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Erscheinung:27.08.2021 | Topic Prospectuses, Consumer protection Making the grey capital market safer
The name speaks for itself: the Act to Strengthen Investor Protection (Anlegerschutzstärkungsgesetz) is intended to better protect investors from losses incurred through capital investments. This article explains the key changes.
Obscure business models, money trickling away uncontrolled down various channels, and providers marketing their own products without giving their clients’ interests a second thought: investors have often found it very difficult to negotiate their way through the grey capital market. Many have lost money with capital investments. Even the Act to Strengthen Investor Protection does not rule out the possibility of making losses. But it will, as the name suggests, offer investors far better protection, mostly by providing more transparency (see interview with BaFin Chief Executive Director Dr. Thorsten Pötzsch) . The majority of the provisions and changes came into force one month after the Act was promulgated in the Federal Law Gazette (Bundesgesetzblatt).
With this new Act, the legislature is implementing the package of measures to further enhance investor protection that the German Federal Ministry of Finance (Bundesministerium der Finanzen) and the German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) had published on 15 August 2019 (see expert article on the BaFin website dated 4 November 2019 ). The changes primarily concern the German Capital Investment Act (Vermögensanlagengesetz – VermAnlG).
Blind pools now banned
For the first time, the VermAnlG will now include provisions relating to blind pools. Blind pools are investment vehicles that finance, for example, real estate investments, wind farms or media projects. Crucially, however, investors in blind pools are not told where exactly their money will be invested. Many investors have suffered major losses as a result of such obscure models. The ban should now put a stop to this. Under the new rules, which came into force one month after the Act was promulgated, blind pools may no longer be offered to investors (with very few exceptions1). From that date onwards, the only investments that may be offered to the public are those that are clearly defined in the prospectus or in the capital investment information sheet – which are concrete and where the stage of realisation can be verified. The ban covers both full blind pools, in which neither the investment item nor the line of business is known, and partial blind pools. In partial blind pools, the line of business to be invested in is known, but the investment item itself is not yet certain.
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Specific aspects of the Act to Strengthen Investor Protection will be explained in greater detail in future expert articles that will appear on the BaFin website.
If a project has a multi-level structure, the blind pool ban applies to each of these levels. This means that each level must be clearly defined in the prospectus or the capital investment information sheet. Multi-level structures are projects in which the issuer does not directly invest the funds received in an investment object but passes them on, for example, via intermediate companies. Only at a later stage will one of these companies, e.g. a project company, acquire the investment items themselves. These items could be real estate, for example.
How is “clearly defined” intended to be understood within the context of the VermAnlG? BaFin will answer this question in its Guidance Notice on the ban on blind pools by specifying what information it expects the prospectuses and capital investment information sheets to contain in future.
BaFin held a public consultation on its Guidance Notice that lasted until mid-June, and released it after the Act to Strengthen Investor Protection was promulgated. The addressees are mainly providers and issuers of capital investments. BaFin’s objective is to define a set of common criteria for the market and thereby ensure that only prospectuses and capital investment information sheets are submitted to it that comply with these criteria. In cases of doubt, providers and issuers are recommended to submit a preliminary enquiry to BaFin’s WA 54 Division in order to resolve any legal questions and avoid unnecessary costs.
New ways to control the application of investments
Up until now, investors were unable to check whether a provider or issuer was actually using their money for the intended purpose. The legislature has created the role of the investment application controller in the VermAnlG whose responsibility in future will be precisely that – to control the release of the investment intended for use in the capital investment product and control how it is actually used after the public offer has started. This innovation also came into force one month after the Act to Strengthen Investor Protection was promulgated. The issuers appoint the investment application controller, but they may only appoint lawyers, notaries, tax advisers or auditors as well as chartered accountants or entities set up by them.
The VermAnlG requires issuers to appoint investment application controllers for public offers relating to the following investments:
- certain capital investments under section 1 (2) no. 7, for example investments in trees;
- certain capital investments in precious metals under section 1 (2) no. 8;
- investments under section 1 (2) no. 3-8 of the VermAnlG if these relate to multi-level structures and are invested in tangible assets
Besides other information, the prospectus and the capital investment information sheet will have to contain personal details on the investment application controller. The investment application control agreement will also have to be included in the prospectus. The new minimum information required will be set out in the amended Capital Investment Prospectus Regulation (Vermögensanlagen-Verkaufsprospektverordnung), which will be published in the Federal Law Gazette. The changes concerning the capital investment information sheets are defined in section 13 (3) of the VermAnlG.
Who may distribute investment products?
