Germany is to introduce greater protection for small investors, in a move intended to shore up trust in online equity crowdfunding.
From next month, many people in Germany will only be able to invest €1,000 in crowdfunded projects, with amounts above this threshold permitted only if investors have liquid assets of at least €100,000.
In Germany there are approximately 80 crowdfunding platforms where tech start-ups can post business pitches. Members of the public can buy stakes in these fledgling companies online, through portals like Seedmatch, Companisto, and Innovestment, in deals that carry high risks and high expected failure rates.
Because the concept is so new, lawmakers are playing catch-up in a scene rife with complaints alleging poor investor protection.
There are several tales of how investors have lost their shirts on crowdfunding projects that go bust, but the one that focused minds in Germany involves Prokon, a clean energy developer that raised nearly €1.4 billion from 75,000 small investors, and later filed for bankruptcy protection. Consumer groups said Proton attracted investors with promises of strong potential returns without giving sufficient warning of the risks.
However, it was the Prokon case that prompted calls for regulation of the online or “grey” capital markets, or those where trading practices are less strictly controlled than official stock markets.
While the new law is designed to protect investors, critics say it will have the effect of deterring investment.
The focus should be elsewhere, others argue. “There are a lot of concerns about investor protection but I don't think rules such as the one suggested are the way to address those,” said David Mellett, founder of Economy2dot0, which advises SMEs on crowdfunding campaigns in Belgium. “People will lose their money in they invest in poorly-run businesses, so I believe that we should focus more on making sure that the projects which are crowdfunded have higher chances of success, to reduce risk.”
“I think the limit of €1,000 per investor is a good thing in the short-term until confidence in crowdfunding increases and then the amounts will too. This is the trend in other countries such as France,” Mellett said.
Crowdfunding rules vary greatly between European countries. Italy was an early mover and opted for a tightly regulated market. In other countries, like the Netherlands and the UK, laws on equity crowdfunding are more relaxed.