On 16 December 2020, the German Federal Cabinet adopted the draft law on the introduction of electronic securities (Gesetz zur Einführung von elektronischen Wertpapieren – eWpG) jointly submitted by the Federal Ministry of Finance (Bundesfinanzministerium – BMF) and the Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz – BMJV). Aim of the new law is to modernize the securities law and thus to strengthen Germany as a financial center, especially in the field of digitization.
The new law will enable the issuance of German-law securities in purely electronic form without the requirement for a physical security as well as the issuance of crypto securities enabling the implementation of distributed ledger technology-based instruments. The original scope of the draft law (Referentenentwurf dated 11 August 2020) provided for an exclusive application to bearer bonds (Inhaberschuldverschreibungen). Electronic shares of a corporate nature, e.g. stock, are out of scope due to further required work on the corporate law implications but the scope may be widened accordingly at a later stage.
In addition to the introduction of electronic securities in the form of bearer bonds, the new draft as of 16 December 2020 contains a proposed amendment to the German Capital Investment Code (Kapitalanlagesetzbuch – KAGB) to the effect that share certificates (Anteilscheine) of German investment funds in the contractual form of Sondervermögen, that do not have legal personality, (elektronische Anteilscheine – electronic fund shares) can also be issued in electronic form. According to the draft law, electronic fund shares may only be registered in bearer form.
The new law does not foresee for the possibility to issue electronic fund shares in the form of crypto securities according to the eWpG. Shares in investment funds of a corporate type such as those of a German investment stock corporation (Investmentaktiengesellschaft) or investment limited partnership (Investmentkommanditgesellschaft) also remain out of scope.
To implement electronic fund shares, certain provisions relating to electronic securities within the ambit of the eWpG shall apply mutatis mutandis according to an amendment of Sec. 93 Capital Investment Code. The rules concerning electronic securities as stipulated in the eWpG shall apply to electronic fund shares in a manner that the provisions of the eWpG relating to electronic securities shall be construed to refer to electronic fund shares, those relating to the terms and conditions of the securities shall be read to refer to the fund rules (Anlagebedingungen) and those relating to the bearer shall relate to the investor.
According to the corresponding references to the eWpG electronic fund shares (inter alia):
- must be registered in a central electronic securities register (zentrales elektronisches Wertpapierregister) as an issuing mechanism which is operated by a duly authorized central securities depositary or a nominated depositary subject to technical security and data compliance standards, and
- have fundamentally the same legal status as a paper security and are deemed a physical (in rem) instrument.
Due to the fact that as regards investor transparency the fund terms are governed by the provisions of the Capital Investment Code, there is no requirement that these are also filed – and thus available to the public (Niederlegung) with the central electronic securities register.
The proposed introduction of electronic fund shares is a welcome step to foster the digitization of the German capital market. Fund shares of Sondervermögen are a common retail investment product and also the standard institutional investment fund (Spezial-AIF) is set up in this format. In its submission to the consultation of the draft law, the German Alternative Investment Association (BAI) proposed the introduction of this new electronic financial instrument.