The German Capital Investment Act (Vermögensanlagengesetz – VermAnlG) may, depending on the business model, target investor group and distribution structure, provide an attractive legal framework for an investment offering in Germany. For issuers seeking advice from a German lawyer or attorney, capital investments may be one of several possible structures for German investment offerings and have both advantages and disadvantages.
What are "capital investments"?
The term “capital investment” (Vermögensanlage) is defined in Section 1(2) VermAnlG. Broadly speaking, it covers investment offerings that are not securities offerings under the Prospectus Regulation, not alternative investment funds under the AIFMD, not crowdfunding offerings under the European Crowdfunding Service Provider Regulation (ECSPR), and not crypto-asset offerings under the Markets in Crypto-Assets Regulation (MiCAR).
Legal structuring options
There are several ways to structure a capital investment under German law. A German lawyer or attorney can assist with assessing the appropriate legal structure. The most relevant instruments in practice are interests in limited partnerships and subordinated loans with qualified subordination.
Interests in limited partnerships offer an income-tax transparent structure with investor participation in profits. For administrative reasons, a trustee is usually interposed between the investor and the limited partnership.
Subordinated loans provide the investor with interest on the capital made available by way of loan rather than a corporate participation. As a profit-participating loan, the instrument may also include participation in turnover or profits. For regulatory reasons, subordination with qualified subordination is usually agreed.
The capital investment may not be structured as a blind pool. A blind pool exists where the investment asset, for example a property, has not been specifically determined at the time the sales prospectus or capital investments information sheet is prepared. BaFin’s guidance on the blind pool prohibition describes various relevant scenarios.
In addition, the use of proceeds must be monitored by an external use-of-proceeds controller. This role may be performed by a German lawyer, attorney, notary, tax adviser, auditor or sworn auditor.
Prospectus requirement and exemptions
A public offering of a capital investment may generally only be made after publication of a sales prospectus approved by BaFin. The structure and content of the sales prospectus are governed by the German Capital Investment Sales Prospectus Regulation. This prospectus is comparable to a prospectus under the EU Prospectus Regulation.
A prospectus requirement does not apply, among other cases, where the capital investment is structured as crowdfunding. In practice, the exemptions under Section 2(1) No. 3 VermAnlG are particularly relevant. These exemptions apply where no more than 20 units of the same capital investment are issued, where the total sales price of the units offered over a period of twelve months does not exceed EUR 100,000, or where the price of each issued unit of the capital investment is at least EUR 200,000 per investor.
Capital investments information sheet and KID
Depending on the structure of the capital investment, publication of a capital investments information sheet or a key information document under the PRIIPs Regulation may be required. The structure and content are governed by the VermAnlG or the PRIIPs Regulation.
Regulation and supervision of the issuer
There is generally no regulation of the issuer or manager of a capital investment comparable to the regulation of alternative investment fund managers under the AIFMD. However, BaFin supervises in particular whether the sales prospectus, the capital investments information sheet, any supplements or updates, and the advertising for the capital investment comply with statutory requirements. A German lawyer or attorney can assist issuers in preparing and reviewing the relevant documentation.
Possible distribution channels
Capital investments are financial instruments for regulatory purposes. Investment advice and investment brokerage therefore require a regulatory licence. Such licences may be held by credit institutions and financial services institutions under the German Banking Act, investment firms under the German Investment Firm Act, and financial investment intermediaries under the German Trade Regulation Act. Institutions may also act as a tied-agent platform and thereby enable intermediaries to act under their licence. Self-distribution by the issuer itself is prohibited by law.
Conclusion
Overall, the VermAnlG provides a regulatory framework that may be attractive depending on the business model, target investor group and distribution structure. Alternatives for structuring an investment offering include units or shares in an alternative investment fund under the AIFMD and securities under the EU Prospectus Regulation. Issuers seeking legal advice in Germany should assess the appropriate structure together with a German lawyer or attorney.
Structuring of capital investments
Classification under the VermAnlG, KAGB and Prospectus Reg.
Sales prospectus and BaFin approval
Prospectus exemptions under Section 2 VermAnlG
Capital investments information sheet and KID
Subordinated loans and qualified subordination
KG interests and trust structures
Blind pool prohibition and investment asset
Structuring of the use-of-proceeds control
Distribution of capital investments
Advertising and prospectus supplements
Insights
