Have you been invited to invest in a real estate project or a start-up? The high interest rate is enticing – however you’re often investing in a risky qualified subordinated loan.
If you provide a subordinated loan to a company, you are lending money to the company. If the company becomes insolvent, other creditors will be repaid first – often nothing will be left to repay you. In such cases, money is not allowed to be repaid where doing so results in the company ending up in financial difficulties. Repayment is postponed – sometimes for an unspecified length of time. As a result you bear the full risk for the company.
The information you receive as an investor depends on the total capital the project collects:
| Project volume | Information for investors | Checked by whom? |
| up to € 250,000 | No information document or prospectus | – |
| € 250,000 to 2,000,000 | Information document under the Alternative Financing Act (AltFG; Alternativfinanzierungsgesetz) | Platform operators check completeness; supervision by the local administrative authority |
| € 2,000,000 to 5,000,000 | Simplified or full investment prospectus (KMG) | Eligible prospectus auditor checks correctness |
| Over € 5,000,000 | Full investment prospectus under the Capital Market Act (KMG) | Eligible prospectus auditor checks correctness |
Companies use qualified subordinated loans to bridge financing gaps. Large number of investors often participate via online platforms. This enables projects that would otherwise be unfeasible. High interest rates are supposed to offset the risk!
Capital market prospectuses and information documents help you to understand the offering better, and compare it with other offerings. You receive information about the project, the company’s financial position, as well as the term, risks and planned repayment.
Opportunities and risks at a glance:
Opportunities:
- The possibility to participate in real estate or corporate projects
- Potential returns that are generally above normal market levels
Risks:
- Project owners do not check whether the offering matches your personal requirements
- No right to guarantees
- In the case of qualified subordinate interest payments and repayments, total losses are possible far before insolvency
- No deposit guarantee scheme or government-backed guarantee
- No right to a say or participation in profits
- Interest payment and repayment may be suspended, if payments would precipitate a financial crisis for the company
Beware!
The higher the interest rate promised, the greater the risk!
Summary:
Qualified subordinated loans may be an alternative form of project financing, but are not a secure form of investment. Anyone investing should check the documents precisely, that under the risks, and should be aware: there is no deposit guarantee scheme and no guarantee of repayment or interest.
Our tips
- Read the subordination clause in the contract carefully.
- Ask for the information document or the capital market prospectus.
- Be sceptical when high interest is promised without a plausible business model.
- Only trust providers that are transparent in informing about risks.
- Only invest amounts you can afford to lose.
Other editions:
17 Investment Advice
30 Let me introduce myself, the FMA!
31 7 Rules of Investing
PDF version of this edition (in German only)
Find out more:
A-Z of Finance: www.fma.gv.at > A-Z of Finance
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Platform operator:
matches the business interests of investors and project owners via a platform.
Local administrative authority:
regional governmental administrative body, district administration office, or municipal office.
Eligible prospectus auditor:
external auditors, named by the FMA in a list on its website.
Investment prospectus:
Official information document about the investment offering with details about the company, risks, and how the money is used. An eligible prospectus auditor checks the correctness of the details.