The Alternative Finance Market in Germany

By Georgina McCreadie on Friday 12 June 2015

Alternative Lending

Crowdfunding Platforms:

Seedmatch: This platform was the first German crowdfunding platform to launch in 2011. It has funded 79 projects, has 39,502 registered users who have invested €23,375,500. The minimum investment is €250

Econeers: Is a spin-off from Seedmatch and is a platform dedicated to funding companies in the renewable energy sector.

Companisto: This equity crowdfunding platform has funded 42 projects from 36,773 registered users who have invested €19,469,700. There is no minimum investment on the platform and so you could participate in an offer for as little as €5. The company also takes investments from anywhere in the world, most require you to have a German bank account.  

Innovestment: Launched in November and has funded 29 companies for €2,441,064 for about €3,220 per investor. It has a minimum investment of €1,000. The platform uses a unique auction based model to allocate funding. 

Bergfürst: The platform was founded in December 2011 and went live in May 2012. It has a minimum investment of €250 and 11,000 users. The platform also offers property investment. The platform allows any residents of Germany, Switzerland or Austria to invest in the platform.  

Startnext: Is a rewards based platform. It has funded 2,685 projects for €20,150,834

Peer-to-Peer Lending Platforms:

Auxmoney: The largest P2P platform in Germany with a minimum investment of €25.

Zencap: Peer-to-Business platform with a minimum investment of €100. The company also operates in Spain and the Netherlands.  

Lendico: A Rocket Internet backed P2P lender with a minimum investment of €25. It also operates in Spain, the Netherlands, Austria, Poland, South Africa. 

FinMar: P2B lender with a minimum investment of €250

Germany is the biggest single market in the EU and the third largest market in Europe when in comes to alternative finance, with about €140 million funded in 2014 (according to University of Cambridge and EY report). Merkel’s government is looking to open up and grow Germany’s digital economy. However, the alternative finance market has been held back by a tightly controlled regulatory regime, in 2014 draft legislation was drawn up but it received a lot of criticism from the crowdfunding industry. At the end of April some crucial amendments were made to these laws and a review is scheduled for 2016.

The amendments to the draft legislation included:

Issuing a prospectus (for companies issuing equity): all companies that are raising up to €2.5 million are exempt from issuing a prospectus (previously the limit was €1 million). The previous limit drew heavy criticism due to the cost and time associated with drawing up a prospectus.

Investment Information Sheet: Another change that has brought crowdfunding up to date is the Investment Information Sheet. Previously investors had to manually sign and post the Investment Information Sheet to the platform, whereas now this process can be done electronically, which should make the process a lot easier and smoother for investors.

Advertising: The original crowdfunding legislation limited opportunities to advertise to media focused on financial topics. Obviously many crowdfunding projects have a reliance on social media to spread the word about their project and a new law removes this ban and allows advertising through other channels.

The cap for retail investors remains at €10,000 but investors have to prove that they can bear the loss, otherwise the maximum investment drops to €1,000, but institutional investors have no such limit.

However, one of the benefits of Germany’s tight regulation is that it protected the retail investor. Changing the regulation around issuing a prospectus means investors are often left with little information when deciding whether to part with their money.

One example that is used to show how retail investors are at risk is the insolvency of windpark operator Prokon. The company raised €1.4 billion mainly from retail investors by offering profit-participation certificated through advertising campaigns on German prime-time television. It has now been accused by consumer groups of attracting investors with promises of potential returns of at least 6% per year without giving sufficient warning of the risks.  

Also, equity crowdfunding platforms tend to be structured slightly differently to those in the UK. Most offer subordinated profit-participating loans (partiarische Nachrangdarlehen) instead of shares in the company. This is because subordinated profit-participating loans are not currently classified as investment products under the German Investment Products Act. Any company that issues investment products requires a license to operate and issuing subordinated profit-participating loans negates the need for a license. The regulator also confirmed that peer-to-peer loans are outside the investment product legislation.

One of the main differences between the regulation in Germany and the UK is that the UK regulators have passed a series of measures tailored to a young industry, whereas in Germany there is no such tailor made approach focusing on the specific requirements of the Fintech industry.

Peer-to-peer lending is also growing in popularity in Germany. It hasn’t attracted the same kind of regulatory regime mainly because a bank has to be involved in the process of originating its loans. The bank grants the loan to the borrower and then splits and assigns it to the investors.

Another trend in the German market is that well-established market players, like cooperative banks (Volksbanken) have started offering platforms for donations/ rewards based Crowdfunding. These are used for regional projects, such as sports clubs, schools, etc. that are looking for financial support. The regionally organised cooperative banks are utilising crowdfunding in rural areas to help grow their relationships with their customers.

The new crowdfunding legislation (Kleinanlegerschutzgesetz) that covers retail investors also applies to the P2P space. Retail investors can only invest €1,000 per P2P project if their salary is below a certain threshold. And for all projects over €100,000 platforms have to compile a 3 page document with risk information that investors have to sign. 

One platform has commented on the new legislation saying that the politicians do not realize that it may have unintended consequences. Many retail investors look to diversify their investments across the platform as much as possible and so will only ever invest the minimum amount in a project (e.g. €100), but the new legislation means that investors will have to comply with different rules if they invest €100 in one project of €50,000 and then one of €250,000. The platform predicts that this will then lead to less retail investor protection as platforms will only offer loans of €100,000 or less to retail investors and all loans above that threshold will be offered to institutional investors. These larger loans are usually in a better risk class and so this leaves the retail investors with less low risk projects with which to diversify their portfolio.

The German Ministry of Finance has launched a consultation with Fintech companies across Germany to evaluate the provisions needed to enable them to regulate this young and growing industry effectively. It is estimated that within the next two years more regulation will emerge that will help shape the industry and allow it to grow.    

Christian Grobe, Co-founder and CEO of Zencap, commented:  

"The future looks bright for Fintech in Germany. Why is that? Traditional banks have lost their customers’ trust in the wake of the financial crisis in 2008. They are now stuck in complex restructuring processes which they fail to manage well. Look no further than Deutsche Bank for an example: for many years now, they have been trying to implement changes, with limited success. As a result, the CEOs are stepping down. And even though the German Fintech model is still in its infancy, numbers already illustrate that marketplace lending has a lot of potential. Zencap is the best proof of this: within just one year we managed to fund 12.8 Mio euro in SME loans. This outperforms LC which has funded 12.3 Mio euro in its first year after inception."

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