enable crowdfunding platforms to provide their services across the EU. The regulation will allow platforms to apply for an EU passport based on a single set of rules, whether operating in their home market or in other EU countries. For investors, the proposal will provide legal certainty as regards the applicable protection rules. Investors on crowdfunding platforms will be better protected and have a higher level of guarantees based on (i) clear rules on information disclosure for project owners and crowdfunding platforms, (ii) rules on governance and risk management and, (iii) a coherent approach to supervision.
German implementation of the EU Prospectus Regulation
The EU Prospectus Regulation will come into effect on 21 July 2019 and will be directly applicable throughout the EU. It will replace the current Prospectus Directive 2003/71/EC.
The key changes relating to the EU Prospectus Regulation are as follows:
- Prospectus summary requirements. Prospectus summaries will be based on a Q&A format and will be restricted to seven A4-sized pages with a limit to 15 of the most material risk factors.
- Profit forecasts and profit estimates. The requirement for audit reports to be prepared and included in respect of profit forecasts and profit estimates will be removed.
- Incorporation by reference. The EU Prospectus Regulation will widen the opportunities to incorporate information such as audit reports, management reports, remuneration reports as well as memoranda and articles of association, as long as the documents incorporated by reference are electronically accessible in the relevant location for 10 years from the initial publication date.
- Supplements to the prospectus. New obligations will be imposed on financial intermediaries where a supplementary prospectus is published. Where securities have been purchased or subscribed through a financial intermediary, that financial intermediary will have an obligation to inform investors of the possibility of a supplement being published, where and when it will be published and to assist investors to exercise their withdrawal rights. The financial intermediary is required to contact investors on the day that the supplement is published.
- Electronic publication. The EU Prospectus Regulation provides that prospectuses shall be deemed available to the public when published electronically on the websites of the issuer, offeror, financial intermediaries or regulated market where admission to trading is sought. In addition, ESMA will maintain a free and searchable online database of all prospectuses approved in the European Economic Area.
- New advertising rules. The rules applicable to advertisements have been widened to cover any written or oral communication relating to the offering.
- Simplified disclosure regime for secondary issuances. There will be an option to use a simplified prospectus for issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for the preceding 18 months.
- Introduction of a URD for frequent issuers. Frequent issuers will have the option to draw up and publish a URD which outlines issuer-level disclosure such as legal, business, financial, accounting and shareholding information, as well as providing a description of the issuer for that financial year. Issuers who draw up a URD each year will benefit from a fast-track approval of five rather than 10 days.
Please read Dechert LLP’s current publication “Prospectus Regulation: What Changes on 21 July 2019” for more detailed information on the EU Prospectus Regulation.
Second German Implementing Act to amend German Prospectus Act
The EU Prospectus Regulation provides EU Member States with options to be exercised in national law. In Germany, changes to the German Securities Prospectus Act will be set out in the Second Implementing Act (“Gesetz zur weiteren Ausführung der EU-Prospektverordnung”) which will become effective on 21 July 2019.
New thresholds for exemptions from prospectus requirements
In Germany, issuers offering securities to the public with a total consideration of between EUR 100,000 and up to EUR 8 million are able to publish a securities information sheet (Wertpapier-Informationsblatt (“WIB”)) instead of a prospectus. Offers of securities up to a total consideration of less than EUR 100,000 are exempted from prospectus and WIB requirements. These thresholds have to be calculated over a 12-month period. WIBs must be approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht ̶ BaFin) before publishing.
Further changes implemented by the German Second Implementing Act are as follows:
- Relaxation of prospectus language regime. The language regime for securities prospectuses will be further relaxed to permit the use of an English language prospectus with a German language translation in the summary in connection with the public offering of securities in Germany. As a result, issuers will not have to obtain an exemption from the BaFin or undertake a dual offering as a requirement for using an English language prospectus.
- Exemptions from prospectus requirements. The scope of the small issues exemptions and the bank/listed issuer exemptions will be extended.
- Supervision. The BaFin will be authorized to request information and documents from any person. The BaFin’s rights in this respect have previously been limited to certain market participants. In addition, the BaFin’s power to prohibit public offerings will be extended to authorize the BaFin to prohibit, at its discretion, public offerings in which mandatory provisions may reasonably be expected to be breached.
- Sanctions regime. The Second Implementing Act will introduce more severe sanctions for violations of prospectus- and offering-related requirements. The maximum fine the BaFin may impose will be increased to EUR 700,000 for individuals and EUR 5 million or 3% of total annual turnover for legal entities. Sanctions may also be imposed for a wide range of breaches of mandatory provisions committed with intent or gross negligence. Publication of incomplete or incorrect prospectuses will subject to an administration fee.