This was initially done on the basis of the Prospectus Act (Verkaufsprospektgesetz – VerkProspG) and since 1 June 2012 on the basis of the Capital Investment Act (Vermögensanlagengesetz – VermAnlG). In line with these acts, offerors of capital investments must file prospectuses with BaFin and publish them before offering the capital investments to the public. The capital investments offered range from participation rights, registered bonds and silent partnerships down to GmbH shares, limited partner shares and foreign equity investments.

When the obligation to draw up a prospectus took effect in 2005, the most popular investments were ships and real estate. For a number of years now, however, wind and solar power plants and biogas plants have raised funding this way. To some consumers, investments in renewable energies appear especially lucrative and low risk; however, just as for other types of investments, investors may still lose all their money. This is why it is also advisable to look at the prospectus before making decisions to invest in ecological and regional investments which appear less risky.

Functions of the prospectus

Prospectuses provide consumers with all the information they need to decide on whether or not to invest in a clear and structured format. Prospectuses improve transparency by describing the often very complex capital investments in a standardised form. This allows consumers to better understand the business model and to decide on this basis whether they are willing to accept the risks associated with the investment.

The prospectus is also the key liability document for consumers who wish to sue for damages. However, it is the civil courts that decide liability claims relating to incorrect prospectuses. Equally, BaFin is not permitted to support consumers in these situations.

No advice or dispute resolution

Consumers often ask BaFin to mediate disputes between investors and offerors, issuers, or investment intermediaries and to help them enforce their rights. However, BaFin is not permitted to intervene in civil law disputes. In particular, it may not influence how investments are structured under company law, the terms of participation rights, or review company law decisions by the offeror.

For example, if investors receive their distributions late or not at all, then they themselves must pursue the matter with the party responsible for the investment. Consumer advice centres or lawyers can assist in this. Under section 34f of the German Industrial Code (Gewerbeordnung), investment intermediaries are subject to supervision by the competent trade supervisory authorities.

BaFin’s task: examining the prospectus

BaFin’s task is to ensure that the prospectus contains all of the minimum disclosures. In addition, it checks the prospectus for comprehensibility and consistency. The Investment Prospectus Regulation (Vermögensanlagen-Verkaufsprospektverordnung), for example, requires information on the risks associated with the investment. Any criminal offences and cases of insolvency involving managing directors or general managers of the issuer must also be disclosed.

In addition, offerors must disclose all costs that consumers must pay if they invest in the product. In many cases, consumers must, for example, pay a sales charge (premium) over and above the actual investment amount. The total amount paid as commission must be disclosed in a prominent place in the prospectus. Since the share of the money invested spent on commission and issue costs is no longer available for investment, consumers should carefully review the cost structure.

In the brief 20 working days BaFin has to examine the prospectus, it does not examine if an authorisation to conduct banking business is needed. This is because the investment’s compliance with section 32 of the Banking Act (Kreditwesengesetz – KWG) is not a precondition for approving the prospectus. It is up to offerors to determine whether their business model requires such an authorisation. BaFin makes the offeror aware of this in its notice of approval for the prospectus. Offerors risk criminal prosecution if they operate without authorisation. However, if the description in the prospectus gives clear reason to suspect that an offeror is violating the law, BaFin will investigate the issue and take action.

The consumer’s responsibility

Some offerors are extremely creative when it comes to developing new and unusual business ideas for which they want to raise capital. However, BaFin does not check whether the content of the information given in the prospectus is accurate. In other words, if BaFin approves a prospectus, it is not automatically the case that, for example, the legal requirements for a planned wind power plant have been met or that the offeror has actually leased the site for the location. Equally, BaFin does not check whether a business model is economically plausible and can actually generate the promised return for investors. Equally, it does not assess whether the offerors or issuers are reputable and have a good credit rating.

Consumers are responsible for their own investment decisions. Before making an investment, they should take the time to read the prospectus in full and make sure that they have understood the business model. In addition, they should critically examine the statements made in advertising flyers, simplified prospectuses, or presentations and compare them with the prospectus. Information from sources such as the Federal Gazette or from other websites may also be helpful. Only an investor who is comprehensively informed is capable of weighing the situation, risk and return, and making a sound decision.

Risks

In order to evaluate an investment, consumers should particularly take a look at the section of the prospectus that deals with the risks. This section provides detailed information on all of the risks that the offeror considers to be material. For example, in the case of investments in limited partnerships, investor’s liability may be revived under certain circumstances if the distributions are not offset by profits at the issuer and the investors must, in a crisis, repay the funds received. Partnership agreements may also give rise to additional funding commitments in which the limited partner must provide additional funds if required.

