Crowdfunding and crowdlending in Germany

BaFin names four models. In crowdinvesting, investors share in a company's profits or receive securities or tokenized instruments; many offers are subordinated loans, which rank behind other creditors if the company becomes insolvent. In crowdlending, investors finance loans to companies or private borrowers. Crowddonating gives nothing back, and reward-based crowdfunding gives a product or a thank-you.

BaFin supervises only crowdinvesting and crowdlending. Crowdlending in Germany used to run through a partner bank that granted the loan and sold the repayment claims to investors. Under the EU regulation a licensed platform can arrange loans to companies directly, a change Startuprad.io discussed with CrowdDesk managing director Jamal El Mallouki.

The EU Crowdfunding Regulation, Regulation (EU) 2020/1503, has applied since November 10, 2021. A platform licensed under it is a European crowdfunding service provider, or ECSP. It covers offers of securities and business loans of up to 5 million euros per project owner, counted over 12 months. Larger offers fall outside the regulation.

A platform based in Germany applies to BaFin. BaFin has 25 working days to check whether the application is complete and three months from a complete file to decide. ESMA keeps a register of licensed platforms, and a platform licensed in Germany can serve investors in every EEA country once it has notified BaFin.

The regulation treats most private investors as non-sophisticated. Before they can invest, the platform runs an entry knowledge test and asks them to simulate their ability to bear a loss of 10 percent of their net worth. If a single investment exceeds 1,000 euros or 5 percent of the investor's net worth, whichever is higher, the platform shows a risk warning and asks for explicit consent. Every non-sophisticated investor can revoke an offer within a reflection period of four calendar days, and each project has a key investment information sheet of at most six A4 pages, as set out in Articles 21 to 23 of the regulation.

BaFin warns that a failed project can cost investors all of their money, that a subordinated loan with a pre-insolvency enforcement bar may never be repaid, and that crowd investors usually have no vote and no easy exit. BaFin checks that a capital investment information sheet meets the legal requirements, but not whether its content is correct or whether the business model works.

Startups in Germany are usually limited companies, and a share in a GmbH can only change hands through a notarized contract. That makes a seed round with many small tickets expensive. Platforms such as tokenize.it, now beel, answer with virtual shares, contracts that pay the holder like a shareholder without making the holder one. Crowdinvesting offers can also take the form of tokenized instruments, and the page on issuing tokenized securities in Germany explains the crypto securities register behind them.

Finance Loop is the meeting place for founders, business angels, platform operators and the bankers and lawyers who work on startup finance in Germany, Austria and Switzerland. It connects the finance, IT and AI communities, with events in Frankfurt, Munich, Berlin and Hamburg.

tokenize.it, now beel, is one of Finance Loop's event and network partners. Finance Loop is a partner of the FinTech Founder & Investor Evening in Frankfurt, presented by Finteda, the law firm Schalast and Fincite under the theme "Capital, Regulation & Scale".

Crowdinvesting and crowdlending are. A platform that arranges investments in securities or business loans needs a license as a European crowdfunding service provider, which BaFin grants to platforms based in Germany. Donation and reward campaigns are not supervised by BaFin.

Through a licensed ECSP platform, up to 5 million euros per project owner within 12 months. Offers above that amount fall outside the EU Crowdfunding Regulation and need a different legal route.

In crowdinvesting the investor takes a share in the company's success, often through a profit participation, a subordinated loan or a token. In crowdlending the investor finances a loan and expects interest and repayment on a fixed schedule. Both carry the risk of total loss.