To avoid cost-intensive and liability-laden prospectus obligations for municipal financing projects
This is because there is a risk that the local authority will be subject to statutory obligations to publish a prospectus on the desired form of financing and the financed project. Such a prospectus is often associated with high costs and entails a considerable liability risk, as the local authority would then have to assume responsibility for the accuracy and completeness of the prospectus. However, such prospectus obligations can be avoided by structuring the project with foresight.
Prospectus obligations are mainly considered under the EU Securities Prospectus Regulation 2017/1129, the German Investment Code (KAGB) and the German Investment Act (VermAnlG). As the Securities Prospectus Regulation only applies to transferable securities (shares and comparable shares in legal entities), the KAGB and the VermAnlG are particularly relevant for municipal projects. This is because the issue of shares by a municipality to finance a local project is likely to be very rare. However, prospectus obligations under the KAGB can quickly arise with the approach described above as soon as the financing project is an investment fund. This is defined by law as follows:
"Investment fund is any undertaking for collective investment which collects capital from a number of investors in order to invest it in accordance with a defined investment strategy for the benefit of those investors and which is not an operating company outside the financial sector."
The maindifficulty here is that the legal definition is not very clear-cut and the interpretation notes published by the Federal Financial Supervisory Authority do not provide the desired clarity. It is therefore almost impossible for legal laypersons to assess whether a specific project falls under this definition or not.
At least the characteristic features of an "organism" and the "collection" of capital are still tangible at the outset. An "undertaking" within the meaning of the KAGB always exists if money is "pooled" by investors, i.e. it is legally and economically independent (regardless of its legal form). This is the case, for example, with a simple participation as a shareholder. The contribution from the shareholder's assets is now part of the company's assets (which are independent of the shareholder's assets).
On the other hand, capital is collected if a large number of potential investors are approached commercially on behalf of the company in order to collect funds from them by way of a contribution as a shareholder. Caution is therefore required, for example, if the project in question is advertised to an unlimited group of people. A generally accessible event in the local community hall or advertising measures on a marketplace can quickly be regarded as "collecting capital". On the other hand, things may be different if only club members (and thus a definable, manageable group of people) are approached to finance the construction of a new sports field for the local sports club.
So far so simple, you might think - but it's not! This is because the collected capital must continue to be invested according to a defined investment strategy for the benefit of the investors. In particular, it is difficult to distinguish this from the usual partnership agreements, because the provisions of the partnership agreement should also be able to include an investment strategy. However, an investment strategy should be characterized by a precise definition of criteria according to which the collected capital is to be used. However, specific criteria for selecting a suitable acquisition object can also be found quite frequently in the contracts for companies that are aimed at acquiring specific assets (such as a plot of land for social housing). However, should there be an obligation to publish a prospectus comprising several hundred pages for a limited liability company that only acts to acquire a plot of land for an infrastructure project as soon as the articles of association contain criteria for the acquisition (size, location, value, etc.)? This cannot be the case and can unfortunately only be achieved with legal certainty by carefully examining and drafting the articles of association.
The same applies to the question of when investments are made for the "benefit of the investors". According to BaFin's interpretation, this should not be the case if investments are made in the public interest and not to generate a return. In the case of a municipal infrastructure project, the primary objective is always to provide services of general interest or similar. (such as a local swimming pool). At the same time, when implementing the project (e.g. the purchase of a suitable plot of land), the local authority will, as always, pay attention to the economic viability of a swimming pool, for example, in order to keep it profitable. Are investments in this endeavor then no longer in the public interest, even though the primary objective is to provide services of general interest? Such problem areas must be identified in advance and resolved in the contract in order to avoid a prospectus requirement under the KAGB.
Nevertheless, once a prospectus requirement under the KAGB has been averted, there are no longer any serious obstacles in this respect. A prospectus obligation can then only exist under the VermAnlG. The scope of application of the VermAnlG is also very broad. It covers all participations in the earnings of a company. This means that the VermAnlG also applies to any participation as a shareholder of a company. However, according to Section 2 VermAnlG, there are exemptions for investments that can be used to avoid the obligation to publish a prospectus.
In particular, according to Section 2 (1) No. 3 b) VermAnlG, a prospectus requirement can be excluded if a maximum sales price of EUR 100,000.00 is set for the respective investment (e.g. the investment as a limited partner in a KG). The same applies to investments that are all offered for at least EUR 200,000.00, as the legislator assumes that only professional investors invest in this amount, who do not need to be informed about certain risks by means of a prospectus.
Ultimately, the difficulties in planning and implementing a municipal infrastructure project while avoiding the obligation to publish a prospectus lie in the broad scope of the KAGB due to the use of undefined characteristics. The legislator has endeavored to create a broad scope of application in order to take account of the many different forms of investment. We recommend countering this with a thorough examination and careful and forward-looking structuring of the financing project. In particular, the specific structure of the articles of association and the external presentation to potential investors are decisive in avoiding a cost-intensive and liability-laden prospectus obligation.