The Statue of Liberty in New York: a crowdfunding project? As is well known, the Statue of Liberty itself was a gift from the French to the Americans. However, the Americans had to pay for the construction of the pedestal themselves. An appeal for donations was launched to finance this project, as the state was unable to pay for it due to the difficult economic situation. An average of USD 1.00 was donated (equivalent to around USD 20.00 today) – a total of over EUR 100,000.
As you can see, the concept of crowdinvesting is not an invention of recent years – even if it has become increasingly popular in the recent past.
What is new, however, is that intranet sites act as intermediaries between the projects and the “crowd”. In principle, there are four different types of crowdfunding.
- Donation-based crowdfunding is a type of financing in which amounts are donated to a specific project .
- In “reward-based crowdfunding”, the investor expects to receive a certain consideration (also idealistic) for providing capital “at the end of the day”.
- The “lending-based crowdfunding” is very similar, where the investor expects a certain return in addition to the repayment of the capital. This type of financing is comparable to financing via a credit institution. It is therefore financing with the character of debt capital.
- In contrast, the last type has equity character and is called “equity-based crowdfunding”. In return for providing capital, investors receive shares in the company .
Particularly in the area of real estate project development, part of the capital to be raised for many projects is financed by means of such crowd investments. The following section will focus on lending-based crowdfunding in connection with the financing of real estate projects and their internet funding platforms.
Especially in view of the current interest rate landscape in the banking sector, it seems very attractive to hide a certain amount of money at the click of a mouse and receive the same plus 6 percent return per annum one to two years later. And it’s “as safe as real estate” – or is it?
Numerous regulations must be observed for credit financing. First and foremost, it should be noted that a corresponding license is required to conduct banking business. This was highlighted in the past in a rather media-effective manner when the “shoe belle” Heini Staudinger came into conflict with the FMA due to customer loans and had to accept a defeat before the Administrative Court (VwGH 2013/17/0242). It quickly became clear that, with crowdfunding financing becoming increasingly popular, it was up to politicians to create the legal framework for it. This was implemented in the AltFG – Alternative Financing Act, which is also popularly referred to as the “Crowdfunding Act”.
However, it should not be forgotten that a wealth of other laws apply in the case of such financing. Most of these laws are positive for the end user who “gives” the capital, as they are largely protective laws in his favor. For example, standardized contracts are typically used in the context of investments. As a result, they qualify as general terms and conditions and are therefore subject to the Austrian Civil Code (ABGB) and the Consumer Protection Act (KSchG ) (if the borrower is an entrepreneur and the lender is a consumer), which is accompanied by a transparency requirement.
In Austrian practice, two models are particularly common: qualified subordinated loans and (non-securitized) profit participation rights. The model that uses cooperative participations should also be mentioned in this context. Internet crowdfunding platforms for real estate projects in particular provide for the financing of projects via qualified subordinated loans from the investor. Crowdfunders are generally left empty-handed not only in the event of the company’s insolvency – interest and capital are not repaid even if the impending payment would cause the insolvency in the first place.
In this context, there has been a controversial debate as to whether it is even permissible to agree qualified subordinated loans under these circumstances (especially in consumer transactions). The Supreme Court also had to deal with this question (4Ob110/17f). In order to answer this question, it must first be clarified whether the obligation to subordinate to the other creditors is a principal obligation of the lender or an ancillary agreement. Only those parts of the contract that determine the individual numerical description of the mutual services are considered to be the main obligation to perform; these are those parts of a contract that the parties must agree upon in order for a sufficiently specific contract to be concluded (4 Ob 112/04f). However, provisions that regulate the price calculation in general terms or that describe the typical contractual performance in general terms are not covered by the exception relating to the main performance obligation (4 Ob 143/17h mwN). The exception to the content review enshrined in Section 879 (3) ABGB is to be understood as narrowly as possible and should be limited to the individual, numerical description of the mutual performance, whereby only descriptions of performance that determine the type, scope and quality of the performance owed should be exempt from content review, but not clauses that restrict, change or undermine the actual promise of performance (RIS-Justiz RS0016908 [T1, T5]; cf. also RS0016931). Whether a clause is subject to review does not depend on whether it deviates from dispositive law or not. Rather, this circumstance is only relevant for the assessment of whether the clause is grossly disadvantageous (6 Ob 13/16d). The qualified subordination clause to be assessed here (on the term Pateter/Pirker, Zur Rechtsnatur der Nachrangabrede, ZIK 2015, 217 [217, 219 f]). This is a constitutive feature for the type of contract, which is therefore exempt from content review pursuant to Section 879 (3) ABGB (Pirker, Qualifizierte Nachrangdarlehen als Finanzierungsinstrument, RdW 2016, 807 [810 f]; Wilfling/Komuczky, Alternative Finanzinstrumente im Lichte der AGB-Kontrolle – Zivilrechtliche Zulässigkeit qualifizierter Nachrangdarlehen, ZFR 2016, 367 [369 f]; Engel/Jeitler, Aus für Finanzierungen über Nachrangdarlehen? ÖBA 2017, 164 [167]). The agreement is therefore legally compliant in this way. This view is also in line with the AltFG.
As real estate crowd investments are regularly offered via the Internet, regulations relating to distance selling also apply. In this context, the German Remote Financial Services Act(Fern-Finanzdienstleistungs-Gesetz– FernFinG) would be particularly relevant. This provides for a wealth of information obligations and regulations for rights of withdrawal.
The provisions of supervisory law are just as important in practice as those of private law. These include the Banking Act (BWG), the Capital Markets Act (KMG) – which primarily regulates the obligation to publish a prospectus, the Alternative Investment Fund Managers Act (AIFMG), the Securities Supervision Act 2018 (WAG 2018), the Payment Services Act (ZaDiG) and the Trade Regulation Act (GewO).
The Alternative Financing Act (AltFG) is the central legal norm in connection with crowdfunding. It regulates the permissibility of financing through a public offer of securities or investments within the scope of the exemption from the prospectus requirement pursuant to Section 3 (1) no. 10 of the Capital Markets Act (KMG). In this context, investments are, among other things, asset rights for which no securities are issued, from the direct or indirect investment of capital of several investors for their joint account and joint risk or for the joint account and joint risk with the issuer, provided that the invested capital is not managed by the investors themselves. Section 3a of the AltFG contains investor protection provisions and Section 4 contains special requirements for the issuer. Special requirements for operators of an internet platform through which investments can be made can be found in § 5 AltFG. For example Operators of an internet platform […] are prohibited from acting as issuers on their own internet platform. Acting as an investor on one’s own internet platform is only permitted if it is a minor participation that serves exclusively to facilitate the flow of information between issuers and investors and is expressly indicated as such. Furthermore, the internet platform must expressly point out that the acquisition of investments is associated with risks (§ 4 para. 1 no. 1 AltFG). A violation of the provisions of the AltFG is punishable by a fine of up to € 30,000 (§ 6 AltFG), irrespective of claims under other legal bases.
Crowdinvesting is still popular – but it is important for both sides to pay close attention to the legal framework. Given the numerous regulations, this is easier said than done. Legal advice is therefore essential.