The EU gives, the federal government takes. This is how the crowdfunding industry sees a law that is due to pass through the Bundestag on Thursday. This would mean that German start-ups would fall behind across Europe.
GThe crowdfunding industry had great hopes for the EU regulation on the “European Crowdfunding Service Provider” (ECSP), which will come into force on November 10, 2021. The regulation will open up the European market across borders and give small and medium-sized enterprises further opportunities to access capital. But now disappointment is spreading – or more than that.
Because the “swarm financing accompanying law” planned by the federal government, which is supposed to implement the ECSP regulation in German law and which is supposed to pass the Bundestag on Thursday, lags far behind. “The Swarm Financing Accompanying Act will become a Swarm Financing Prevention Act,” says the Federal Crowdfunding Association (BvC).
On the one hand, for example, GmbH shares were not included in the law. As a result, according to BvC managing director Karsten Wenzlaff, a French startup, for example, will be able to offer shares of up to five million euros across Europe on a French platform, but a German start-up will only be able to offer up to 100,000 euros and that only throughout Germany. This is a gross distortion of competition to the detriment of German companies. “This is justified by the notarial certification of a transfer, which according to the European regulation may not be an obstacle,” says Wenzlaff. Here investor protection is played off against investor protection at the expense of companies in Germany.
On the other hand, it is only provided in Germany that the managing directors of the issuers are liable with their private assets in the event of simple negligence, and supervisory and administrative board members in the event of gross negligence. Basically, anyone who wants to place a loan of over one million euros is liable with full private assets, but the company is liable for a much larger share placement on the stock exchange. “The managing directors of the issuers are threatened with a liability risk that has no reasonable relation to their economic interest in the success of the issue,” says Guido Sandler, CEO of the Bergfürst platform and responsible for European regulation on the association’s board.
The law in the form presented will mean that companies in Germany have no interest in using crowdfunding across Europe, although the financial supervisory authority Bafin itself made a practical proposal at the hearing that was ignored by the government, the association said .
“From our point of view, the regulations that concern liability are a disaster,” says the chairman of the board of the federal association, Jamal El Mallouki. The law harms the local platforms and companies. The desired harmonization of the European Capital Markets Union will be thwarted. German platforms will not try to obtain the necessary ECSP licensing under these conditions, which means that a lot of potential is lost in alternative financing models.
“From our point of view, the cabinet draft and the present reprints prevent the application of the ECSP regulation in Germany,” says Wenzlaff. In particular, the changes made by the grand coalition in parliamentary deliberations created considerable legal uncertainty and worsened effective investor protection.
For securities and assets, the issuer is only liable in the event of gross negligence, employees are not. Since higher volume limits apply to these forms of issuance, issuers would be forced into subordinated loans in the “gray capital market” or small securities issues. Unlike in the ECSP regulation, these platforms are not directly supervised by the Bafin and are not also liable.
Issuers, on the other hand, could easily circumvent the requirements of the law by setting up foreign subsidiaries and crowdfunding on foreign platforms. At most, the Bafin will only be informed if foreign companies actively approach investors in Germany. The Bafin has no way of reacting through product interventions.
Since the foreign platforms and issuers may be subject to different liability regimes, it is also to be feared that the German crowdfunding market will in future mainly be used by foreign platforms to which the accompanying law does not apply.
In addition, the liability regime is improperly formulated. Contrary to what is stated in the justification for the transfer, it not only affects the managing directors, but potentially threatens all employees of a company, because not only the managing directors are involved in the creation of the basic investment information sheets. All of these employees were liable with their private assets in the event of simple negligence.
A startup has to explain possible (technical) risks for the business model on less than six pages. There it will only be able to name the most important risks, but the person responsible is also liable with his private assets for a risk that could not be fully described for reasons of space. Board members of a citizens’ energy cooperative were also liable with their private assets if, for example, changes in the law were not correctly anticipated.
It would also be impossible for the special companies founded by some platforms to bundle the rights of the investors in order to represent the interests of the investors vis-à-vis the issuer. This means that the employees of the crowdfunding platforms are now liable with their private assets.