Crowdfunding

‘Crowdfunding’, also known as crowd financing, describes a type of funding that has been developed in recent years and is receiving increasing public attention. Crowdfunding allows projects to be financed by a multitude of capital investors, who are mostly attracted to the project via Internet platforms. The first platform in Germany started up in autumn 2011. Until now crowdfunding in Germany has been used mainly to fund social or creative projects, but has also been used to raise equity capital for start-up companies. As it is possible for investors to invest only very small amounts, the potential target group of investors is larger than for traditional forms of investment. Market participants predict that this form of funding has good growth prospects.

Numerous variations

Crowdfunding platforms and the investments offered are designed in very different ways. How are investors and offerors brought together? How is subscription organised – does the platform act as a broker or does the platform operator sell the investment directly? How is the transfer of investment capital effected – does the investor pay the capital to the offeror directly or does the platform act as neutral depository trustee or even as investment trustee? Is debt capital or equity raised, and in which investment form? How is the circle of investors configured? These questions are relevant not only from a corporate, tax and company law viewpoint, but also from a supervisory perspective.

Which supervisory regulations are applicable to crowdfunding depends on the design of the individual project and platform. Operation of a crowdfunding platform may involve authorisation requirements under the Banking Act (Kreditwesengesetz - KWG) or the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz - ZAG) and observation of other obligations such as under the Securities Trading Act (Wertpapierhandelsgesetz - WpHG). Offerors of investments are faced with the issue of whether they are subject to an obligation to publish a prospectus under the Capital Investment Act (Vermögensanlagengesetz - VermAnlG) (only in German) or the Securities Prospectus Act (Wertpapierprospektgesetz - WpPG). This also depends on how the investment and the modalities of the offer are designed.

Authorisation requirements

Due to the differences between individual crowdfunding platforms, it is not possible to make binding statements about authorisation requirements until the respective business model has been examined.

An authorisation pursuant to section 32 (1) sentence 1 of the KWG is required if banking business is to be conducted or financial services are to be provided in Germany commercially or on a scale which requires a commercially organised business undertaking.

An authorisation pursuant to section 8 (1) sentence 1 of the ZAG affects operators who wish to offer payment services as a payment institution in Germany – again on the basis that this is to be conducted commercially or on a scale which requires a commercially organised business undertaking.

Commercial or commercially organised business undertaking

Businesses are operated commercially if the business is established for a certain period of time and the operator intends to generate a profit. A particular indication of the intention to generate a profit is valuable consideration.

Whether or not the scale of the business requires a commercially organised business undertaking depends on the banking conception. However, as regards the authorisation requirement it is irrelevant whether or not the business is actually operated in that way.

Financial instruments

An authorisation requirement for the provision of investment services which do not constitute banking business under the Banking Act presupposes that investments offered via the platform are financial instruments within the meaning of section 1 (11) of the KWG. Financial instruments include securities and capital investments (Vermögensanlagen) within the meaning of section 1 (2) of the VermAnlG, with the exception of shares in a cooperative.

Securities include all types of transferable securities (with the exception of payment instruments), which by their nature are tradable on the capital markets. This includes in particular shares and comparable interest in legal persons, commercial partnerships and other enterprises. It also includes certificates representing shares, debt instruments (particularly participation certificates), bearer bonds and order bonds. On its website, BaFin has published a guidance notice (only in German) that further details financial instruments.

Capital investments within the meaning of the Capital Investment Act include shares that are not securitised within the meaning of the Securities Prospectus Act and which confer the right to participate in the earnings of a company (section 1 (2) no. 1 of the VermAnlG); it also includes participation rights (section 1 (2) no. 4 of the VermAnlG). If silent partnerships, participation rights or participation certificates are offered via crowdfunding platforms, these also fall under the term financial instruments like shares, limited partner’s shares and shares in partnerships under the Civil Code (GbR).

Financial services

If the investments offered are financial instruments, the platform operator may be providing financial services either by way of investment broking or contract broking or placement business, which is a special type of contract broking.

