The German capital market must be modernized to remain efficient and competitive. Therefore, the German government published a document describing a German law on future financing (Zukunftsfinanzierungsgesetz)1 on June 29, 2022, which includes significant changes to capital markets law, tax law and company law.
Compared to capital markets in other countries, the German capital market is seen by market participants as too bureaucratic and not in line with modern technology, as the process still requires written applications in some areas. These factors make it unattractive for start-ups and SMEs (small and medium-sized enterprises) and prevent fast-growing companies from obtaining financing through the capital markets.
This is why the German law on the financing of the future aims to improve the performance of the capital markets and to increase Germany’s attractiveness as a financial center.
“The goal is to make Germany the premier location for start-ups and growth companies.”
– Christian Lindner, Federal Minister of Finance
Key Issues for German Future Funding Law
In order to achieve its goal, the German Federal Government has announced key points that must be implemented in addition to the EU List Act2which also provides for new rules of access to the capital market:
- Better access to the capital market: Access to the capital market will be improved. To this end, the minimum capital for a company to go public (IPO) will be reduced from 1.25 million euros to 1 million euros. This aims to give more companies and investors the opportunity to receive funding through the capital market. As in 2019, only four3 and in 2021 124 IPOs have been made in Germany.
- Improved framework conditions for the design of financial instruments and transactions: Furthermore, the framework conditions for the design of financial instruments and transactions need to be improved. This is particularly interesting for securitization transactions. Thus, the German Federal Financial Supervisory Authority (BaFin) will in future recognize model contracts in the financial services sector between professional contracting parties. This will result in the general terms and conditions of a contract being subject to reduced scrutiny (in particular under Sections 307 et seq. of the German Civil Code (BGB)). Thus, each contract can be a standard model contract and no longer has to be drawn up individually. This will simplify the standardization of securitization documents.
- Special provision to facilitate the transferability of monetary claims under the EU Securitization Regulation: Another point concerning securitizations could also be relevant: so far, securitization transactions are subject to certain restrictions. For example, in the case of an assignment of pecuniary claims between merchants, a prohibition on assignment previously agreed with the initial debtor has no effect.5 The assignment between the merchants themselves is therefore effective. However, payment by the debtor to the previous creditor has a discharging effect. This is particularly undesirable in securitization transactions based on a remote insolvency structure. Therefore, it is generally desired that this provision6 should not apply to securitisations. The Key Issues Paper addresses this point: with the introduction of a special provision to facilitate the transferability of securitized monetary claims under the EU Securitization Regulation between traders, the provision of payments to the previous creditor to have a liberating effect should not apply in order to counter this risk of mixing.
- Improved framework conditions: In addition, the framework conditions for modern forms of transactions (ie bare warrants and special purpose acquisition companies) need to be improved.
- Promoting the digitalization of the capital market: The new regulations also promote the digitization of the capital market. They enable the issuance of securities based on blockchain technology and reduce written form requirements. The Electronic Securities Act (eWpG) permits the use of this technology for listed securities. This also includes improved legal certainty for the transfer of other crypto assets. In addition, special regulations aimed at facilitating the transferability of securitized monetary claims are provided for. Thus, the trading of crypto assets in Germany can increase and gain in importance.
- Authorization of dual-class shares: The document also provides for the authorization of dual class actions. Companies can issue different types of shares (usually Class A and Class B shares). These different classes of shares confer different levels of voting rights. For example, a shareholder may hold 4% of the capital, but have 90% of the voting rights due to a class A share. Class B shares would confer fewer voting rights in relation to the amount of equity. Shares with a high proportion of voting rights are generally more expensive, but at the same time guarantee better protection for investors. This type of shares is particularly interesting for institutional investors.
- Improving the tax framework: In addition, the tax framework must be improved: on the one hand, an allowance for capital gains from the sale of shares and shares of equity held in private assets must be introduced, the separate loss compensation groups for capital losses on disposal of shares, losses resulting from forward transactions and bad debts should be eliminated, and the VAT exemption for venture capital funds should be extended to the extent permitted by EU law. On the other hand, the deduction for employee share ownershipseven increases from EUR 1,440 to EUR 5,000, the downstream taxation of the non-monetary benefit of the capital investment8 is extended, the employee savings premium for the placement of patrimonial advantages in the shareholding is increased and the circle of beneficiaries is widened.
- Extension of the INVEST grant funding program: Finally, the INVEST grant funding program, which supports start-ups in their search for investors and encourages private investors to provide venture capital, is maintained beyond the end date of December 31, 2022.
Recently, the realization of the Future Fund (Zukunftsfonds) was announced,9 which will be anchored as an additional building block in the already successfully integrated Advanced Technology Growth Funding (VTGF) program. This fund is a corporation between the German Federal Government and the Kreditanstalt für Wiederaufbau (KfW), a state-owned development bank of the Federal Republic of Germany. It will provide 1.2 billion euros for joint financing with private lenders. However, a condition precedent to loan approval is the participation of a 50% private lender on equal terms. The VTGF will also provide debt capital to listed technology companies. In addition, financing needs between two fundraising events can be covered by interim financing and KfW can offer the private lender a refinancing (without release of liability) of its financing shares if necessary.
What’s to come?
These legislative initiatives will most likely be implemented by the end of 2022. The implementation of the law on financing for the future is an opportunity for all public and private investors to invest in start-ups from their creation and to benefit from their growth. The new law minimizes the risks associated with investing in start-ups and makes investing in them more attractive. This is also ensured by the new Future Fund, which will provide funding for a new generation of founders. It is all the more important to take the right steps now and to be optimally prepared for what is to come.
1 https://www.bundesfinanzministerium.de/Content/DE/Downloads/Finanzmarktpolitik/2022-06-29-eckpunkte-zukunftsfinanzierungsgesetz.pdf?__blob=publicationFile&v=6 (in German).
3 https://www.pwc.de/de/pressemitteilungen/2019/deutschland-erlebt-schwaechstes-ipo-jahr-nach-anzahl-im-regulierten-markt-seit-2009.html#:~:text=Mit% 20nur%20vier%20Erst%2DListings,Anzahl%20seit%20der%20Finanzkrise%202009 (in German).
4 https://de.statista.com/statistik/daten/studie/152876/umfrage/boersengaenge-in-deutschland-seit-2000 (in German).
5 § 354a para. 1 Sentence 2 German Commercial Code (HGB).
6 § 354a para. 1 sentence 2 HGB.
7 Section 3 no. 39 German Income Tax Act, EStG.
8 § 19a EStG.
9 https://kfw.de/%C3%9Cber-die-KfW/Newsroom/Aktuelles/Pressemitteilungen-Details_720512.html (in German).
Helena Voege (White & Case, Legal Trainee, Frankfurt) contributed to the development of this