Funds: Advice from a lawyer
Funds – Advice from a lawyer – Funds are exclusively launched by investment or fund companies. These are also called capital investment companies. The fund shares can be purchased at branch and direct banks, among others.
Funds are part of banking and capital market law.
Topics in our legal advice
Table of contents
- Funds – Types
- Funds – Definition
- Investor interests
- Financial loss? Advice for affected investors
- Media funds
- Oil funds
- Aircraft funds
- Energy Funds and Right of Withdrawal
- Container funds
- Real Estate Funds
- Investment Funds
Funds – List of products offered
The list of products offered is long. In Germany alone, there are over 12,000 mutual and special funds.
- Equity funds
- Asia funds
- Biogas funds
- Biotech funds
- Container funds
- Fund of funds – investments are spread across individual funds
- Monument funds
- Energy funds
- Aircraft funds
- Guarantee funds
- Money market funds
- Hedge funds
- Real estate funds
- Infrastructure funds
- Index funds
- Media funds
- Mixed funds
- Oil funds
- Patent funds
- Private equity funds
- Bond funds (fixed-interest securities such as Pfandbriefe, bonds and municipal bonds)
- Commodity funds
- Ship funds
- Solar funds
- Environmental funds
- Forest funds
- Wind farm fund
- Wind power fund
- Wine funds
- Certificate funds
Mutual funds are investment funds intended for private investors. Special funds, on the other hand, are reserved for institutional investors.
The idea of an investment fund is to spread the risk. Funds usually collect investments such as stocks, bonds or real estate and the money of many investors to invest.
Investors have a relatively low time commitment, as the fund manager takes care of the management and monitors the market. Funds also have no issuer risk, since in the event of the fund company’s insolvency, the shareholders are entitled to their assets. They are financially satisfied by the sale of the investment properties.
Funds also offer higher returns compared to savings books. However, they are also riskier and represent a relatively expensive investment.
Distributing funds pay out dividends and interest regularly. Accumulating funds, on the other hand, reinvest the profits earned so that an investor can benefit from the effect of compound interest.
Funds – actively or passively managed
In actively managed funds, the fund manager is responsible for analysing and selecting sectors and securities. He manages the fund’s assets according to his expectation of the further development of the market and its risks.
But since this is speculation, it is not surprising that less than half of all fund managers outperform the stock or bond index. So in most cases, investors could save themselves the management fees and go straight for the index. It is a fact that no one is smarter than the market in the long run.
You can do this through passively managed funds. Passively managed funds are computer-controlled 1:1 replicas of the selected index. A DAX fund, for example, consists of the shares of the 30 companies in the leading index. The management fees are usually no more than 0.5% and are rather low in comparison.
An investment fund is a special asset managed by an investment company. A distinction is made between open-ended and closed-ended funds.
In the case of open-ended funds, units can be purchased at any time and also returned to the issuer.
Closed-end funds are entrepreneurial investments with a limited term. Shares cannot be returned and cannot be increased further after the capital investment has been completed. A closed-end fund is nothing more than an investment in a company, including the possible economic risks.
Closed-end funds are still comparatively little regulated. Commissions that flow into the distribution network are also leading to increased criticism. A report in the Handelsblatt even speaks of the “worst investment in the world”.
In addition, many investors are not clear about the nature of their investment. Also, the rights and options of closed-end funds are usually not known to affected investors.
Investment properties for closed-end funds
- Commercial real estate at home and abroad, real estate funds
- Merchant ships, e.g. container and special ships or tankers (ship funds)
- Renewable energy plants: Wind power plant, photovoltaics, biomass, geothermal projects
- Endowment policies
- Corporate investments, venture capital, private equity
- Infrastructure projects
- Media funds, film funds
- Aircraft funds
Closed-end funds mean entrepreneurial participation
Shares in closed-end funds represent an entrepreneurial participation. A fund is set up by collecting capital for a previously defined project. The volume of the fund is also defined accordingly.
When the placed fund volume is then reached, and thus fully subscribed, the fund is closed. Further subscriptions are then no longer permitted.
As a rule, closed-end funds are structured in the form of partnerships. The company usually uses debt capital in addition to the collected equity capital in order to achieve the promised return on equity.
