Initiator support and controlling: products, such as participation certificates, sometimes prove to be a placement fiasco*.

The ad-hoc release from 02.01.2006 – Allgemeine HypothekenBank
Rheinboden AG (AHBR):

“AHBR expects negative annual result for 2005, Frankfurt am Main,
2 January 2006
Allgemeine HypothekenBank Rheinboden AG (AHBR) expects a negative after-tax result for the 2005 financial year. This
will be in the range of EUR 1.1 to 1.3 billion, according to the Bank’s preliminary estimates. The background to this is the final realisation of losses from charged interest positions and the revaluation of the loan portfolio in the course of a comprehensive restructuring and repositioning of the Bank following the now completed takeover by the American financial investor Lone Star. In view of the expected balance sheet loss, the liable equity capital provided by profit participation certificate creditors and silent partners will be drawn upon to a significant extent. Creditors of subordinated registered and bearer bonds are not affected by the measure. To support the repositioning of the
Bank becomes Lone Star of AHBR at the beginning of the 2006 financial year
inject an appropriate amount of new equity.”

Billions in profits had turned into billions in losses ?
Meanwhile, so-called investor-protection attorneys, labor and employment lawyers…
interest groups and “victims” associations, the poorer
investors who have become investors.

The story usually arises in the middle market’s search for equity:

The conversation with the credit department of the banks sobered many
Middle class. The equity ratio has increased from less than 20% 25 years ago to
decreased by less than 8% on average. The credit rating gets
easier to their limits “so the middle class needs liable
Equity.” Already a windy prospectus consultant is found, who
Medium-sized company in an initiator for the placement of capital investments
transformed: At the core, the newly minted initiator is given a
Contract bundle (legal services, shelf company, advertising agency,
software programming, trade fair presentation, sales services) “from a single source
hand” offered “regrettably” all too often with the “wrong
Product” as a solution approach.

Those initiators, who at first had to go to trade fairs “to sell their
profit participation rights”, potentially form later informal
communities of interest because of false sales and
Prospecting Advice. Many initiators from the small and medium-sized business sector note that
it is difficult to place the profit participation capital with the investor
lets. And this is not just a consequence of so-called “scandals”, such as
the “AHBR”, “VermögensGarant AG” or “Securenta/Göttinger” cases
Group” (BGH judgements of 21 March 2005 ? II ZR 124/03 , II ZR 140/03, II
ZR 149/03, II ZR 180/03 and II ZR 310/03 ), “SüdwestRentaPlus Group”,

Profit participation right and profit participation certificate:

Originally, the Genusschein was an instrument for restructuring, merger
and liquidation of companies – the share capital was
settled, and only one profit (enjoyment !) could follow.
Today, “profit participation capital” or “mezzanine capital” is used to refer to a variety of
of designs offered on the market ? in essence this means
today for the investor first of all a fiscal and factual
Participation in the (total!) loss.

One speaks of a profit participation certificate if the profit participation right in a document
was securitized as a security. In the mid-1980s, the
Profit participation certificates in vogue ” mainly because a German Banking Act (KWG)
amendment allowed banks to increase their liable equity capital by
to “expand” and issue multiples of loans.

The sky’s the limit:

Statutory provisions on the form of the profit participation certificate can be found in
just as little as on the type and content of profit participation rights.
Rights of co-determination, such as those enjoyed by a shareholder, are regularly not
provided for. There are numerous contract variants – this makes the
product already requires a great deal of consultation and offers numerous pitfalls in the case of
of the prospectus design: Here investment advisors and initiators can easily
have been held liable for “misadvice and prospectus liability”.

Nothing’s been checked:

A widespread misconception in the practice of investment brokerage is that
with regard to BaFin approval or prospectus review. Thereby
it is merely a formality check, not a factual one,
content and economic controls. It is therefore crucial that
some investment advisors offer such products to their clients as supposedly
“safe investment.” This means that the liability of the intermediary
or investment advisor is pre-programmed.

Nothing is insurable:

One reason why profit participation certificates are so difficult to sell
is the fact that the investment intermediary in the usual
Insurance policies covering his professional risk this product
…you won’t find it. Ralf W. Barth, a specialist broker for property damage liability insurance, points out that VSH insurers are systematically withdrawing from this market segment. Nevertheless there are initiators, who let themselves be “made believe” by your folder advisors, such Private Placements are easily sellable over distributors at investors. Medium-size entrepreneurs fall gladly on such folder advisors, who pull for years the (nearly) always same folders from the drawer – connected with the announcement that with these folders the own capital funds would be as good as safe ready.

Criminal prospect consultants ?

It is difficult for the medium-sized company to
see through. Numerous investment scandals are based on
brochures and concepts of the same old brochure consultants. On the
market (e.g. FALK, Dreiländerfonds, Göttinger
Group) potentially lead to countless problems for those prospectus advisors in particular.
process follow-up orders, which may have originally been ?the soup
by their negligent design to the initiator? have.
Practically every initiator needs controlling, i.e. ?control, planning,
Steering and control of legal and economic processes? in the
Implementation Phase. This is where lawyers and management consultants
together in order to prevent erroneous and possibly criminal
Prospectus advice to ward off. This range of services is offered by
only select law firms have been offering.

A particularly blatant approach of some prospecting consultants is to offer the
Initiator to recommend ?small-money-action? at once: Often with the
Tip, “with this you can already recoup the first costs again
Get.” Moreover, this is dubious because without prospectus approval of the
Federal Supervisory Office for Financial Services (BaFin) the Initiator
for the most part, may not yet begin to make any investment funds
to collect. This is particularly harsh for these early investors when
the project does not find a distributor in the aftermath, in order to

Another popular variant, is the prospecting through a
Inadequately insured tax firm without legal authority:
The only thing that the look in the commercial register and a
credit rating inquiry show is the inadequate capitalization. For
the medium-sized company that pays its five- or six-figure consulting fee
paid by such constellations there is no financially bonide
Securing the liability of the firm. by the way, at the latest
Liability insurer of the Steuerberatungs-GmbH the liability to pay,
for violation of the Legal Advice Act.
Such conceptual errors are not uncommon ? for the medium-sized company can be a
Contract with the ?wrong? Prospectus advisor into the safe own (!)
Lead to insolvency. For the monitoring of such a concept, the following should be considered
a law firm for controlling additionally from the medium-sized company resp.
Initiator, because the costs for the monitoring stand
out of all proportion to the conceivable damage. Also for
Financial service providers and distributors are advised to focus in future only on
focus on concepts that have been re-examined.

by Dr. Johannes Fiala

Our office in Munich

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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