The legislator has once again taken up the cause of investor protection; this time with a law to further strengthen investor protection. The focus of the new regulations, which apply today (16 August 2021), is the German Investment Act (VermAnlG) with the following “highlights”:
More investor protection for investments
The Investment Act is the regulatory catch-all for all types of investments that are not offered in the form of securities or investment assets under the KAGB. These include, among others, investments in tangible assets ranging from real estate to trees to animals. More recently, investments in tangible assets – collectibles (such as sneakers, luxury watches, classic cars and supercars) – are often offered via tokens, often so-called non-fungible tokens (NTF), which can also fall under the VermAnlG.
Ban on blind pools
In the case of blind pools, the actual object of the financial investment is not yet determined at the time it is marketed. The selection is the responsibility of the manager of the financial investment. For investors, this type of investment entails special risks in several respects: On the one hand, both the qualification and the quantification of the risks of such an investment are particularly difficult. Secondly, the investment is completely at the mercy of the manager’s skill.
Such blind pools are now completely prohibited for investment products within the meaning of the VermAnlG in which (also) private investors can invest. Also, so-called semi-blind pools, where the range of investments to be considered, for example the sector of target companies of a private equity fund, must be sufficiently specified, are no longer permitted for asset investments. These can now only be offered in the form of closed-end public funds. For securities, which also include standardised, market-tradable and transferable tokens, there are still no restrictions on blind pool investments. The special stringency vis-à-vis asset investments is due to the lower degree of supervision to which they are subject.
No own distribution
Under the new legal situation, issuers of investments may no longer distribute them themselves (whereby distribution here already means the first public offering of investments). Distribution is reserved for banks and financial services institutions under the German Banking Act (Kreditwesengesetz, KWG) or the German Securities Institutions Act (Wertpapierinstitutsgesetz, WpIG) and financial investment brokers under the German Industrial Code (Gewerbeordnung, GewO). In this way, the legislator wants to ensure that investments are only sold to investors who are able to cope with their risks (suitability) or at least understand them (appropriateness). If an issuer wishes to continue to distribute its investments itself, it must slip under the liability umbrella of a regulated institution as a contractually linked intermediary and then conduct an appropriateness/ suitability and KYC check.
Control of the use of funds
As a reaction to fraudulent activities in the area of investments in containers, the legislator now requires the appointment of a controller for the use of funds. Investor funds collected must be released by him and their use must then also be monitored. In this way, the legislator wants to prevent further cases in which investor funds are not invested as stipulated in the investment conditions and are instead spent on opulent parties with live tigers or the issuer’s fleet of vehicles.
Open questions
In practice, the new law is likely to lead to a large number of unanswered questions, especially in cases where the design of the product, the issue or the distribution channel does not correspond plainly vanilla to the corresponding guiding principles of the legislator. For example, if collectibles (or fractional ownership) are sold directly to the investors and an application of funds test would be pointless. Or the self-distribution of public offers of less than 100k euros, for which there is no information sheet or prospectus requirement, which would make distribution via a regulated institution unrealistic. This is another reason why BaFin is asked to publish an announcement with explanatory notes in the near future. The compatibility of the new law with MiCAR, which will come into force next year, should also be interesting.
Links to related topics
Act to Further Strengthen Investor Protection:
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