The disadvantages of closed-end funds compared to open-end funds are that the shares can only be traded on a few marketplaces.
In some cases, the only option is the secondary market. There, units can be sold prematurely. However, this usually means a relatively high loss compared to the original value. Closed-end fund investors also have no right to demand that the issuer redeem the units during the term.
Due to the nature and structure of a closed-end fund, the investor also bears the entrepreneurial risk. It is not uncommon for this to be borne as well. The risks include:
- Insolvency of the fund with possible total loss.
- Obligation to make additional contributions
- Lack of information on the value of the investment object
- Loss of value
- Back taxes
- Bad investments by the management
- Limited opportunities for closed-end fund investors to exert influence
- Legal risks
What claims can investors make in closed-end funds?
In principle, closed-end fund investors can hold many parties liable. These include the economic initiators, founding partners, investment advisors and brokers, prospectus auditors, controllers of the use of funds and, in some cases, the financing banks. (Banking Law)
In addition to the legal possibilities, economic considerations are also decisive. Only where funds are available does it make sense for investors to use further funds to assert claims. With regard to legal options, the question of the statute of limitations must be examined regularly.
Investors must be fully informed about the risks. Liability may arise if the prospectus was not handed over in time before the closed-end fund contract was signed. The prospectus must also contain correct information in essential points. If this is not the case, the initiators, founding partners and investment intermediaries may be liable.
Investor interests do not always come first
Investors are well aware that the initiators of a fund think first of their own earnings. In cases where banks supplement investors’ capital, payments are also due here. Finally, investment advisors and brokers are responsible for selling the products. For reasons of self-interest alone, some of them do not take investor-friendly advice very seriously.
If you add up these costs, often only 70% of the investment remains for the actual investment goal. 30% end up in the pockets of the initiators, employees, brokers and banks. It is then no wonder that the promised return cannot be achieved.
Many funds are constructed in such a convoluted way that an investor cannot get a complete overview of which companies he is ultimately involved in.
In addition, the investor usually bears the full risk, up to and including total loss. Significant losses occur not only in times of economic crisis. In addition to the realisation that investors are often obliged to make additional contributions, many cases of fraud have become known in recent years. Herfurtner Rechtsanwaltsgesellschaft mbH regularly informs you about warnings concerning investments.
Funds: Losses? What affected investors can do
In any case, investors should be aware of their legal options and have them examined by a lawyer in the interest of investor protection. In many cases there are claims for damages due to incorrect advice or, if applicable, an extraordinary right of termination. In the case of some funds, the initiators can also be prosecuted and held liable.
Another starting point is the commission payments. Banks have often not informed their clients about the kick-backs they received from the fund initiators.
Closed-end media funds
An important aspect for investors was that investments in a media fund could be claimed as a total loss in the very first year. Probably more than 60,000 investors then invested hundreds of millions of euros in closed-end film funds. Over the years, it became clear that there were relatively few film projects that could generate the desired return.
Media fund structure
As a rule, investors participate as limited partners or through a trustee. The trustee buys the rights to a film project that has not yet been produced. Subsequently, the film production is usually realised by a service provider.
The fund has the opportunity to influence the film production through rights of instruction and control. The film rights are then transferred to licensees and/or collecting societies for a fixed period of time via a licence agreement. At the end of the term there is usually a so-called final payment.
An option to acquire the film rights by the collecting society is also not uncommon, as this closes the exploitation chain for all parties involved.
Closed-end media funds & risks
In addition to the economic risks up to and including total loss, there are in particular possible back tax payments to be mentioned. The corresponding interest payments are then added to the untaxed amounts.
Funds with debt assumption or defeasance structures are particularly affected, as here the licensee undertakes to conclude a debt assumption agreement with a bank, on the basis of which the bank has to pay the due licence fees and the final payment and waives any defences.
However, this risk minimisation with regard to the tax to be paid is offset by the higher economic risk. In addition to the usual market risks, there are often production delays, delayed exploitation, currency risks and credit risks of the licensees.
In particular, of course, the return depends on whether the film becomes a box office hit or simply flops.
Oil funds and similar investments pose considerable risks for private oil investors – investors should have claims for damages examined.
