German Government publishes key points to improve the German capital market

The German capital market needs to be modernized to remain efficient and competitive. Therefore, the German Government published a paper outlining a German Future Financing Act (Zukunftsfinanzierungsgesetz)¹ on 29 June 2022, which includes important changes to capital markets law, tax law and corporate law.

Target

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 companies), and prevent Fast Growth Companies from obtaining financing through capital markets.

For this reason, the German Future Financing Act aims to improve the performance of capital markets and increase the attractiveness of Germany as a financial center. 

"The aim is to make Germany the leading location for Start-ups and growth companies."
– Christian Lindner, Federal Minister of Finance

Key issues of the German Future Financing Act 

In order to achieve its goal, the German Federal Government has announced key points that shall be implemented in addition to the EU Listing Act², which also provides for new regulations on access to the capital market:

• Better access to the capital market: The access to the capital market shall be improved. To this end, the minimum capital for a company to go public (IPO) will be reduced from EUR 1.25 million to EUR 1 million. This is intended to give more companies and investors the opportunity to receive financing through the capital market. As in 2019, only four³ and in 2021 12⁴ IPOs were completed in Germany.
• Improved framework conditions for the design of financial instruments and transactions: In addition, the framework conditions for the design of financial instruments and transactions are to be improved. This is especially interesting for securitization transactions. Thus, the German Federal Financial Supervisory Authority (BaFin) will in the future recognize models for standard 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 (particularly pursuant to sections 307 et seq. of the German civil code (BGB)). Hence, every contract can be a model for standard contracts and no longer has to be individually drawn up. This will simplify the standardization of securitization documents. 
• Special provision to facilitate the transferability of monetary claims under the EU Securitization Regulation: Another point regarding securitizations could also be of relevance: So far, securitization transactions are subject to certain restrictions. For instance, in the case of an assignment of monetary claims between merchants, a prohibition of assignment previously agreed with the initial debtor is ineffective.⁵ The assignment between the merchants themselves is therefore effective. However, the debtor’s payment to the previous creditor has a discharging effect. This is particularly undesirable in securitization transactions based on an insolvency remote structure. Therefore, it is generally desired that this provision⁶ should not apply to securitizations. The key issues paper addresses this point: With the introduction of a special provision to facilitate the transferability of monetary claims securitized under the EU Securitization Regulation between merchants, the provision of payments to the previous creditor to have discharging effect, should not apply in order to counter such commingling risk.
• Improved framework conditions: In addition, the framework conditions for modern forms of transactions (i.e., naked warrants and Special Purpose Acquisition Companies) shall be improved.
• Promotion of the capital market’s digitalization: The new regulations also promote the digitalization of the capital market. They enable the issuance of securities based on blockchain technology and reduce written form requirements. The Electronic Securities Act (eWpG) enables the use of this technology for listed securities. This also includes an improvement in legal certainty for the transfer of other crypto assets. In addition, a special regulation to facilitate the transferability of securitized monetary claims is planned. Thus, trading in crypto assets in Germany can rise and gain in importance.
• Authorization of dual class shares: The paper also provides for the authorization of dual class shares. Companies can issue different types of shares (usually Class A and Class B Shares). These different classes of shares grant different levels of voting rights. For instance, a shareholder may own four percent of the capital, but have 90 percent voting rights due to a Class A Share. Class B Shares would confer fewer voting rights compared to the amount of equity. Shares with a high proportion of voting rights are usually more expensive, but at the same time ensure higher protection for investors. This type of share is particularly interesting for institutional investors.
• Improvement of tax framework: Furthermore, the tax framework is to be improved: On the one hand, an allowance for gains from the sale of shares and equity fund units held as private assets is to be introduced, the separate loss offset groups for losses from the sale of shares, losses from forward transactions and from bad debts are to be abolished, and the VAT exemption for venture capital funds is to be extended to the extent permitted by EU law. On the other hand, the tax-free allowance for employee share ownership⁷ is to be increased from EUR 1,440 to EUR 5,000, the downstream taxation of the non-cash benefit from capital investment⁸ is to be extended, the employee savings allowance for the investment of capital-forming benefits in share ownership is to be increased and the group of beneficiaries is to be expanded.
• Prolonging 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 to be maintained beyond the end date of 31 December, 2022.

Other changes

Recently, the realization of the Future Fund (Zukunftsfonds) was announced,⁹ which will be anchored as a further building block in the already successfully integrated Venture Tech Growth Financing program (VTGF). 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 EUR 1.2 billion for joint financing with private lenders. A prerequisite for the approval of the loan, however, is the participation of a private lender at 50 percent on equal terms. The VTGF will also make it possible to provide debt capital to listed technology companies. In addition, the financing needs between two equity rounds can be covered by interim financing and KfW can offer the private lender refinancing (without release of liability) of its financing shares if required.

What is to come?

These legislative initiatives will be very likely cast into law by the end of 2022. The implementation of the Future Financing Act is an opportunity for all public and private investors to invest in Start-ups straight from the beginning and benefit from their growth. The new law minimizes the risks of investing in Start-ups and makes investing in them more attractive. This is as well ensured by the newly established Future Fund, which will secure financing of 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).
2 https://ec.europa.eu/info/consultations/finance-2021-listing-act-targeted_en.
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 Section 354a para.1 Sentence 2 German Commercial Code (HGB).
6 Section 354a para. 1 sentence 2 HGB.
7 Section 3 no. 39 German Income Tax Act, EStG.
8 Section 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 
publication.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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