Important changes to German investment law – Part I: Capital investments and securities
The law aimed at further strengthening investor protection makes important changes for capital investments (Vermögensanlagen) and securities (Wertpapiere).
On July 16, 2021, the law to further strengthen investor protection (Gesetz zur weiteren Stärkung des Anlegerschutzes) has been published in the Federal Gazette. The Law amends the Law on Capital Investments (Vermögensanlagengesetz – VermAnlG), the investment code (Kapitalanlagegesetzbuch – KAGB), the Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) and other laws. In this first part, we will examine the evolution of capital investments and securities.
1. Prohibition of blind pools in capital investments (article 5 (2) VermAnlG)
The legislator wants to thwart the particular risks inherent in blind pool investments. In the case of blind pool investments, the investment object is not yet determined when the prospectus or information sheet is drawn up. Therefore, retail investors cannot assess risk. Capital investments that are structured as blind pool investments may not be offered to retail investors in the future. This prohibition does not apply to institutional investors who have more extensive knowledge and sources of information.
In the future, the specific investment object must be determined. It is not enough to design the capital investment in such a way that it is limited to a certain industry (so-called semi-blind swimming pool constructions).
BaFin has already started consulting a leaflet on the ban on the construction of blind swimming pools in the investment law (Consultation 07/2021).
A comparable ban is not apparent for securities. This undoubtedly means that it gives the possibility of making a capital investment a sui generis security by means of tokenization and thus to escape the ban. In addition, there is still room for PSPCs (ad hoc acquisition company) in Germany.
2. Breakdown of capital investments only by intermediaries (§ 5 para. 3 VermAnlG)
In the future, the self-distribution of capital investments by the supplier / issuer will also be prohibited. In such cases, there is no suitability or relevance test. In the future, capital investments may only be distributed by investment advisers and investment brokers in accordance with German banking law (Kreditwesengesetz – KWG) or the law on investment firms (Wertpapierinsitutsgesetz – WpIG) or financial investment intermediaries according to the Industry Code (Gewerbeordnung – GewO). These intermediaries are subject to the obligation to carry out a suitability or suitability test.
Under the Change Act, comparable regulation for securities is not apparent, so a capital investment that is made in a sui generis security through tokenization is unlikely to be subject to this. requirement.
3. Obligation to appoint a fund allocation controller (§ 5c VermAnlG)
After the market was impacted by some scandals, the legislator decided to introduce the obligation to appoint a credit controller for certain capital investments.
This applies to other capital investments as well as to precious metals capital investments which were only introduced on July 1, 2021 by the law on strengthening the integrity of financial markets (Finanzmarktintegritätsstärkungsgesetz), insofar as it concerns the acquisition of a (right to a) asset or the rental of an asset, or a capital investment in the form of loans (equity loans, subordinated loans, profit-sharing rights, registered bonds, other capital investments, precious metals capital investments) in which the investor’s funds are transferred to a third party for the purpose of acquiring a (right to) asset or the rental of ‘active. As assets, the legislator envisages, for example, containers and trees; which have gained popularity and attention in recent years. The other assets are land as well as buildings, other real estate and animals. It does not matter whether the issuer itself acquires these assets; the transfer of funds for this purpose to a subsidiary or an ad hoc structure (SPV) is also covered.
The controller of the use of funds is supposed to eliminate a possible transparency deficit. It must therefore be independent; there should be no connection under company law or personal relationships. In addition, the law limits the persons who can be considered as controllers of the use of funds: Only lawyers, notaries, tax advisers, auditors or accountants or companies formed by these professionals are authorized to apply for this function. However, the auditor appointed for the issuer is excluded, these functions must not be mixed. The fund controller application can only work for an issuer for ten years; after that, the fund controller application needs to be changed for new issues – current issues, however, can continue to be monitored.
The law also specifies the procedure for releasing funds. The issuer must open an account which can only be accessed jointly with the controller of the allocation of funds (so-called “and” account). The funds can only be released after an audit by the controller, the result of which must be transmitted to BaFin in a report.
The following points should be mentioned in this report:
a) Amount of investors’ funds collected,
b) Amount of investors’ funds invested in investment properties,
c) Amount of investor funds used for other expenses,
d) List of other expenses and description of the use of investor funds for other expenses,
e) List and description of the investment properties already acquired or of the rights attached thereto or of the investment properties already leased; and
f) the sum of uninvested investor funds.
4. Facts subject to publication after termination of the offer (article 11a VermAnlG)
The obligation of the issuer after the closing of the public investment offer to immediately inform BaFin and the media of any fact directly or concerning him or the capital investment issued by him and not being common knowledge, if it is likely to affect the issuer’s ability to meet its obligations to the investor, has already been included in the Capital Investment Act in 2015 by the Retail Investor Protection Act. Now the legislator is adding standard examples of the facts in question. These include in particular:
a) the impending insolvency of the issuer,
b) default of payment by the issuer to investment investors,
c) the opening of insolvency proceedings on the assets of companies against which the issuer has significant payment claims or whose insolvency may result in the issuer’s inability to pay,
d) the initiation of insolvency proceedings against the assets of a member of the issuer’s group of companies, if this could lead to default by the issuer to investors or to the insolvency of the issuer ‘transmitter,
e) failure of the issuer’s significant counterparties.
These standard examples are not surprising. In addition, the legislator mentions other examples in the explanatory memorandum to the law: the control of the use of funds reveals an unscheduled use of the investor’s funds if this could significantly affect the ability to the issuer to fulfill its obligations to investors. Insofar as the deviation from the intended use is only insignificant, this is not a fact to be published.
5. Publication of WIBs, VIBs and prospectuses
The adjustments to the Securities Prospectus Act (WpPG) are limited. In the future, BaFin will also publish information sheets on approved securities, approved sales prospectuses for capital investments and information sheets on approved capital investments on its website. These will remain accessible to the public for 10 years. Updates and supplements will also be available there. This new regulation is accompanied by regulation (EU) 2017/1129, which also regulates the publication of securities prospectuses by BaFin. This is intended to provide investors with better access to relevant prospectuses and fact sheets.
6. What’s the next step?
The law will enter into force, with a few exceptions, on August 16, 2021 (one month after its announcement). Only the provisions relating to the transmission to BaFin and the publication of sales prospectuses and information sheets (in application of WpPG and VermAnlG) by BaFin will only become applicable from the start of 2022.