The German Bundestag recently reviewed legislation that will implement the European Crowdfunding Service Provider Regime Regulation (ECSP). According to industry participants, the German rules may fundamentally undermine online capital formation in the country just as the European Union is poised to boost the industry with pan-European rules that allow for issuers to raise up to €5 million across all EU member states.
Last year, it was reported that the European Commission had come to terms regarding pan-European rules for online capital formation. Industry advocates such as the European Crowdfunding Network (ECN) had worked with European policymakers for years seeking to harmonize crowdfunding regulations that have been peppered with bespoke national laws making it challenging for issuers to solicit investments across Europe.
The EU harmonization law still means that platforms and issuers will be regulated at the EU member nation level and then passported across all other members. The regulation will be supervised by national regulators allowing them to control certain aspects of implementation. Germany, for whatever reason, appears to be on a path to stymie the development of this sector of Fintech compelling platforms and issuers to perhaps look for other options.
The Bundesverband Crowdfunding eV (German Crowdfunding Association) represents the interests of the crowdfunding platforms in Germany and has been fighting this policy battle. Last February, Karsten Wenzlaff, CEO of the Geman Crowdfunding Association, took an optimistic view of crowdfunding in Germany as some European platforms have more than 60% German investors.
“I do expect a lot of activity in Germany and a lot of competition for the German Platforms. At the same time, the German platforms are eager to scale-up outside of Germany, so it will be a very interesting time,” Wenzlaff said at that time.
The German Bundestag has created SchwarmfinanzierungsbegleitG, which implements the European Crowdfunding Service Provider Regime Regulation into German law. On Thursday, May 6th, 2021, the law was passed in the third reading. Industry insiders were dismayed by the legislation.
“The current implementation of the SchwarmfinanzierungsbegleitG contradicts the goal of the ESCP-VO and puts German companies at a disadvantage compared to their European competitors,” says Uli Fricke, the association’s deputy chairwoman. “In essential points, the proposals of the grand coalition contradict the idea of the ECSP regulation: to create uniform conditions for companies that can carry out crowdfunding campaigns across Europe.”
The proposed liability regime would demand that managing directors, employees, and supervisory board members are liable for the crowdfunding with their personal assets. The proposal thus deviates significantly from the liability regime in other sectors. In the case of securities offerings with a prospectus, only the issuer is liable in the event of gross negligence. In brief, an individual who wants to place a loan of €1 million on a platform for a startup is liable with all of their private assets. However, if the same company were to place a share placement of over €50 million on a stock exchange, then the company would be liable.
Dr. Guido Sandler, CEO of the Bergfürst – responsible for a European regulation on the association’s board of directors, says:
“The managing directors of the issuers are threatened with a liability risk, which is in no reasonable relation to the economic interest of the managing directors in the success of the issue.”
Tamo Zwinge, founder of the Companisto – responsible for regulation in Germany at the association, adds:
“Crowdfunding financing rounds are partly carried out with the help of special purpose vehicles (SPVs) – this is expressly provided for in the ECSP Regulation. The SPVs bundle the investments of the investors and are mostly managed through the platform. In the case of SPVs, the platform managers are also threatened by the liability risk – we assume that this is why numerous platforms will not operate under the ECSP regime.”
Pan-European crowdfunding rules were anticipated to level the playing field across the EU but in Germany, it appears that national rules have been saddled with hobbling requirements. Bundesverband Crowdfunding believes policymakers have taken a completely impractical approach.
The fact that GmbH (limited liability firms) shares were not included in the rules will undermine investment crowdfunding viability in Germany. A French limited company will be able to offer shares of up to €5 million across Europe on a French platform. A German start-up will no be able to do this in its home country.
The disparity between the two countries is described as a gross distortion of competition that undermines German companies.
In a report by Frankfurter Allgemeine, the crowdfunding legislation in Germany was labeled a “disaster” for the young industry.
So who does this harm beyond Germany-based firms in need of growth capital?
In the end, as pan-European rules should commence towards the end of 2021, German companies can work with an investment crowdfunding platform in another European Union member state that sees value in supporting early-stage firms. German crowdfunding platforms will probably need to set up operations elsewhere – or perhaps shut down. CI recently participated in a call where industry insiders discussed which countries are poised to benefit from ECSP as issuers vote with their feed and select accommodative jurisdictions.
And who does this benefit? That is not quite clear.
Perhaps the political ignominy of the Wirecard debacle is simply too much for policymakers to do what appears to make sense as Europe seeks to encourage a single market. Of course, early-stage firms and crowdfunding platforms do not wield significant political clout putting them at a disadvantage. Securities crowdfunding in Germany declined in 2020. If policymakers don’t change paths, it may be going lower in coming years.
Handelsblatt shared a comment from CDU politician Carsten Brodesser:
“Ultimately, with the law, we also want to protect investors in such a way that they can basically rely on the information in the basic investment information sheet. If the information is incorrect, they should be able to take recourse against those responsible.”