German government mulls change to crowdfunding regulation

The German government is mulling changes to crowdfunding regulation that would subject it to the same scrutiny as senior lending and publically-raised equity.

Currently, crowdfunding regulation in Germany states that it is exempt from the kind of regulatory controls imposed on senior lending and publically-raised equity, which are heavily regulated. At the moment, if the total capital raised by a crowdfunding project does not exceed €2.5m, it is not necessary to have an authorized investment memorandum. Individual investors are not allowed to invest more than €10,000 in a crowdfunding project and it is ranked behind the senior loan tranche.

‘The German government has realized that some crowdfunding capital is going into real estate,’ said Markus Kreuter, team leader of Debt Advisory at JLL in Frankfurt. ‘So far, crowdfunding has only raised about €40m a year in Germany which goes into real estate. However, once you take into account the senior loan, which typically accounts for around 60% of the capital, 20% to 30% equity and then 10% which comes from crowdfunding, that equates to between €200m and €350m of total investment.’

When the Kleinanlegerschutzgesetz (Small Investor Protection Act), regulating crowdfunding came into force in Germany in July 2015, it was designed to protect investors in the grey market and to make it more transparent. To a large extent, it has been successful.

Nonetheless, crowdfunding remains a very small part of the German market and is ‘not pushing it to new heights’, according to Kreuter. According to a study commissioned by the crowdfunding platform iFunded.de, which focuses on real estate, whilst 17% of Germans are aware that they can invest in real estate via crowdfunding, only 13% of them are inclined to do so.

Real estate consultancy Dr. Klein announced this week that it was teaming up with crowdfunding platforms Exporo und ZINSLAND in a bid to introduce more clients to the notion of crowdfunding as an additional financial instrument in their portfolio.

‘It doesn’t make sense to use crowdfunding for every project but we will examine the financing possibilities and strategies with our clients to determine the best fit for each project,’ said Boris Matuszczak, head of commercial property North/East at Dr. Klein. ‘The financial instruments on offer and projects are too diverse for a “one instrument fits all” approach.’

Going forward, it seems likely that crowdfunding will have to be brought into line with other capital sources, according to Kreuter: ‘The government might want to level the playing field so that crowdfunding is subject to the same level of regulation as the senior loan and publicly-collected equity components,’ he said. ‘This looks fair as there is no reason why it should be easier for crowdfunding. The government is currently getting opinions from those in the industry to see what everyone thinks.’

The German Crowdfunding Association has made it clear that it would like to see the €10,000 investment cap on crowdfunding abolished, so that investors with larger disposable income are able to freely use crowdfunding platforms in Germany, as they can already do in many other countries. However, this does not yet appear to be on the table.

However, other changes may be on the cards. According to Karsten Wenzlaff, founder and director of the German Crowdfunding Association, the amount that a crowdfunding project can raise may be increased: ‘Equity-based crowdfunding in real estate is a growing market all over the world. It allows investors to diversify their portfolio, so it would make sense to push the project limit to €5m, in accordance with the European Commission proposal on the European Capital Market Union.’

An update is unlikely before the summer and there will certainly be some resistance in the industry: ‘The proposal would obviously make crowdfunding more expensive, both in terms of establishing the investment product and running the platform, making it more in line - from a regulatory perspective - with the fund business,’ Kreuter said.