The Act to Strengthen Investor Protection addresses another topic of importance: in future, investors may only acquire an investment product if they previously received investment advice from or the product was brokered to them by an investment services enterprise or financial investment intermediary. This is defined in section 5b (3) of the VermAnlG that came into force one month after promulgation of the Act to Strengthen Investor Protection. The change is due to the fact that investment services enterprises are supervised by BaFin and must be in possession of the necessary expert knowledge in order to advise investors. Not only that: they must offer this advice in a manner that is consistent with these investors’ interests and requirements. Financial investment intermediaries are also subject to supervision. The responsible bodies are the Trade Supervisory Offices (Gewerbeaufsichtsamt) or the chambers of industry and commerce.
More transparency through digitalisation and publications
The Act to Strengthen Investor Protection also makes it easier for investors to obtain information on an investment product. This is because, from the beginning of 2022, BaFin will be obliged under section 9 (3) of the VermAnlG to publish the prospectuses it approves on its website and ensure that they can be retrieved there for a period of ten years. The same applies to supplements and, in cases in which prospectuses are not required under sections 2a, 2b of the VermAnlG, to the capital investment information sheets approved by BaFin and their updated versions (section 13a (3) of the VermAnlG). In future, investors will be able to retrieve all these documents from a central point and thereby benefit from more transparency.
From the beginning of 2022, prospectuses and capital investment information sheets as well as supplements and updated versions will have to be submitted to BaFin electronically, using BaFin’s reporting and publishing platform MVP Portal. The signature requirement set out in the Capital Investment Prospectus Regulation will no longer apply.
In this context, the Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) also specifies a change. From the beginning of 2022, BaFin will also have to publish the securities information sheets on its website and ensure that they can be retrieved for a period of ten years. The same applies to updated versions of these securities information sheets submitted to BaFin under section 4 (8) sentence 1 of the WpPG.
Capital Investments: prospectus scrutiny and product intervention to be interlinked
As regards the approval procedure for capital investments, the Act to Strengthen Investor Protection also makes provisions to interlink the prospectus scrutiny process with the product intervention process. Up until now, when a prospectus for a capital investment was to be scrutinised and approved, it was irrelevant whether BaFin had identified reasons which might require the prohibition of the investment in question, for example. If a prospectus met the legal requirements, in other words was consistent, complete and comprehensible, BaFin had to approve it, regardless of whether there were grounds for considerable investor protection concerns and whether BaFin was examining a possible need to prohibit the capital investment or restrict its distribution.
In future, the approval procedure for capital investments will be suspended as soon as BaFin has grounds for investor protection concerns and will in principle remain suspended until BaFin has completed its examination of whether product intervention measures need to be adopted. If BaFin prohibits an investment product, the prospectus approval is also blocked, and the prospectus is therefore not approved by BaFin.
Investments in precious metals now only with a prospectus
The Act to Strengthen Financial Market Integrity (Gesetz zur Stärkung der Finanzmarktintegrität – see expert article on the BaFin website dated 4 August 2021), has also brought about a change to the VermAnlG that came into force on 1 July 2021: the new “number 8” in section 1 (2) of the VermAnlG. This relates to certain investments in precious metals, which are now defined as capital investments under the VermAnlG and are thus subject to the prospectus requirement. The legislature has made this provision because, in the past, providers of precious metal investments had deliberately circumvented the prospectus requirement. Investors now have better ways to obtain information on such products.
Author
Rüdiger Koch
Referat WA 51 Grundsatzfragen
Dr. Katharina Kunz
WA 54 Approval of Capital Investment Prospectuses
Footnote:
- 1 The blind pool ban does not apply if the offer is only addressed to a corporation or a partnership with a limited liability company as a general partner (“GmbH & Co. KG”) in which the limited partners are at the same time shareholders of the limited liability company or are involved in the decision-making processes within the limited liability company, unless the GmbH & Co. KG is an investment fund or a management company in accordance with the German Investment Code (Kapitalanlagegesetzbuch).
Chief Executive Director Dr Thorsten Pötzsch about the Act to Strengthen Investor Protection
“Transparency as the recurrent theme“
Dr. Pötzsch
@BaFin
The Act to Strengthen Investor Protection (Anlegerschutzstärkungsgesetz) makes the grey capital market more transparent for investors. For Dr. Thorsten Pötzsch, transparency is a recurrent theme that runs throughout the Act. In this interview, BaFin’s Chief Executive Director, who is also currently Interim Head of BaFin’s Securities Supervision Sector, explains how the new legislation will make it easier for investors to make up their own minds where to invest their money.
Dr. Pötzsch, what can investors expect from the Act to Strengthen Investor Protection?
They can expect better protection, above all from the increase in transparency on the grey capital market that the new legislation provides. Transparency is a recurrent theme that runs through the entire Act. The legislators have taken the right approach here in my opinion, as they are making it easier for investors to decide for themselves how and where to invest their money. But greater protection does not mean that the lawmakers are releasing investors from their responsibility.
