German Regulator: Advertising violations on crowdinvesting platforms
The German Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht, or short “BaFin”) has carried out internet-based research on infringements of advertising and publication obligations on platforms that enable crowdfinancing. The aim was to uncover deficiencies and thus strengthen the supervisory objective of collective consumer protection. The focus was on investments that are offered without a prospectus via crowdfunding platforms in accordance with paragraph 2a of the Investment Act (Vermögensanlagesetz, or short “VermAnlG”). The research was published on September 17, 2018 on the BaFin website in its original German text.
Overall, BaFin reviewed projects on 50 active crowdinvesting websites. Compliance with the advertising and publication obligations according to paragraphs 12 and 13a of the Investment Act were examined in detail. The focus was on the proper design of the warnings and the easy accessibility of the Investment Information Sheets ( Vermögensanlagen-Informationsblätter, or “VIB”). The result: In about 70 percent of the crowdfunding platforms examined, BaFin noted irregularities.
Disclosure obligations
Advertising of publicly offered investments is subject to legal disclosure requirements pursuant to paragraph 12 sections (2) and (3) of the Investment Act. The disclosures are required wherever an advertising statement with the essential characteristics of the investment is placed, for example covering the interest rate or the term of the investment. This also applies to the home page and individual overview pages of crowdinvesting platforms and social media.
The warnings must be clearly highlighted. This can be done for example by a frame, a striking color or a larger font compared to the rest of the text on the page. The highlighted alert should not be mitigated by other design features. It should be positioned so that the investor can immediately perceive it in relation to the essential characteristics of the investment before making his or her investment decision. A warning without reference to the essential terms and conditions, for example at the bottom of a page, is not sufficient. Ideally, the warning should be positioned flexibly so that it is continuously visible and runs at any time. Because of the variety of design options, there is always the individual case to consider.
For advertising videos that refer to specific assets, the advertising regulations under the Investment Act also apply. The warnings must be continuously displayed in the video, clearly highlighted and always legible. There should be no visual overlap with other content, such as subtitles.
Nature of the violations
BaFin identified three different categories of abnormalities. In 94 percent of the violations, there was a deficiency regarding the “risk warning” according to paragraph 12 section (2) of the Investment Act. In 26 percent of the cases, there were violations of the requirement to insert a “yield warning” in accordance with paragraph 12 section (3) of the Investment Act. Finally, at 17 per cent, contrary to paragraph 13a section (2) of the Investment Act, the respective VIB was not accessible to anyone without access restrictions, but could only be viewed in a password-protected area.
Since multiple types of violations were identified on some crowdinvesting platforms, the total value is over 100 percent.
Risk disclosures
Looking more closely at the violations regarding the risk warning in accordance with paragraph 12 section (2) of the Investment Act, the following picture emerges: on 62 percent of the websites, the warning was not clearly highlighted. In around half of the crowdinvesting platforms, the warning on the home page or on the individual overview pages was missing altogether. In every fifth case, the warning was not properly positioned.
Many crowdinvesting platforms also use promotional videos for their projects for visual support. The review found that the warning suffered from limited visibility in 37 percent of the promotional videos. In 9 percent of the crowdinvesting platforms, the warning was not consistently embedded in the videos and was missing in 6 percent of the documented violations.
Yield disclosures
Contrary to the risk disclosure, which was missing in only a few cases, there was a lack of awareness regarding the yield warning pursuant to paragraph 12 section (3) of the Investment Act, in that it should be included at all: the note was missing on 55 percent of the crowdinvesting Platforms entirely. This was particular evident in profit participating loans.
In 33 percent of the cases, there was a lack of emphasis on the website. The wording of the reference did not correspond to the wording of the law at 11 percent of the websites.
In addition, for 44 percent of the promotional videos the disclosure was missing. In 11 percent of the cases each, it was either not clear or not consistently recognizable.
Corrective measures
BaFin has informed the operators of the crowdinvesting platforms about the findings in a non-formal procedure. The proper compliance with the advertising regulations under the Investment Act is, in principle, the responsibility of the providers of the investments. However, their advertising appearance is usually bundled through the mediating crowdinvesting platforms, so that changes can be implemented technically and uniformly for all providers. Therefore, BaFin has approached the operators directly in order to establish the legally compliant state as soon as possible.
BaFin has given them the opportunity to eliminate the violations and to ensure legal compliance. The operators mostly showed a high level of cooperation. BaFin continues to pursue unresolved breaches. It may prohibit certain types of advertising in accordance with paragraph 16 section (1) of the Investment Act.
The communication with the platform operators already allows the conclusion that the active control of BaFin has created a stronger awareness of the advertising regulations of the Investment Act. For new projects, most operators now comply with the regulations from the outset. In this respect, the review can also be seen as a success from a longer-term perspective.
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