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Crowdfunding platform operator zinsbaustein.de has become the first German company to be granted a licence under the European Crowdfunding Service Provider (ECSP) regulations. The licence, issued by German financial watchdog BaFin, came into effect in June.
The ECSP Regulation is designed to standardise regulations for operating crowdfunding platforms across the EU, and improve investor protection across the EU jurisdiction. It aims to facilitate EU-wide distribution of financial investments and, hopes the crowdfunding industry, should boost the competitiveness of the asset class.
According to Volker Wohlfarth, managing partner at zinsbaustein.de, "The ECSP regulation not only facilitates the EU-wide distribution of investments in financing, but above all improves transparency and thus investor protection, since it is no longer the individual transaction that is licensed, but the entire organizational and operational structure of the platform."
Among the advantages the ECSP regulations promote is that crowdfunding platforms can now also broker securities up to five million euros directly without a liability umbrella. Furthermore, projects licensed by the domestic regulator can be offered across the EU without further licensing by foreign authorities. "This creates access to the entire European investor market and will lead to European cooperation between different platforms," Wohlfarth said.
The ECSP Regulation covers projects with a total financing volume of up to €5m per promoter over a twelve-month period. For volumes up to this threshold, the prospectus requirement does not apply, but the project sponsor must provide an EU-wide standardised basic information sheet for investors on the platform. Both securities and partial loan receivables can be brokered by the platforms.
According to Markus Kreuter, managing director of zinsbaustein.de, the new regulation does have its advantages, because up to now, each individual form had to be submitted to Bafin in advance. "Crowdfunding financiers will have to structurally adapt to the new requirements and convince through proof of qualified processes. Prior to the new regulation, this individual processing has involved different deadlines for different processes, which in extreme cases could result in the project being unplannable. The advantage of the ECSP regulation is that we are treated like a bank in that case: we have to adhere to rules with our setup and process structure, and are audited afterwards."
Kreuter acknowledged that, given Germany's cumbersome liability rules which are being adapted by a new German government "Future Financing Act", the implementation of the ECSP Regulation in Germany goes even further than what the EU strictly requires. This is because the original liability legislation, which was initially very narrowly defined, proved a severe stumbling block to many German platforms who were subsequently hesitant to apply for the ECSP licence. "For us as zinsbaustein.de, however, it was clear from the beginning that we would apply for an ECSP license even under the tightened liability rules. In fact, our application helped us to further improve our internal processes and provide an even higher level of transparency for our investors*," said Kreuter.
Only three German companies had applied for the ECSP licence by January of this year, of the 49 registered crowdfunding platforms in the country. By contrast, European lobby group Eurocrowd said that by last July about 70% of Europe's qualifying companies had submitted an application to their relevant domestic financial authority for the licence.
The problem, from a German perspective, had to do with the degree of personal liability carried by German 'managing directors', or Geschäftsführer, which would expose them to much greater personal risk than in other European countries. Even a minor oversight could leave them at the mercy of lawsuits from investors who could sue them for negligence on the lightest of pretences, should a crowdfunded investment go wrong - always a possible risk. National legislation, as it stands, positions Germany at a clear disadvantage to its European peers in promoting cross-border partnerships and platform collaborations.
Unless something changes, German companies stand to lose out to nimbler European competitors. As Wohlfarth says, simply ignoring the new regulation is not an option. "Once the ECSP regulation comes into force, crowdfunding up to the limit of €5 million will probably no longer be possible as asset investments under the old law in Germany," says Wohlfarth. "Then, without the new license, only qualified subordinated loans would remain as an investment option." That's not a bad product per se, he says, but this type of financing in particular cannot offer additional collateral to investors, who must instead rely on the platform's ability to select the right financing.
Wohlfarth said he was hopeful that the German implementation of the new regulation will be improved. "As far as we know, there are talks taking placing about this at the level of the Finance Ministry. But time is pressing - the new regulation comes into force in November, after already having been put back for a year."