Surely investors could still come to grief on the grey capital market.
Yes, they could. Investors must always bear in mind that capital investments might not perform in line with the issuer’s projections and forecasts. You have this risk with all investments on the capital market. The higher the prospective returns, the higher the risk. And there’s something else investors should bear in mind: no matter how much regulating and monitoring we do – we will never be able to entirely prevent criminal activity.
Would it not be better to impose a general ban on grey capital market products?
As always, it’s a question of what can be deemed proportionate. Imposing a general ban on grey capital market products might be construed as a step towards paternalism.
While on the subject of bans: at least blind pools may no longer be offered to investors in future, barring a few exceptions. Is that protection or does that constitute paternalism?
There’s always a fine line between protection and paternalism and we have to tread very carefully. But here, negotiating this fine line has been successful as the ban in question really is about protection. Protection that enables investors to act responsibly and strengthens personal autonomy. Particularly retail investors need to know in advance which projects they are investing their money in. But they can’t do that if they’re left in the dark.
There’s the old proverb that you should never buy a pig in a poke. That’s precisely what’s been happening here on a widespread scale. There was an enormous imbalance in knowledge between offerors and investors and the only way to resolve this was by banning blind pools. Here the theme of transparency recurs again: the lawmakers are not prohibiting investors from investing in projects normally funded through blind pools but are enabling them to form their own impression of these projects. In this way they can better decide whether it makes sense for them to invest in such a product. In other words, investors are being given the means to make responsible decisions.
There’s bound to be investors who don’t wish to concern themselves with a capital investment to such a degree. Or who say it’s all too complicated for them to understand. If that is the case, they should steer well clear of such products. People should only take risks if they know what they are letting themselves in for and can bear the risks.
Let’s talk about direct selling: what do investors stand to gain from the fact that, in future, only investment services enterprises and financial investment intermediaries will be allowed to distribute capital investments?
They can expect better protection, and here’s why: anyone distributing their own capital investments will have their own economic interests at heart first and foremost. And these might conflict with those of the investors. Investment services enterprises and financial investment intermediaries do not distribute their own investment products but offer an array of products from different providers.
And that’s not all: investment services enterprises are supervised by BaFin and have the necessary expert knowledge to advise investors and to customise their advice to the investors’ needs. What’s more: they have to meet transparency requirements and comply with rules of conduct designed to protect investors. Financial investment intermediaries are also subject to supervision, in their case by the Trade Supervisory Offices (Gewerbeaufsichtsamt) or the chambers of industry and commerce.
But once again: the Act to Strengthen Investor Protection makes the grey capital market safer but it cannot provide complete protection in all situations. That would be simply impossible.
Some issuers will soon be obliged to appoint an independent third party to control how investors’ money is being used. What changes do you expect from this?
I expect a further tangible increase in investor protection. The fact that, in future, an independent third party will be entrusted with monitoring the application of investments in, for example, direct investments in tangible assets will lead again to more transparency. Up until now, all investors could do was rely on their money being properly invested. Now they will be able to better trace whether the money really is being used for the intended purpose.
One final question: the new legislation interlinks the processes of prospectus scrutiny and product intervention for capital investments. What is going to change here?
Let me briefly explain the situation as it is at the moment: on the one hand, prospectuses for capital investments are subject to an approval process by BaFin. We scrutinise prospectuses in accordance with statutory requirements. Specifically we examine whether they are consistent, complete and comprehensible. No more, but no less than that. On the other hand, there’s the tool of product intervention. We can, for example, prohibit a product or restrict its distribution if there are considerable grounds for investor protection concerns. For example, we took measures to impose a restriction on the marketing, distribution and sale of contracts for difference (CFDs) in Germany to retail investors.
Up until now, these two processes were handled separately. If a prospectus met the legal requirements, in other words was consistent, complete and comprehensible, BaFin had to approve it. End of matter. It was completely irrelevant whether BaFin was at the same examining a possible need to, for example, prohibit the product due to considerable investor protection concerns.
We’ll no longer be faced with such situations. We’ll continue to scrutinise whether the capital investment prospectuses are consistent, complete and comprehensible. But in future the prospectus approval procedure will be suspended as soon as BaFin has grounds for investor protection concerns. And we will in principle continue to suspend the process until we’ve finally concluded whether there is a need to adopt product intervention measures. If BaFin prohibits an investment product, we will of course stop the prospectus approval process.
However, these provisions do not apply to prospectuses under the EU Prospectus Regulation. The reason is that this is a directly applicable European regulation, which means that national legislators do not have any legislative powers in this area.
I welcome these new tools for capital investments: they contribute towards making our supervisory practice more effective and our actions more comprehensible.
Thank you for the interview, Dr Pötzsch.
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