Crowdfunding: Significant statutory changes in effect

On August 16, 2021, the “Act to Further Strengthen Investor Protection” came into force. This implements the government draft from the beginning of the year, which, in addition to the German Investment Code (KAGB) and the German Securities Prospectus Act (WpPG), particularly amends the German Investment Act (VermAnlG).

The legal changes have a big impact on the growing crowdfunding market. Both, issuers of crowdfunding investments and crowdfunding platforms displaying these investments, will have to comply with new obligations that apply with immediate effect without any transitional period. Especially affected are crowdfunding offers to participate in the financing of real estate, energy plant and forestry projects.

Public offer of investments only through investment intermediaries

According to Section 5b (3) VermAnlG the direct selling of investments by the provider/issuer is from now on prohibited. Consequently, investments may only be offered to the public by a financial services institution or a financial investment intermediary. This aligns the provisions of the VermAnlG with the requirements of the WpPG.

Ban on blind pool constructions

In addition, so-called blind pool constructions are prohibited by Section 5b (2) VermAnlG. Blind pool constructions are investment offers in which the specific investment object has not been determined at the time the sales prospectus or the investment information sheet is drawn up. The ban also covers semi-blind pool offers, in which the investment area has been defined, but not the specific investment object.

This means that only investments that are specifically identified and have a verifiable degree of realisation may be offered to the public. The ban also applies to multi-level structures in which the issuer does not invest the collected investor funds directly in an investment object, but forwards them to special-purpose vehicles. Each level up to the specific investment object must be described in the sales prospectus or the investment information sheet.

The German Federal Financial Supervisory Authority (BaFin) has published a declaratory note to further define the ban on blind pools and the requirements for avoiding blind pool constructions. The note contains specifications as to which reason for realisation or which information will be required in the future for real estate, energy plant and forest investments in order not to fall under the blind pool ban.

However, the blind pool ban only applies to the “grey capital market” of asset investments. Investments via so-called SPACs (special purpose acquisition companies) as well as via investments that can be classified as securities through tokenisation are still possible.

Audit on the use of funds

Section 5c VermAnlG introduces a new regulation for the protection of investors, requiring that in certain crowdfunding constellations the use of the funds that have been invested must be reviewed by an auditor. According to the VermAnlG, auditors must be appointed for public offerings that have the following investments as their object:

  • Investments in accordance with Section 1 (2) no. 7 (other investments) and no. 8 (precious metal investments) VermAnlG, insofar as these investments concern the acquisition of a tangible asset, a right thereto, or the lease of such an asset.
  • Investments in accordance with Section 1 (2) no. 3 to 8 VermAnlG (and thus also participatory loans, subordinated loans, profit participation rights, registered bonds), provided the investment is made via several levels (forwarding of crowdfunding loans) and is invested in tangible assets.

The explanatory memorandum to the law explicitly mentions container or forest investments as well as real estate investments as tangible assets.

The issuer must appoint the auditor. Only attorneys, notaries, tax advisors or certified public accountants and sworn auditors are eligible. The auditor must be listed in the sales prospectus respectively in the investment information sheet. The sales prospectus must also contain the audit contract. After ten years, the issuer must appoint a new auditor. However, ongoing issues may continue to be supervised by the auditor.

Section 5c (2) VermAnlG also specifies the audit on the use of funds in more detail: The issuer must set up a special account which can only be accessed jointly with the auditor (so-called “joint account”). A release of the funds by the auditor may only take place once the conditions laid down in the audit contract have been met. After the release, the auditor must check whether the released funds are used in accordance with the purpose specified in the contract and the other provisions. The obligation to check exists continuously at least every six months until all investor funds have been entirely used and must start six months after the first public offering. The result of the audit on the use of funds must be summarised in a report which has to be sent to BaFin. The following points must be stated in this report:

  • Amount of investor funds collected,
  • Amount of investor funds invested in investment properties,
  • Amount of investor funds used for other expenses,
  • List of other expenses and description of the use of the investor funds for the other expenses,
  • List and description of the investment properties already acquired or the rights thereto or the investment properties already leased, and
  • the amount of uninvested investor funds.

In addition, the report must state whether the investor funds have been used as planned. The reports must be published in the Federal Gazette until the investment has been repaid in full.

Facts requiring publication after termination of the offer (Section 11a VermAnlG)

Based on Section 11 VermAnlG, the issuer was already obliged to notify any change of circumstances important for the assessment of the asset investment even after the end of the public offer. Section 11a VermAnlG now expands and specifies these obligations. Accordingly, all circumstances must also be disclosed that are likely to significantly impair the issuer’s ability to fulfil its obligations towards the investor. BaFin shall publish the facts on its website no later than the third working day after receipt.

Interlinking of prospectus review and product intervention

So far, it was of no importance for the review and approval of an investment sales prospectus whether BaFin would have to prohibit the product it dealt with. If a prospectus met the legal requirements because it was formally coherent, complete and comprehensible, it had to be approved. Sales could only be restricted subsequently.

According to Section 8 (4) VermAnlagG, BaFin can now suspend the prospectus review process as long as there are indications that investor protection concerns exist with regard to Section 15 of the WpHG. As a result, substantive legal aspects are now also factually included in the prospectus review.

(16 August 2021)