More light in the ‘grey’ capital market

Draft legislation aimed at protecting small investors

As part of its action plan for consumer protection in the financial market, in July 2014 the German government presented draft legislation aimed at protecting small investors, to be voted on after the summer break. It isn’t just since the insolvency of Prokon that lawmakers have recognised a need to act. This is why BaFin, the Federal Financial Supervisory Authority, will in future also monitor the ‘grey’ capital market and, for example, warn investors of risky financial products.

The draft is intended not only to close regulatory loopholes and eliminate possibilities of circumvention, but also to define a regulatory framework for crowdfunding platforms for the first time in Germany. New rules on documentation and mandatory information are planned in order to increase the transparency of financial products. Restrictions on advertising round off the efforts to protect small investors.

Prospectuses will continue to be the main pillar of investor protection. If an issuer is not required to draw up a prospectus, investors will still have access to a capital investments information sheet, known as a VIB (Vermögensanlagen-Informationsblatt).

The prospectus requirement is to be extended and the existing threshold values adjusted. In future, a full prospectus will still not be mandatory if the total amount to be raised does not exceed 1 million euros and investors can purchase one or more shares with a total value of no more than 10,000 euros. But even such cases require the publication of a VIB. Only where shares are sold for a total value of up to 250 euros is the obligation to submit and sign a VIB waived.

These broader disclosure requirements increase the administrative burden on issuers, platform operators and also consumers, because if it is possible to invest more than 250 euros individually, then the investor has to sign the capital investments information sheet (VIB) before sending the original back to the issuer or platform.

At the same time, platform operators must be authorised as investment intermediaries under Section 34f of the German Industrial Code (GewO) in order to sell or offer the issuer’s investments as a commissioned third party. The mere fact that a platform assumes responsibility for creating a VIB does not make it the issuer of the capital investment. As such, the platform operators and issuers must agree internally on clear rules concerning each other’s tasks and functions.

The proposed legislation seeks to meet the concerns of young companies funded by crowd investments and the interests of investor protection at the same time. So far there has been limited enthusiasm for the proposal in Germany’s crowdfunding scene.