April 23, 2015 / 2:46 PM / 5 years ago

Germany approves crowdfunding rules to protect small investors

* Bundestag adopts small investors protection law

* Lawmakers soften rules for innovative start-ups

By Michael Nienaber

BERLIN, April 23 (Reuters) - The German parliament approved tighter rules on Thursday for firms selling financial products, including online platforms that support fledgling businesses through crowdfunding, in order to protect small investors against heavy losses.

Crowdfunding allows individuals and small businesses to raise funds, often via the Internet, from pools of investors who put money into peer-to-peer schemes or securities such as unlisted shares.

Worried that German companies are falling behind in the digital age, Chancellor Angela Merkel’s government is keen to promote innovation and start-ups.

The lawmakers softened the draft legislation by adding exemptions for online platforms such as Startnext and Kickstarter and by loosening plans for a strict ban on Internet advertising for crowdfunding projects.

Consumer protection watchdogs have warned that the crowdfunding industry, which raises a billion euros a year globally in alternative financing, falls between the cracks of existing regulation.

Since crowdfunding platforms can skirt requirements for businesses to publish a prospectus, investors often have little information and face high failure rates.

The new law excludes crowdfunding platforms from the duty to publish a detailed and therefore costly prospectus as long as the project volume does not exceed 2.5 million euros. That is higher than the originally planned threshold of 1 million euros.

In addition, investments by individuals may not exceed 1,000 euros, thereby reducing potential losses. Individuals may invest up to 10,000 euros if they can provide proof of assets or income of a level deemed sufficient to bear the risk of loss.

BALANCE

Industry group Bitkom welcomed the new law, saying it struck the right balance between protecting small investors and supporting innovative start-ups.

“With these new rules for crowdinvesting, reason and good argument have prevailed in many areas,” BITKOM deputy president Ulrich Dietz said in a statement.

The law follows the insolvency of windpark operator Prokon, which had raised 1.4 billion euros mainly from retail investors by offering so-called profit-participation certificates through advertising campaigns on German prime-time television.

Consumer groups accused Prokon of attracting investors with promises of potential returns of at least 6 percent a year without giving sufficient warning of the risks.

Its insolvency dealt a blow to thousands of retail investors who had hoped to profit from Germany’s shift from nuclear power to renewable energy sources such as wind and solar. (Additional reporting by Matthias Sobolewski; Editing by Gareth Jones)

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