Investment broking is defined in the Banking Act (KWG) as ‘the brokering of business involving the purchase and sale of financial instruments’. Investment broking is provided by anyone who as agent of the investor transmits the investor’s declaration of intent to buy or sell financial instruments to the entity with whom the investor wishes to conclude the transaction. The brokerage can also be carried out electronically: Anyone making an IT system available by which declarations of intent may be transmitted to potential contractual partners is also providing investment broking. This also applies to operators of crowdfunding platforms.

If the platform operator acts not only as agent but also as authorised representative, this may constitute contract broking. This is defined by statute as the purchase and sale of financial instruments in the name of and for the account of others (section 1 (1a) sentence 2 no. 2 of the KWG). The platform operator is an authorised representative if it is authorised to accept the investor’s declaration of intent to buy a capital investment.

One special form of contract broking is placement business. This is provided by anyone who sells financial instruments upon emission – when they are first issued – on the capital markets or to a limited circle of investors on behalf of and for the account of third parties. The issuer must then have appointed the underwriter to place the financial instruments on the capital markets (placement agreement) without the underwriter being committed to buy the financial instruments.

Current crowdfunding models do not appear to involve deposit-taking activities within the meaning of section 1 (1) sentence 2 no. 1 of the KWG, neither on the part of the (brokering) platform operators nor on the part of the capital investment offerors. These models do not envisage unconditional repayment claims for the investor, which is a prerequisite for deposit business.

Exceptions to authorisation requirements

Even if the platform operator effectively fulfils one of the specified authorisation requirements, pursuant to section 2 of the KWG under certain circumstances there will be exceptions to the authorisation requirement. A company does not require authorisation if it only operates investment broking and contract broking between customers and offerors or issuers of capital investments within the meaning of section 1 (2) of the VermAnlG ‒ provided that the financial services are restricted to the specified capital investments and the company is not authorised to obtain ownership or possession of funds or securities of customers (section 2 (6) sentence 1 no. 8e of the KWG). The same applies if the company provides the placement business solely for offerors or issuers of capital investments within the meaning of section 1 (2) of the VermAnlG (section 2 (6) sentence 1 no. 19 of the KWG).

If a platform only offers silent partnerships or participation rights and under the business model the platform operators do not accept any monies from investors, they are not subject to authorisation requirements. The platform operator then also does not require authorisation for placement business pursuant to the Banking Act (KWG) if it accepts monies from investors.

Authorisation requirement according to the Payment Services Supervision Act

If the operator of the crowdfunding platform does not accept monies directly from investors, it does not provide payment services pursuant to the Payment Services Supervision Act (ZAG). However, if the operator does accept monies and passes these on to the offeror of the investments, an authorisation requirement pursuant to the ZAG may be applicable.

The same applies to the paying agent to which investors transfer the monies so that this can hold the monies until they are paid out and finally transferred to the offeror of the capital investment. Both instances may constitute money transfer services pursuant to section 1 (2) no. 6 of the ZAG.

Obligation to draw up a prospectus

Offerors or issuers of an investment may be subject to the obligation to draw up a prospectus pursuant to the Securities Prospectus Act (WpPG) or the Capital Investment Act (VermAnlG), which replaced the Prospectus Act (Verkaufsprospektgesetz – VerkProspG) on 1 June 2012. The determining factor is the nature of the offer, for example the type of investment, particularly the legal form (partnership investment, silent partnership, participation right etc.) or the issue volume.

Currently one often finds participation rights or silent partnerships on offer in the market via crowdfunding, and these could possibly require a prospectus under the Capital Investment Act. It is also possible that other investment or legal forms, such as limited commercial partnerships (KGs) or partnerships under the Civil Code (GbR), could also fall under the Capital Investment Act. There have been a few instances of shares being offered via crowdfunding. The public offer of shares and other securities may carry an obligation to draw up a prospectus under the Securities Prospectus Act.

Who is affected by the obligation to draw up a prospectus?

