Some 300 private real-estate investors in Berlin just had a very bad day.
These unlucky individuals had piled into a crowdfunding project organized through Zinsland, a fledgling online fintech. On Wednesday, the curtain came crashing down on the venture after a Munich court opened insolvency proceedings against the project developer, Conrem-Ingenieure GmbH, which had planned to build two apartment blocks in Berlin’s Tempelhof district.
Sadly, when it comes to bankruptcy cases, holders of so-called subordinated debt are at the back of the line. The Zinsland investors are on the deeds to subordinated loans totaling €1.25 million ($1.47 million). Instead of receiving the tantalizing six percent return offered in the crowdfunding deal, their entire investment will evaporate.
The chances of losing it all has done little to deter German investors – an odd development in a country famous for its aversion to risk. Some Germans, it seems, do get a frisson from betting on risky business. “If I invest in stocks I’m just an unimportant cog,” complains one investor, who instead, has put money into 15 start-ups through the platform Seedmatch.
Philipp Düring, an independent corporate consultant, said crowdfunding is as much about establishing a connection with a start-up as supporting innovation. “We opted for crowdfunding because it allowed us to obtain capital without handing out stakes in the company. That accelerates our growth,” said Stefan Sebök, founder of Horando, an online watch retailer that raised money on the platform Companisto.
Equity crowdfunding first appeared in the US in the mid-2000s, and sprouted in the UK around 2011. Three years later the UK took steps to better protect investors, while the US, which took steps towards legalization in 2012, finally did so in 2016.
The German government has encouraged the market through deregulation. Since 2015, projects of up to €2.5 million, financed through subordinated debt or profit-participating loans, do not need to put out a sales prospectus; all they need is to submit a three-page information sheet. Another requirement is that a private investor’s individual investment cannot exceed €1,000, although in certain cases it can be increased to €10,000.
Between 2011 and 2015, the German crowdfunding market grew at an average 220 percent per year.
That has helped the sector to flourish. Between 2011 and 2015, the German crowdfunding market grew at an average rate of 220 percent per year. In that period, platforms collected a total of €110 million, with two-thirds going to start-ups and one-third into real-estate ventures. But recently, real-estate projects began to dominate the market.
Consumer watchdogs have long warned of the risks, and even the platforms themselves admit the dangers. Although every financing offer must include a warning that investors could lose every penny, there are other issues. In the western state of Hesse, the local consumer rights association pored over leaflets provided by 33 platforms for 83 different crowdfunding projects this year, and discovered that many of them charge hefty one-off fees.
In 21 cases, the platforms charges ranged between 1 and 6 percent of the investment, and in 50 cases the costs were between 6 and 10.5 percent. That means a considerable portion of the funds raised go towards overhead rather than into the project itself, the agency said.
It also said that nearly two-thirds of these projects failed to provide concrete details about the one-time costs. “That makes it difficult for investors to make a well-founded investment decision,” said Wolf Brandes, the agency’s financial team lead.
The Federation of German Consumer Organizations, VZBV, wants crowdfunding platforms to be closely supervised by the financial watchdog Bafin. “The platforms aren’t doing their job,” complains Dorothea Mohn, head of the VZBV’s market team.
Germany’s Federal Crowdfunding Association, which cooperates with BaFin, said industry standards have improved since the Hesse review. “We’re a young sector and welcome suggestions,” Uli Fricke, the crowdfunding association’s deputy chairwoman, told Handelsblatt. She said platforms provide substantial information about the projects. “We’re very transparent in that respect.”
David Rhotert, co-founder of the Companisto platform, said its site alerts people “at least seven times” about the financial risk before they make their first investment. “We believe our investors are capable of acting responsibly,” he added.
Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. To contact the author: firstname.lastname@example.org