Privileges for the crowd in jeopardy

  • Why it matters

    Why it matters

    Changes to financing provisions for real estate under the Capital Investment Act could adversely affect crowdfunding or crowd investing platforms in Germany.

  • Facts


    • The crowd investing market in Germany grew by 220 percent annually between 2011 and 2015.
    • The government is considering getting rid of the prospectus requirement for stocks and bonds of up to €1 million if they are sold via crowdfunding platforms.
    • Proponents of crowd investing argue that it is an appealing financing instrument for young companies and that unnecessary bureaucratic hurdles should be removed.
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Eine Neubausiedlung in M?nchen, am 21.06.2015.
German real estate is attracting billions of euros each year, and some fear a bubble might be building. Source: Mauritius Images

The federal government appears a fan of online lending platforms. “Here in Germany, we need to learn to let delicate saplings grow,” the coalition government said to explain its relief for swarm financing – or crowd investing – in 2015. This is why financing with certain instruments via credit platforms is not subject to prospectus requirements. A prospectus is a formal legal document providing details about an investment offering.

But following an evaluation of the Small Investor Protection Act, the government apparently sees a need to correct these exceptions in the case of real estate financing.

“Given that sufficient alternative financing options are available for real estate projects, the federal government could consider excluding financing for real estate from the scope of the Capital Investment Act,” the government wrote in response to a request from the Green Party obtained by Handelsblatt.

The crowd investment market in Germany is still small, but it’s growing rapidly. According to the evaluation report, between 2011 and 2015 the market grew by 220 percent a year, reaching a total financing volume of €110 million, or $117.6 million. Other experts estimated an even higher figure. Two-thirds of this investment went to startups, and €36 million to real estate.

The federal government is critical of crowd financing’s growing importance for real estate. This is because facilitated financing could lead to overvaluation in real estate markets and trigger systemic financial crises, the government officials said in their evaluation.

“Crowd investing in real estate allows investors to further diversify their portfolio.”

Karsten Wenzlaff, Federal Association of Crowd Funding

Christoph Grätz, the chief executive officer of credit marketplace Kapilendo, is opposed to the possible cancellation of real estate’s prospectus exclusion. Last month, Kapilendo and Engel & Völkers Capital jointly launched a crowd investing platform for real estate. “The exception for crowd real estate financing would not fundamentally change our business model, but it would exclude private investors from a form of investment that has performed very well,” Kapilend chief executive Christoph Grätz said.

Prospectuses are currently not required for crowd-funded projects with a maximum volume of €2.5 million. “The possible exclusion of real estate financing in the Small Investor Protection Act cannot be justified by lack of investor protection,” Mr. Grätz said, because the law provides for a maximum limit of €10,000.

“Crowd investing in real estate allows investors to further diversify their portfolio,” Karsten Wenzlaff of the Federal Association of Crowd Funding argued.

The association does, however, welcome possible relief for other assets.

In its letter to the Green Party, the federal government suggested it was rethinking the issue when it comes to small stock and bond investments. The cabinet could envision abolishing the current prospectus requirement for stocks and bonds of up to €1 million if they are sold via crowd investing platforms. So far, these exemptions apply only to so-called subordinated loans.

It was considering “anticipating the results of the amendment to the EU prospectus law and abolishing the prospectus requirement for stocks and bonds for up to €1 million if these financial instruments are distributed via crowdfunding platforms,” the letter said.

Nicole Maisch, consumer policy spokesperson for the Greens, welcomed the initiative. She said crowdfunding could be a good investment opportunity and an appealing financing instrument, especially for young companies. For this reason, “unnecessary bureaucratic hurdles” such as the limitation of the exemptions should be eliminated, she added.

The Green Party politician also supports that credit platforms are to be monitored by the German financial supervisory authority, BaFin, and not by trade offices any more. It remains to be seen whether the Christian Democratic and Social Democratic government will play along. At the end of April, lawmakers will discuss the consequences of the evaluation of the Small Investor Protection Act. At that point, it will also become apparent whether the crowd will continue to benefit from exceptions in real estate financing.


Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. To contact the author:

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