Germany Tightens The Crowdinvesting Rules

The German government is set to roll out new rules that would limit how startups can raise funding through crowdfunding platforms, as well as who can invest, The Wall Street Journal reported on Friday (April 17).

Under the rules, which are intended to balance protection for investors and support for innovation, startups trying to raise €2.5 million ($2.7 million) or more through crowdfunding will have to provide a detailed prospectus and disclose investment risks. The Federal Financial Supervisory Authority will be able to restrict advertising it considers problematic.

Retail investors will have the right to a refund of their money within 14 days after agreeing to invest in a crowdfunded startup. But no private investor will be able to put in more than €10,000 on a crowdfunded venture, and to invest more than €1,000 an investor will need to have at least €100,000 in liquid funds or a monthly net income that’s more than twice the invested amount.

The new rules, which are similar in purpose to the recent implementation of the so-called Reg A-plus in the U.S., will still have to be approved by the German parliament. A draft law was created in the wake of the bankruptcy of wind farm operator Prokon last year, when thousands of retail investors lost money, and originally published a few weeks ago. But startups objected, saying that version would sharply reduce investor willingness to invest, so the rules were loosened somewhat.

The startup industry now supports the revised rules. “We welcome the compromise because it establishes a functioning framework for crowdinvesting,” said Florian Nöll, chairman of the German Startup Association. “Crowdinvesting has become an important funding source for founding of innovative companies over the past two years.”

Despite the new limitations, crowdfunding is likely to become increasingly popular under the new rules. Retail investors are turning to crowdfunding platforms such as AngelList in the U.S. and Companisto in Germany, which provide small startups with the chance to raise money and give small investors the opportunity to get in early on a potential tech boom.