Due to the sharp drop in oil prices, investors are threatened with considerable losses. Oil adventures can go wrong for small investors and institutional investors. Both are threatened by the same risks of oil investments in the grey capital market. The signs are alarming.
Many thousands of private investors have invested their savings in oil funds and gas projects. The fund initiators Texxol, Proven Oil, ECI, Nordic Oil, and New Capital Invest have collected about 900 million euros through closed-end funds, bonds and silent partnerships.
Oil funds are closed-end funds. Investor money is collected to invest in companies whose business model is the production of oil. Closed-end funds are based on the principle that the initiators of the funds collect the necessary initial capital from investors for a specific investment target.
This allows issuers to pass on the risks for ship funds, real estate funds, energy funds, etc. to investors. Ideally, the returns flow to the investors via annual distributions.
Energy funds: oil funds and gas funds
Oil funds, like gas funds, are energy funds because they invest in energy sources. Oil wells and the associated areas are bought and developed. The extracted crude oil is then sold. The fund company therefore not only takes care of the purchase of the investment object, but also the subsequent permanent operation.
Investments in the “black gold” seemed lucrative until recently. For example, the world economy depends on this raw material and the China boom would have been inconceivable without oil. So oil fields and oil drilling usually sounded like a profit. The oil price was also stable for a long time and knew only one direction. So private investors could easily be convinced to invest in closed-end oil funds.
However, there is no income that can be firmly calculated in the long term, as it always depends on the current development of the oil price. Very many oil-exporting countries depend on high prices for crude oil. However, rising prices are not in sight for the time being and demand remains weak. Supply on the world markets is likely to remain high, as many national budgets are dependent on revenues from oil transactions.
Oil funds and oil companies
As investors become limited partners in the company, you are exposed to the risk of total loss. Oil funds were therefore never suitable for conservative investors. Investors who invested in the closed-end funds via registered bonds and silent partnerships have no say in the matter.
- Proven Oil Canada
- Proven Oil Asia
- Nordic Oil
- Nordic Oil USA 1
- Nordic Oil USA 2
- Nasco Energy and Raw Materials AG
- Deutsche Oel & Gas
- Furie Operating Alaska
- Oil Fund Norway
- TEXXOL AG
- KSH Energy Fund
- KSH Capital Partners AG
- New Capital Invest
- Furie Petroleum LLC
- Energy Capital Invest (ECI)
- Registered bond “US Oil and Gas NSV 6 “Pylon Performance Fund – closed-end fund, business purpose natural gas and oil production – Preliminary insolvency proceedings were opened against the fund company at the end of 2014.
In an aircraft fund, money from private investors is used to buy an aircraft. This is then rented or leased to an airline. Private investors provide their own capital and invest their money in a fund company.
This capital is then used, usually in conjunction with another bank loan, to purchase one or more aircraft. The aircraft is then usually leased to the airline for roughly ten years.
Investors benefit from a fixed amount, which is distributed annually. The loan is also serviced with the income from the lease. At the end of the term, the aircraft is returned to the company (usually a GmbH & Co. KG). The aircraft is then sold to an airline. The remaining loan is repaid with these proceeds and the rest is distributed to the investors.
The private investor’s incentive therefore lies in the annual distributions as well as the final distribution.
Distributions during the life of the fund and the final distribution minus the initial contribution thus result in the return for the investors. The risk for the investor also appears low: an economic failure as well as the maintenance and operating costs are assumed by the airline.
Aircraft funds – tax considerations
Returns are often treated as income from renting and leasing. Depending on the design of the fund concept, however, income from capital assets or from commercial operations may also exist in individual cases.
In order to be able to conclusively assess the tax treatment, it is therefore always necessary to take the individual case-specific design of the respective fund from the corresponding prospectus.
Risks of aircraft funds
As described at the beginning, aircraft funds are supposedly rather safe and high-yield investments. This is especially true in comparison to other closed-end fund investments, such as real estate or ship funds.
Risks exist above all through the follow-up leasing and the sale of the aircraft.