Participation rights do not give rise to a right to be consulted on important business decisions and are often subordinated. This means that consumers will only get their money back after all other creditors in the case of insolvency or liquidation. In addition, consumers must be aware that investments are usually for the long term and are difficult to sell. If they need to access the invested funds in an emergency or the investment does not perform as hoped, they are generally unable to resell it, or only on relatively poor terms. Finding a buyer at all is difficult because no sufficiently effective secondary market exists. The purchase price is usually only a fraction of the original investment amount.

Participation rights (Genussrechte)

The obligation to publish a prospectus for capital investments also applies to participation rights. Participation rights are capital transfers governed by the law of obligations and do not constitute shares in a company. Since investors do not become shareholders, they have no right to be consulted. However, they are liable for the issuer’s losses if this has been agreed in the terms and conditions. In the case of the insolvency or liquidation of the issuer, investors usually only get their money back after all other creditors (subordination agreement). This is different to participation certificates, which are securitised and hence tradable. Whether a securities prospectus is required for such participation certificates is governed by the Securities Prospectus Act (Wertpapierprospektgesetz – WpPG).

Prospectus database

BaFin documents every prospectus in a public database (only available in German). Consumers may research the database to see whether a prospectus has been filed and published. Although the prospectus itself is not contained in the database, it can generally be found on the offeror’s website or be viewed at the paying agent (usually the offeror or issuer) free of charge.

Capital investments information sheet

In addition to the prospectus, the offeror must draw up a capital investments information sheet (Vermögensanlagen-Informationsblatt – VIB) for the capital investment, submit it to BaFin and make it available at the paying agents stated in the prospectus. The VIB must provide the key information on the investment being offered in a clear and easily understandable form on no more than three standard A4 pages. Consumers may view the current version of the VIB on the offeror’s website during the time of the public offer. This makes it easier for them to compare different financial products. However, BaFin does not examine the content of the VIB during the examination of the prospectus. Any investment decision should therefore be based on the prospectus, which contains all the prescribed information.

Accounting

Starting in financial year 2014, issuers of capital investments (irrespective of their legal form and size) will be required to prepare annual financial statements and a management report including a remuneration report, and to have them audited by an auditor. Thus in future it will be mandatory for the first time for partnerships such as civil law partnerships (Gesellschaft bürgerlichen Rechts – GbR) to prepare annual financial statements and a management report, and to have them audited. Also new is that the companies must include an interim report in the prospectus on business transactions that have occurred since the most recent reporting date. BaFin checks whether this information is contained in the prospectus.

However, German legislators did not authorise BaFin to examine whether the annual financial statements contain content errors, for example, whether a recognised asset actually exists or the wrong measurement policy was adopted. Equally, the enforcement set out in sections 37n ff. of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) does not apply to the financial statements of issuers of capital investments because capital investment units are not listed on a regulated market.

Capital investment issuers are often start-ups that do not yet have any historical financial information. The future net assets, financial position and results of operations must then be provided in the form of a forecast in the prospectus. In this case, the annual financial statements and the management report do not have to be included in the prospectus.

Investment Code

The new Investment Code (Kapitalanlagegesetzbuch – KAGB), established on 22 July 2013 by the Act Implementing the AIFM Directive (AIFM-Umsetzungsgesetz), classifies many closed-ended funds that were previously treated as capital investments as alternative investment funds. Within the scope of the new regime, consumer protection standards for the supervision of domestic management companies and their collective investment schemes are significantly higher than the standards provided by the prospectus examination in accordance with the VermAnlG.

The KAGB considerably expanded BaFin’s powers of intervention in large parts of the grey (i.e. unofficial) market. Closed-ended funds that meet the requirements for an investment fund in accordance with section 1 (1) of the KAGB and their management companies now require authorisation and are subject to ongoing supervision. BaFin has published an interpretive letter on these requirements on its website (only available in German). If an issuer operates an investment business without authorisation, BaFin is permitted to intervene and wind up their business activities. The issuer can additionally be punished in accordance with section 339 of the KAGB.

Investments such as closed-ended funds or participation rights whose prospectuses have already been approved may be subject to the KAGB in retrospect depending on the company’s actual business activities. This means that a number of requirements for transparency and adequacy apply to, among other things, the terms and conditions of investment, portfolio management, risk management and the costs borne by the investors. BaFin reviews the company’s financial resources and its organisation, employee qualifications and the fair treatment of its investors on a regular basis. Once a year, an independent auditor audits the fund’s accounting, the valuation of the assets and compliance with the requirements for their management. In addition, a depositary, which must be approved in advance by BaFin, must approve all transactions for the fund and verify the ownership of the assets. If the company becomes insolvent, the fund assets are protected. In this way, BaFin will be able to protect consumers in future by specifically targeting dubious offerings and abusive structures such as pyramid schemes. The Code also provides for an arbitration board for investors in investment funds to deal with disputes.