Any so-called soft costs contained in an investment need to be described in the related investment prospectus in an accurate and easily understandable way. This ensures that investors can see how much of their money will not be spent on the investment but used to cover costs. When drafting a prospectus, however, often mistakes are made which can entail damage claims of investors if the investment later fails and investors lose their money. In such case, the initiators of the investment, the employees of the financial service provider marketing the investment, or other parties involved can be liable.
Investor demands refund of his contribution
Recently the Federal Supreme Court (BGH) had to rule on a case in which the investor in a closed-end real estate fund demanded the founding shareholders and a trustee to refund his contribution and release him from the duties relating to his investment. He believed he had not been properly informed about the relative amount of soft costs contained in the investment.
Defective prospectus due to inadequate presentation of soft costs
When considering this question, the investment prospectus plays a decisive role. The investor must get clearly understandable and complete information on any and all circumstances that are or may be of mayor importance for the investment decision. This includes information on soft costs contained in the investment product. Soft costs are costs that are not spent on the object of the investment itself and are hence unable to increase the investor’s return. If the share of soft costs in an investment equals or exceeds 15%, information is required.
The information required in this context must be presented in an understandable way. If the investor himself has to gather various data from the prospectus and calculate the share of soft costs by several arithmetic operations, this requirement is not deemed fulfilled and the prospectus is considered defective.
No exaggerated requirements on investment prospectuses
In this context, no exaggerated standards may be applied, however. If the investor can easily derive the share of soft costs, because the arithmetic operations to be applied are easy, the prospectus will not be deemed to be defective. In the prospectus to be judged by the Federal Supreme Court, the amount of soft costs was stated as amounting to 11.2%, based on the total investment.
But according to the Federal Supreme Court’s settled case-law, the share of soft costs is not calculated based on the total investment volume but on the contributions to the capital investment. On the other hand, it was mentioned on the same page of the prospectus that the total investment consisted of equity and debt capital. In addition, the amounts of both components were stated. In this way, it was easy for the investor to compare the soft costs with the contributions in order to calculate the correct percentage rate of the soft costs. In the case decided by the Federal Supreme Court, this rate was 28.53%.
Avoiding risks when drafting a prospectus
The present judgment of the Federal Supreme Court shows that drafting investment prospects may entail significant risks. Numerous details and extensive case law need to be taken into account. Our expert attorneys in banking and capital market law will be pleased to advise you on all questions concerning the drafting of an investment prospectus.
Federal Supreme Court (BGH), Judgment of June 21, 2016, II ZR 331/14
Credit linked notes: BaFin intervenes to protect investors
Legal requirements for the issuance of securities on the German market