The term of the lease is always fixed. However, it is not always possible to find suitable interested parties who would like to lease or buy a used aircraft. The decisive factor is certainly how modern the aircraft is. The more modern, the higher the chances that the aircraft will be bought or leased again at the end of the contract period.
Basically, there is a recoil risk in the aviation market. Terrorist attacks, as in 2001, or natural disasters can have a significant impact on the worldwide demand for aircraft. A current example is the Corona virus: at the moment, virtually all aircraft are on the ground. Airlines are cancelling all their flights to avoid the spread of the virus.
Further liability risks with foreign contractual partners must also be taken into account. Many legal regulations are different abroad than in Germany. Problems can arise here. There are also currency risks with foreign contractual partners.
Meanwhile, many investors have experienced the flip side of the advantages, i.e. the disadvantages. Many investors were never properly informed and instructed about these risks:
A380 Aircraft Fund
In February 2019, it was announced that production of the A380 will cease as demand for the world’s largest passenger aircraft has plummeted. The last aircraft of the type is scheduled to be produced in 2021.
More and more airlines want to return the aircraft when the lease expires. Fewer and fewer airlines are interested in buying the aircraft. In addition, various used A380s that have not been taken over are already waiting for potential buyers. Other aircraft have already been dismantled into their individual parts, as there are no interested buyers or leasers.
Private investors have invested about 1.6 billion euros in 21 A38 aircraft.
Due to the low demand, the funds’ forecasts can hardly be kept. Without extension options or buyers after the leasing contracts expire, the funds’ specified targets will not be realised.
Investors must fear for their money
If the aircraft cannot be sold at the end of the leasing period or if the proceeds from the sale are significantly below the forecast expectations, the risk of being stuck with high losses increases. This also applies in the event that the leasing airline encounters payment difficulties.
As mentioned above, most airlines are in financial distress due to the current Corona virus. Not a single airline is thinking of buying a used aircraft at the moment. On the contrary, they are trying to sell or rent out aircraft they own.
The risk, which has always been considered unrealistic, is now hitting investors hard:
- Annual distributions do not materialise.
- Loans from the fund company cannot be settled because the aircraft are not purchased at the end of the contract period.
- There is no final distribution.
- In addition, investors are threatened with a tax consequence if the investor has paid tax on profits made in the meantime. This can lead to the repayment of the tax benefits obtained to date.
Energy funds – use the right of withdrawal
Energy funds have become a losing proposition for many investors.
The drop in the oil price has punished energy funds that have invested in shares in the energy sector.
This puts particular pressure on the business of energy producers and suppliers. The performance results of energy funds show that it is risky for investors to invest in products in the energy segment.
Many investors have the option of withdrawing from their unprofitable energy fund contract. Some providers of fund investments sell their products through distance selling channels or traditional door-to-door selling.
Check for right of withdrawal
Here, the possibility of a revocation according to the doorstep-selling right or the distance selling right should be examined. If the revocation instruction does not comply with the legal regulations, the investors have the right of revocation even after the expiry of the 14-day period.
If in individual cases there is no other way for the investor to exit, this option at least offers the chance to limit the losses. The losses incurred up to the declaration of revocation cannot be reclaimed by way of revocation.
Solar funds invest their investors’ money in the construction and operation of photovoltaic systems to generate electricity from the sun’s energy. Solar funds are invested for many years. The state-guaranteed feed-in is an important part of the overall calculation. The investors become co-entrepreneurs and bear the risk of total loss of the investment.
Energy Fund – Energy Company
Energiefonds Saarpfalz GmbH & Co. KG
MPC Bio Energie Brasilien GmbH & Co. KG
Chorus Clean Energy AG
ConTrust Energie Fonds
JB EF Energy Transition
Threadneedle Global Energy
Candriam Eqs B Global Energy
Guinness Global Energy
JB EF Energy Transition
KBC Equity Oil
Mediolanum Ch Energy Equity
MFS Meridian Global Energy
NN (L) Energy P Cap
SSgA Energy Index Equity Fund
Swisscanto (LU) Equity Global Energy
Threadneedle(Lux) Global Energy Eqs
Windenergiefonds / Windenergie
Leonidas Associates XIII – Windfonds Frankreich
Leonidas Associates XIV Wind GmbH & Co. KG
PROKON Regenerative Energien GmbH
DCM Energy Solar 1
DCM Solarfonds 4
GSI Solarfonds Deutschland 3
PT Energiefonds SolarInvest GmH & Co. KG
Sonnenstrom alpha GmbH & Co. KG
POC Proven Oil Kanada
MPC Deepsea Oil Explorer
MPC Deepsea Oil Explorer GmbH & Co. KG
DEF Deutscher Erdgasfonds I GmbH & Co. KG („DEF I“)
DEF Deutscher Erdgasfonds II GmbH & Co. KG („DEF II“)
Container funds & container investment – For a long time, container investments were considered investments in a strongly growing market that guaranteed high returns. Since the crisis in shipping funds that lasted until 2008, container funds have now also been affected.
