One of the most important questions for every young enterprise is its financing. Business angels, accelerator programmes and classic bank financing are just some of the options. Rather new is the possibility of crowdfunding which has just recently been addressed by the German legislator.
Crowdfunding allows a large number of investors to invest mostly small amounts of money in a company.
Startup financing through capital investments
Subordinated loans have so far been the preferred option for investors due to a regulatory exemption. As subordinated loans are not imperative to be repaid in extreme cases, neither the startup nor the investor needs a banking license. Subordinated loans are also eligible to benefit from regulatory exemptions for crowdfunding. If matched with other requirements, the prospectus requirement is exempted up to a specific total amount of investments.
Both the qualifying investment products as well as the threshold amount have now been adjusted by the legislator: businesses may collect up to EUR 6 million (formerly EUR 2.5 million) without triggering the prospectus requirement, but need to issue a capital investment information documents (Vermögensanlagen-Informationsblatt – VIB). The threshold for individual investments was adjusted as well. The maximum investment remains at EUR 1,000 for individual investors to invest in a prospectus exempted business. This threshold is elevated to EUR 10,000 if the investor controls credit or financial instruments valuing at least EUR 100,000. The third and last threshold was adjusted to double the investor’s average monthly net income, but limited to EUR 25,000. The eligibility to invest within one of these ranges is subject to the investor’s self-disclosure.
Next to subordinated loans, shareholder loans and other investments (according to paragraph 1, section 1, number 7 Capital Investment Act (VermAnlG)), profit participation rights are now included into the catalog of possibly exempted crowdfunding products.
For the prospectus exemption for crowdfunding to take effect, the offer must be made in the form of investment consulting or investment brokerage via an online service platform. The exemption is thus not available for own issues of investment instruments.
Equity financing is not possible as a means of crowdfunding through capital investments under the exemption rules. This makes the issuing of a prospectus compulsory. The Capital Investment Act (Vermögensanlagegesetz – VermAnlG) does offer prospectus exemptions to methods other than crowdfunding. The thresholds of total investment amounts are, however, less flexible. The issue of investment instruments must either be limited to 20 units of the capital investment, must not exceed a total sales price of EUR 100,000 for the duration of 12 months or the minimum price for one unit must be at least EUR 200,000.
Startup equity financing and debt financing through securities
Crowdfunding through capital investments is not the only financing option that was subject to adjustments by the legislator. With implementation of the European Prospectus Regulation (which at large replaces the German Prospectus Act (Wertpapierprospektgesetz - WpPG) offers exemptions for securities (especially stocks and bonds). Security issues under EUR 8 million in value within a period of 12 months do not require a prospectus, if sold by means of investment consulting or investment brokerage of a securities-related services enterprise. Own issues are exempted up to a maximum amount of EUR 1 million in value. If, within a period of 12 months, the total amount of EUR 100,000 is exceeded, the publication of securities information documents (Wertpapier-Informationsbaltt – WIB) and its deposit with Germany’s Federal Financial Supervisory Authority (BaFin) is required.
The thresholds of maximum investments for investors are the same for securities as they are for capital investments. The maximum investment is EUR 1,000 for individual investors to invest in a prospectus exempted business. This amount can be elevated to EUR 10,000 if the investor controls credit or financial instruments valuing at least EUR 100,000 or to double the investor’s average monthly net income, but limited to EUR 25,000. The eligibility to invest within one of these ranges is subject to the investor’s self-disclosure.
Startup financing through ICO or STO
One additional way to finance a startup is through an Initial Coin Offering (ICO) or Security Token Offering (STO). This however, requires a thorough analysis whether the issued Token constitutes a security or a capital investment. In this case the relevant rules, regulations and exemptions (including the above) apply.