In future, companies offering securities to the public will no longer be required to produce a securities prospectus in certain circumstances. How start-ups can benefit from this – and where they need to remain cautious.
On 28 June 2018, the German federal parliament (Bundestag) passed the bill on exercising the options provided for under the recast EU Prospectus Regulation. The new rules came into force on 21 July 2018. Under these rules, several financial market laws, including the German Securities Prospectus Act (Wertpapierprospektgesetz, WpPG), are adapted to the European standards. The German federal government exercised some of the options that were made available. As of this date, the new EU Prospectus Regulation stipulates that the Member States may no longer require a securities prospectus for public offerings of securities valued at less than one million euros. However, national documentation duties below this threshold that do not cause disproportionate effort remain possible.
Start-ups and crowdfunding platforms
One positive aspect for start-ups and crowdfunding platforms in particular is that the new German Securities Prospectus Act now makes it easier for companies to raise capital by no longer having to prepare a comprehensive and costly securities prospectus for a public offering of securities with an equivalent value of EUR 100,000 to a maximum of EUR 8 million.
The preparation of a fully-fledged prospectus, describing the company, its business and risks and usually comprising more than 100 pages, is quite complex and takes several months to approve.
However, a securities information document (Wertpapier-Informationsblatt, WIB) must be produced and published for the investors' information. This document must contain the essential information and risks regarding the securities in a short and understandable form on three A4 pages.
The limitation of the scope of the securities information document forces the authors to provide a very concise presentation, which is not unproblematic with regard to risk factors against the background of liability, for example. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is required to permit publication of the document within ten days after a formal review.
Restrictions on private investments
This relief is needlessly limited by the newly created maximum investment thresholds for private investors, however. Non-qualified investors may invest amounts in excess of EUR 1,000 only if they either have freely available assets in the form of bank deposits or financial instruments of at least EUR 100,000 or invest a maximum of twice their average monthly net income. The maximum for the individual investment per investor is always EUR 10,000.
There is also a major disadvantage for crowdfunding platforms: The Prospectus Regulation applies only to equity investments in public limited companies. Unfortunately, the German lawmakers failed to extend the simplification of public offerings of up to EUR 8 million to include, for example, the offer of shares in limited liability companies (GmbH) German Investment Products Act (Vermögensanlagegesetz, VermkAnlG). This would have facilitated access to growth financing, especially for young companies.
Further, there is no relief for issuers that have already listed securities in a regulated market. Under the recast German Securities Prospectus Act, they may still offer securities only up to an annual maximum of EUR 5 million without a prospectus. It would have been preferable to raise the threshold to EU 8 million for these issuers as well, which would easily have been possible under the new Prospectus Regulation.
Advantages and disadvantages with regard to liability
There are advantages, but also disadvantages with regard to the liability for the securities information document. Since its scope is limited to three A4 pages, the issuer is liable for incorrect or misleading, but not for incomplete information. However, it is doubtful whether this relief of liability with regard to incomplete information really helps. In practice, the rather difficult question of whether an incomplete securities information document is not misleading for the investor, for which the company would in turn be liable, is likely to arise.
For start-ups and crowdfunding platforms, the new German regulations do not go far enough overall. It would have made sense not to prescribe documentation for public offers of less than one million euros. The maximum investment thresholds for small investors are not helpful and do not help to make it easier for start-ups and small to medium-sized enterprises to raise equity.