The supposed security of recent years is now over. Container investments were considered a relatively safe form of investment because the containers are usually leased to shipping companies over a fixed and long-term period. Since the financial crisis, the risks of container funds have become clear.
Investors share in the entrepreneurial risk (BGH, judgement of 08.07.2010, ref. III ZR 249/09) and now fear considerable losses and in some cases even have to reckon with a total loss in container funds.
Overcapacities and falling charter rates lead to a decline in the market value of containers. Container funds were often advertised as high-yield and low-risk. The opposite is now the case.
Not a safe investment
Container investments & container funds are precisely not safe and high-yield investments that are also ideally suited for private investors.
Manager Magazin writes that “investors can hardly judge properly what the risk-reward ratio looks like in individual cases.” In 2015, there were over 38 million containers. Of these, more than 45% were leased from shipping companies and shipping lines in container leasing.
Like ship investments, closed-end investments also offer high return potential with high risk. Investors have already invested approximately 1.2 billion euros in container funds in 2013. The largest provider in this area speaks of over 62,000 customers – Handelsblatt.
The options for structuring container funds vary greatly. Subscribers often participate as limited partners or indirectly via a trustee. The company form chosen is then a GmbH & Co. KG is chosen.
Container funds – prospectus requirement for all direct container investments
According to the draft for the Financial Market Amendment Act, direct container investments will in future also fall under the Asset Investment Act if they do not provide for a redemption obligation.
The correction to the Small Investor Protection Act is intended to ensure that direct investments in tangible assets & container funds (e.g. participations in the acquisition of individual containers), where the redemption of the investment depends on the will of the provider or a third party, are also covered by the act. The law is to come into force at the beginning of 2017.
Risks of container funds
In principle, container funds are subject to the same risks as all closed-end funds. In addition to a long-term commitment of the invested capital, there is a relatively high risk of loss in the event of an unexpected unfavourable economic development. Depending on the corporate form of the company, the risk profile and the origin of the borrowed capital, further losses cannot be ruled out.
The specific risks of container investments are intensified by a weakening development of the world economy or by disruptions in the exchange of goods in the event of unrest or war.
Rental prices then come under pressure and the expected returns of the container fund can no longer be achieved. Increasing insurance premiums can also lead to a poorer return.
Other risks of container funds include:
- increased purchase prices of containers, which depend on the current price of steel
- insolvency of buyers
- decreasing rental income due to market changes
- Fluctuations in short-term rental contracts
- Not exactly calculable resale price of containers at the end of the fund’s term
- Currency risks (especially with foreign currency loans)
Container Funds – Obligations to Inform
Investors must be comprehensively informed by investment advisors about the considerable risks of their respective investment. The risks that must be explained include in detail:
- the total loss risk of container investments
- the currency risk of foreign currency loans
- the high distribution costs (more than 30% for some funds)
- uncertain market situation due to the lack of a secondary market
- possibility of reclaiming distributions according to § 172 para. 4 HGB (limited partner liability)
- Kick-back payments (commissions) to banks and brokers
The investment must also fit the investment objectives of the investor. This is always not the case if the investor wants a safe form of investment.
In the case of faulty issuing prospectuses, claims against initiators, founding partners and investment intermediaries may come into question through prospectus liability.
