The largest economy in Europe has been slow to create a sustainable regulatory environment for investment crowdfunding platforms to thrive. Under ECSPR or European Crowdfunding Service Provider Regulations, an approved platform may raise up to €5 million across the European Union. The kicker to the new rules is that a platform must be approved by the “relevant authority,” typically the securities regulator, in their home country. This means each EU member state may create somewhat different rules, meaning some European countries have more accommodating rules than others. Up until now, Germany had some pretty obtuse requirements that effectively blocked ECSPR approval in the country, crippling investment crowdfunding as outlined by the EU.
According to industry insiders in Germany, the big challenge was the liability for offerings that may have raised money on a platform that left the executives of the platforms exposed. Obviously, no manager in their right mind would want to shoulder that type of exposure – especially when early-stage firms are naturally risky.
In a blog post this past weekend, Karsten Wenzlaff, Managing Director of the German Crowdfunding Association ( Bundesverband Crowdfunding), said they had just received the full support of BaFin – the German Securities regulator (Bundesanstalt für Finanzdienstleistungsaufsicht) – in their push to craft viable rules. The German Crowdfunding Association represents the political and public interests of crowdfunding providers to the German Government, regulatory agencies, etc., and has been working diligently to get the authorities to approve actionable rules.
Earlier this year, the German Crowdfunding Association indicated that legislation was poised to improve the investment environment for online capital formation. The “Future Financing Act” sought to mitigate the liability concerns of platforms. But there were also other issues that needed adjustment.
“Our association the German Crowdfunding Association, argued that while the law improves the situation for companies issuing under ECSP, it still is not perfect. Guido Sandler (CEO of BERGFÜRST – a platform) made a powerful case that, especially for start-ups, the uncertainty of being in court for issues as trifle as translation errors was a substantial risk. Tobias Riethmüller (a partner at the law firm Gorg) had analysed capital market laws of the last 50 years and shown that the current regime is extraordinarily strict. I made the case that the new law makes life actually more difficult for investors, because the new law denies them the opportunity to have access to internal documents in court cases.”
Wenzlaff said that in the past, BaFin has not been a big fan of Fintech, but a recent leadership change has altered the dynamics for embracing the digital evolution of finance. BaFin recognized that out of 66 crowdfunding platforms in Germany, only one (Zinsbaustein) had been approved under ECSPR – an embarrassment for the country. As was recently reported, there are now over 60 ECSPR-approved platforms in Europe, with France and the Netherlands leading the charge. A top executive at BaFin apparently acknowledged the failure of existing regulations, including the liability issue and the need to align with other EU member states.
“For me, it was absolutely stunning to understand that we have the BaFin in agreement on this. After last week, when the German Bundesrat (essentially the German Senate) agreed with us on that issue, I hope that now there is a path forward to make the Future Finance Act work for all ECSP platforms in Germany,” stated Wenzlaff.
It appears that the progress made in other EU member states has helped to push BaFin in the right direction to enable online capital formation. This, along with support from key members of the German Bundestag (Parliament), regulatory change is coming. While not yet finalized, it appears that Germany is finally turning the corner in allowing investment crowdfunding to thrive.
Wenzlaff said he will provide a further update at the forthcoming Digital Finance Summit in Germany on November 27th.