Successfully raising investments through crowdinvestment: opportunities, risks and legal pitfalls for startups

Introduction to crowdinvestment for startups

Crowdinvestment is an intriguing way for startups to raise capital without relying on traditional funding methods like banks and venture capital firms. It is a form of capital raising based on the principles of collective financing by a crowd of people – the “crowd”. Stakeholders often invest smaller amounts, and their collective financial strength can help fund larger projects.

It enables startups to present their business ideas directly to a wide range of potential investors, creating a community of supporters. By using online platforms, startups can present their business ideas to a global investor base, increasing the reach and potential for investment.

But while crowdinvesting offers a great opportunity, there are also legal hurdles and risks that startups need to be aware of. In particular, compliance with financial market and consumer protection regulations is crucial. It is important that the campaign is transparent and honest in order to gain the trust of investors and avoid legal consequences. Compliance with advertising and information requirements is another important aspect.

As your attorney, I can help you navigate these challenges and ensure that your crowdinvesting campaign is legal and effective. I can guide you through the complex legal process, make sure all necessary documents and agreements are in order, and help you avoid potential legal pitfalls.

Pitfall: Crowdinvest contracts (current judgments)

A recent ruling by the Dresden Regional Court sheds light on the potential risks of crowdinvesting contracts. The decision affects the crowdfunding platform Seedmatch and could have far-reaching effects. In the ruling, a subordination clause in the platform’s investment contracts was deemed invalid. This clause meant that investors had to take a back seat to all other creditors in the event of insolvency of the company in which they had invested. This significantly increased investors’ financial risk, up to the risk of total loss.

In the specific case, an investor had invested in the startup Protonet via Seedmatch, which ultimately went bankrupt despite successfully raising around 3 million euros in capital from around 18,000 small investors. The investor suffered a total loss and sued for damages, arguing that the subordination clause was incomprehensible to private investors and therefore invalid. The Dresden Regional Court agreed and ordered the platform operator OneCrowd Loans, which operates Seedmatch, to pay 5,000 euros in damages to the plaintiff.

The ruling could have far-reaching effects, as it could pave the way for claims for damages by other investors and could lead to both the platform operators of Seedmatch and the responsible persons of the invested company being held liable. The reason for this is that, without an effective subordination clause, they operated the deposit-taking business without the necessary license from BaFin. This development underscores the need for careful legal scrutiny of crowdinvestment contracts. As your attorney, I can help you identify and avoid such potential pitfalls.

Opportunities of crowdinvesting

One of the biggest advantages of crowdinvesting is that it gives startups the opportunity to reach a large number of investors. By using online platforms, startups can present their business ideas to a global investor base. This not only provides access to funding, but also allows for broader visibility and awareness of the company.

In addition, crowdinvestment can accelerate the time-to-market of products and generate valuable feedback from investors and customers. This interaction with the target group can lead to valuable market and product information that can help improve the offering. Furthermore, it enables early retention of customers who have committed as investors. This can build a loyal customer community that supports the company through word-of-mouth advertising.

Other legal pitfalls with crowdinvestment

The legal challenges of crowdinvesting should not be underestimated. Startups must ensure that they comply with applicable financial market regulations, especially when targeting investors from multiple jurisdictions. An important aspect of this is the preparation of a prospectus, which is required by law for certain types of offerings. However, preparing such a prospectus can be costly and requires a thorough legal review.

Transparent and accurate information about the company and its financial position is essential to avoid allegations of fraud. Therefore, it may be advisable to use reputable platforms that already have the necessary infrastructure and expertise to ensure compliance with these requirements.

In addition, the wide dispersion of investors can lead to challenges in corporate governance. In order not to affect the scope of the Asset Investment Act or other consumer or capital investment laws, special legal constructions can be developed to enable effective and legally compliant communication and interaction with investors.

However, these audits and constructions can be complex and may require the cooperation of experts in the fields of legal and tax advice. Therefore, it is important to carefully consider the costs and benefits of a crowd-investment campaign. Considering all aspects, including legal requirements and potential risks, I can help you determine the optimal timing for such a campaign. Remember, a well-planned and executed crowd-investment campaign can be a great way to fund your startup while building a loyal and engaged investor base.

Blockchain and crowdinvestment: new opportunities and additional legal considerations

Advancing digitalization and, in particular, blockchain technology have opened up new avenues in the field of crowdinvesting. Startups can now use digital assets or tokens to raise capital. However, these novel forms of financing, often referred to as forms of crypto finance, bring their own legal challenges, particularly with regard to crypto regulations and investor protections.

Startups using blockchain tools must carefully consider whether they need a license for their activities or whether their activities fall under a particular regulatory construct. It is important not to make the false assumption that the use of blockchain technology mitigates legal requirements or the need for careful legal review. In fact, the complexity of blockchain technology and related regulations may actually increase legal challenges.

However, the use of blockchain tools can increase the level of digitalization, provide access to a wider audience of financially strong small investors, and allow the use of ready-made software solutions. However, it should be borne in mind that the cost of legal review in this context is often higher than for traditional forms of crowdinvestment. Despite these challenges, blockchain technology, if used carefully and responsibly, can open up new and exciting opportunities for startups looking for alternative sources of funding.

Conclusion: Crowdinvestment and legal aspects

In summary, crowdinvesting offers startups an interesting opportunity to raise capital from a variety of investors while also fostering early customer loyalty. However, startups must keep legal requirements and risks in mind, such as the preparation of prospectuses, compliance with financial market regulations and consideration of investor protection provisions.

Digitization and blockchain technology have enabled new forms of crowdfunding. Although these opportunities present additional challenges in terms of legal review and regulatory compliance, they nevertheless open up new opportunities for startups, particularly in terms of access to a broader audience of investors.

Given the multitude of legal challenges and regulatory requirements, it is advisable to seek the support of experts in the field of legal advice and tax consulting. Expert advisors can help plan and execute crowdinvestment campaigns to minimize risk and ensure legal compliance. If needed, an attorney who specializes in these issues can provide valuable support and guidance to ensure the success of the crowdinvestment campaign.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.