List Shipping Container Investments
Magellan Container Investment
Buss Capital Exklusiv Container 1
Buss Container Fonds 3
Buss Container Fonds 4
Buss Container Fonds 5
Buss Container Fonds 6
Buss Global Container Fonds 1
Buss Global Container Fonds 2
Buss Global Container Fonds 3
Buss Global Container Fonds 4
Buss Global Container Fonds 5
Buss Global Container Fonds 6
Buss Global Container Fonds 7
Buss Global Container Fonds 8
Buss Global Container Fonds 9
Buss Logistics Container Fonds 1
Buss Logistics Container Fonds 2
ConRendit Navigare 1
ConRendit 16 Tankcontainerfonds
Deutsche Bank DB Containerfonds
DCM Deutscher Containerfonds Madeira
DCM Deutscher Containerfonds Madeira 2
DCM Deutscher Containerfonds Madeira 3
IGB Container One
IGB Container 2
IGB Container 3
IGB Container 4
IGB Container 5
P&R Container Insolvenz
Schroeder & Co. Container Fonds Österreich 3
Schroeder Logistik Investment Fonds 1 und 2
Real estate funds
Real estate funds lawyer – In real estate funds, capital is pooled from several investors and invested in real estate. There are three different types of construction.
Closed-end real estate funds
In most cases, this involves the financing of a single property. As soon as the capital required for the project is fully paid in, the fund is closed to other investors. From this point on, deposits and withdrawals are only possible under certain conditions.
Open-ended real estate funds (OIF)
In most cases, an open-ended real estate fund consists mainly of real estate holdings. The open-ended real estate fund is legally identifiable special assets. Investments can be made at any time and paid-in capital can be withdrawn without further ado.
For this reason, these funds have a large number of shareholders and many real estate properties. Mutual funds are designed for private investors. Special real estate funds, on the other hand, are designed for institutional investors.
REIT – Real Estate Investment Trust
A real estate investment trust is a capital company, usually listed on the stock exchange, for investing in real estate properties. A REIT is subject to special taxation and supervisory rules.
Real estate funds and risks
The economic success of a closed-end fund essentially depends on whether the property can be let. Investors are often promised that the rent will be guaranteed by another company.
However, it may turn out that this company does not have sufficient financial resources. If this so-called guarantor becomes insolvent, the rental income necessary for the fund can often not be achieved. In most cases, the relatively high rents cannot be achieved on the open market. As a result, the real estate fund as a whole loses value.
If there are properties that cannot be let, the fund is threatened with insolvency and a loss of the entire investment is possible. If the capital investment continues and the share of debt financing is high, the loan instalments can lead to major financial losses for investors. Currency risks with fund properties abroad can also lead to further, not inconsiderable losses.
Real estate funds – high losses in liquidation
In recent years there have been bankruptcies and convictions of individual founders for investment fraud. Investors can therefore suffer heavy losses on products that are usually offered as risk-free. When investing in a closed-end real estate fund, investors may end up with a total loss and/or a high level of debt.
In an investment fund, investors’ money is pooled and managed through a corporation or investment company.
These special assets are invested by the fund manager in one or more areas. As a rule, the manager has to follow the specified investment strategy. Investors receive unit certificates for the amounts paid in.
The investment is usually in the form of shares, bonds, derivatives, real estate or commodities. The risk is to be minimised by diversification into different asset classes.
The investment fund remains in the possession of the investors. It is separated from the other assets of the corporation. This is intended to protect investors in the event of insolvency. Profits earned are either distributed to the investors or reinvested. The latter increases the value of the unit certificates.
Investment funds: risks at a glance
The overall risk of the investment fund is made up of the general capital market risk, the interest rate risk, the risk of a total loss and, if applicable, the currency risk. In the case of shares, the incalculable entrepreneurial risk plays a particularly prominent role.
The general capital market risk can cause the value of the shares to fall below the cost price. The prices of shares and interest-bearing securities are also subject to considerable fluctuation risks.
Entrepreneurial participation entails the fundamental risk of total loss. If the market interest rate rises, interest-bearing securities generally fall. Currency risks must always be taken into account when an investment is made in a foreign currency.
You ask yourself: What to do in case of losses? Funds lawyer advises in 2021 – Contact our lawyers now.
If you have invested in or made payments to one of the companies on this list, our lawyers will be at your disposal at short notice.