German Bundestag passes the Future Financing Act (ZuFinG)
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Counsel
Germany
As a Counsel in our Corporate / M&A Team in Munich, I focus on domestic and international venture capital and venture lending transactions for emerging and high-growth companies.
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The aim of the so-called German Future Financing Act (“Act”) is to make Germany more attractive for entrepreneurs and their employees and to provide easier access to capital markets for start-ups. The German financial market, and Germany as a location for business, are to become more attractive for both national and international companies and investors through digitalisation, internationalisation, and the elimination of bureaucracy. The act contains various tax, capital markets and corporate law measures to improve the financing of future investments and facilitate access to capital markets for companies, particularly start-ups, growth companies and SMEs.
Some of the most important changes are:
Easier access to the stock exchange
From January 2024 the minimum market capitalisation will be lowered from EUR 1.25 million to EUR 1.0 million to allow more young companies to go public. Furthermore, an underwriter such as a bank is no longer required.
Employee participation
In Germany startups often struggle to retain talent as they are not able to offer high salaries. Due to enormous tax risks and liabilities for the employees, German startups typically offer (only) virtual shares to compensate for low salary. In contrast, shares are issued to employees in other countries without any particular tax issues arising. This dilemma has often been a locational disadvantage for German start-ups when competing with foreign start-ups for talent.
This is where the Act comes in. From January 2024 it will be possible to defer taxation until the shares are sold, provided the employer assumes liability for the wage tax incurred. This will mitigate the dry income problem. In addition, the tax-free amount for shares held by employees has been increased from EUR 1,440 to EUR 2,000. The only requirement is that the shareholding is offered to all employees who have been with the company for at least one year.
Multiple voting shares (dual class shares)
The introduction of multi-voting shares for stock corporations (Aktiengesellschaft – AG) in accordance with the articles of association is intended to make it easier for growth companies to raise equity. By subscribing to such multi-voting shares, founders are able to retain control over their company even after an IPO. This certainly makes the legal form of the stock corporation more interesting for young companies.
Electronic and crypto shares
From January 2024 it will be possible to issue shares on the basis of a register managed by using blockchain technology. Registered electronic shares can then also be issued as shares entered in the electronic crypto securities register (crypto shares).
New regulatory framework for SPACs
A special purpose acquisition company (SPACs) is an empty shell company that is listed on a stock exchange and offers an already operating company the opportunity to enter into it in several possible ways. The purpose of the SPAC is the IPO, the raising of capital and the search for an unlisted company in order to bring it to the stock exchange. SPACs are very popular in the US, though in contrast, have played a relatively minor role in Germany. Thus, the act focuses on investor protection, it seems uncertain whether the improved investment protection will increase willingness to invest in a SPAC in Germany, and whether this model will develop into an established financing model on the German capital market despite the stricter regulatory environment.
Level playing field with other EU countries.
VAT regulations for investment funds are to be harmonised with the regulations in other EU Member States. The aim of the German government is to achieve a "level playing field with other European countries". There are also to be changes in relation to liability regulations for crowdfunding projects. Corresponding sections in the Securities Trading Act are to also be amended.
Final assessment
The Act has met with a positive response from both the financial sector and the start-up industry and contains some interesting measures that could achieve the desired regulatory effect. Above all, it will be interesting to see to what the market will take from these changes. The Act contains specific improvements and plans creating better framework conditions on the supply side, in particular for financing start-ups, growth companies and SMEs, while at the same time providing incentives for investors to build up assets with securities. Enabling employee participation programs that are not virtual could make in future a difference in the war for talents.We will keep you informed of further developments and will be happy to answer any questions you may have on the Future Financing Act.
Written by Andrea Schlote and Philipp Stöckert