The obligation to draw up a prospectus always falls on the offeror of the investment. Who that will be depends on how the crowdfunding is set up. In practice, two different types of structure can currently be seen:

1. An offeror sets up the crowdfunding itself, collecting capital for a specific project by issuing capital investments.
   
   In such a case this may constitute a public offer of capital investments pursuant to the Capital Investment Act, so that in general there is a statutory obligation to draw up a prospectus. The question of whether an offer is subject to an obligation to draw up a prospectus or if an exception applies turns on the preconditions set out below.
   
   
2. The crowdfunding takes place via a platform to connect up offerors and investors. The platform operator merely provides a sort of forum to initiate contact, but has nothing to do with the contractual element of the offer and is not itself an offeror.
   
   The operator of such a platform is not itself subject to an obligation to draw up a prospectus. This obligation is incumbent upon the offeror that presents its capital investment for sale on the platform.

Capital investments

Crowdfunding is usually used for offers of capital investments within the meaning of the Capital Investment Act. The obligation to draw up a prospectus under section 6 of the VermAnlG generally applies to a public offer of capital investments that is designed to raise investor funds for projects under the crowdfunding concept. It is irrelevant whether the offer is made via the Internet or via other media such as advertisements or flyers.

As a rule, capital investments may not be publicly offered for sale in Germany without publication of a prospectus that has received prior approval from BaFin. The obligation to draw up a prospectus extends to company shares, shares in trust funds or units in other closed-end funds, participation rights and registered bonds that are not securitised. Company shares include capital investments in partnerships, shares in limited liability companies (GmbH), shares in partnerships under the Civil Code (GbR) and silent partnerships in the specified companies or specified assets of such companies, and investments in foreign companies with other legal forms. All types of investments in GbRs, such as for the financing of community solar energy facilities and investment clubs, are therefore also subject to the obligation to draw up a prospectus.

The minimum information published in a prospectus give the investors the minimum information they require to make an investment decision. The obligation to draw up a prospectus ensures greater transparency. This should allow potential investors to draw up their own opinion about the characteristics and risks of a project. It allows them to investigate investment opportunities more thoroughly.

Exceptions to the obligation to draw up a prospectus

In particular, section 2 no. 3 of the VermAnlG states that offers up to specific minimum limits are excepted from the obligation to draw up a prospectus. For example, the legislature proceeds on the assumption that an investor in emissions not exceeding €100,000 within a period of twelve months does not particularly need protection. This is intended to prevent overregulation. The €100,000 threshold is also in the Securities Prospectus Act (WpPG) and is derived from transposition of the EU Prospectus Directive. The minimum threshold following this Directive had already been set out in the Prospectus Act (VerkProspG) and it was also retained in the Capital Investment Act (VermAnlG).

Other exceptions under the Capital Investment Act, such as the limitation of the number of shares offered to no more than 20 or a minimum price for each share offered of at least €200,000, are not normally applicable to crowdfunding – which is based on the concept of securing a large number (a crowd) of investors and small investment sums for the investment.
BaFin does not make any general statements as to whether or not there is an exception from the obligation to draw up a prospectus considering section 21 of the VermAnlG stipulates (civil) liability for failure to publish a prospectus. Only civil courts can make a decision on cases brought on the basis of this liability provision and the courts are not bound by any decision of BaFin as the supervisory authority. Detailed information about how a capital investment prospectus should be drawn up and which minimum information it must contain can be found on BaFin’s website.

Key information document

If an offer requires a prospectus, the offeror must also prepare a key information document prior to the public offer being made (section 13 of the VermAnlG). Otherwise BaFin may prohibit the offer from being made.

In addition to requirements on the offeror, the Capital Investment Act also imposes requirements on the issuers of capital investments. If the issuer is not already bound to observe the (increased) accounting and publication provisions pursuant to the Commercial Code (Handelsgesetzbuch – HGB), section 23 of the VermAnlG et seqq. imposes the duty to prepare and publish audited annual financial statements and a management report.