Out-Law News 3 min. read

Restrictions to be placed on investment-based crowdfunding in Germany


New laws set to come into force in Germany next month will place limits on the amount of money people can invest in businesses through online crowdfunding platforms.

The German parliament earlier this year passed a new Small Investor Protection Act. The Act will come into effect in stages, but most of the provisions relevant to crowdfunding will take force the day after its official publication, which is expected to be in July.

Under the new regime, many people will only be able to invest up to €1,000 in a business via crowdfunding platforms. The new framework will, though, allow higher earners to invest up to twice as much as their net monthly income, up to €10,000. People will also be able to invest up to €10,000 if their liquid assets are worth at least €100,000.

The German finance ministry said that it will be up to the crowdfunding platforms to ensure that investors are not breaching their investment limits. Businesses receiving funding from investors via the platforms will not be held responsible for ensuring the investors remain within the limits, it said.

The new rules are aimed at addressing consumer protection issues in the 'grey market' and come after a German windfarm investment business that raised money through crowdfunding went insolvent, leaving thousands of retail investors in the company out of pocket.

In a paper on the regulation of German crowdfunding through the new Act published earlier this month, three German academics said that the restrictions represent "a form of hard paternalism" and "limits the freedom of the investor on the justification of protecting the investor from himself". The academics behind the paper include Lars Klöhn, professor of civil and business law at Ludwig Maximilian University of Munich.

"Strongly paternalistic rules require special justification in a legal system based on individual freedom," the academics said. "There are several good reasons, however, that this requirement is met with respect to the crowdfunding market:  the low quality of the information that issuers disclose when procuring investor money, the high risk of the investment, particularly for start-up companies, the tendency of investors to underestimate risk, as well as the danger of market bubbles developing, above all in crowdinvesting."

Under the new Act, businesses seeking investment through crowdfunding platforms will not be required to issue a prospectus with details of the nature and risks of investment in their companies unless they are seeking more than €2.5 million in funding. The academics questioned whether this threshold would help to boost the German crowdfunding market.

"The increase of the maximum aggregate value of investments being exempt from the prospectus requirement from €1 million according to the draft Act to €2.5 million will barely have a positive effect on the evolution of the already stagnating German crowdinvesting market," their report said. "Until now, only three crowdinvestings exceeded €2.5 million, indicating that the new ceiling does neither unleash nor restrict the volume of forthcoming issues."

Corporate law expert Eike Fietz of Pinsent Masons, the law firm behind Out-Law.com, said cultural issues have prevented the German crowdfunding market from growing as fast as elsewhere in the world.

"The technicalities mentioned in the article certainly don’t help the crowdfunding scene," Fietz said. "However, the exceptions are absolutely sufficient – the biggest German crowdfunding projects would not come close to the new thresholds, and they have been welcomed by BITKOM, the German federal association for IT, telecoms and new media, which represents 2,200 companies in the digital sector."

"The real problem of crowdfunding lies somewhere else: Germans are a nation of savers, averse to taking personal financial risk. They also have difficulty accepting the low success rate of venture investments as part of the deal. Whereas in the US a serial entrepreneur with an insolvency on his CV is 'experienced' and people assume that he has learned from it, in Germany the same would be stigmatised as a failure and would likely give rise to speculation that criminal activities were involved. That’s an issue that the venture capital scene in Germany generally has to deal with," he said.

Fietz said that Germany needs crowdfunding "success stories" to help drive interest in the market and for crowdfunding platforms to be more transparent with investors to build trust.

A study by the University of Cambridge and EY published earlier this year found that the entire alternative finance market in Germany has grown from a value of €31m in 2012 to €140m last year. However, the comparative market in the UK was worth €2.34bn for 2014, it said.

According to Germany's federal statistics office, the investment-based crowdfunding market in Germany last year was worth €8.7m and the loan-based crowdfunding market worth €35m. Crowdlending in Germany is subject to regulation that requires crowdlending providers to partner with banks. Fietz said that some investment-based crowdfunding in Germany has previously been structured in a way to avoid the requirement for a prospectus and other regulations.

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