How does an investment work legally and what does “subordinate” really mean?

Anyone investing through a crowd investing platform, such as Kazpar, is not simply “supporting a project.” From a legal perspective, the investor enters into a contract and it is precisely this structure that determines the rights, obligations, and risks involved. For this reason, it is worth taking a closer look.

1. What legal form does an investment have?

In many cases, especially in the real estate sector, the investment is made in the form of a loan. This means that the investor provides capital to be repaid at a specified time, often plus an agreed interest.

Depending on the structure, this can be:
• a classic loan
• a profit-participating loan (with a performance-based component)
• a qualified subordinated loan

The decisive factor is not only the interest, but the ranking in the event of insolvency.

2. What does “subordinated” mean?

The term “subordinate” describes the order of repayment if a project or company becomes insolvent.

In the event of insolvency, the following order generally applies:
1. Banks and Priority Creditors
2. Suppliers, public claims etc.
3. Subordinated lenders (e.g. crowd investors)

Subordinated therefore means:
Crowd investors are served only after all senior creditors have been fully satisfied. If there is no longer any assets after the service of these creditors, there may be a complete loss of capital. This is not a special case, but an integral part of the structure.

3. What does “qualified subordinate” mean?

With a qualified subordinate, the regulation goes even further. Here it is contractually stipulated that repayments outside of insolvency proceedings may only be made if this does not result in the project sponsor’s insolvency. This serves to close the balance sheet equity, but at the same time increases the risk for the investor.

4. And what about collateral?

Some projects provide security, such as land charges, assignments and/or guarantees. What is important, however, is that collateral is also subject to ranking. For example, if a bank is first entered in the land register, it will be served first in the event of recovery. Security reduces information uncertainty, but you do not eliminate entrepreneurial risk.

5. Why is this structure common?

Crowdinvesting is often used as a supplement to bank financing. Since banks are usually secured with priority, there is often a subordinated position for crowd investors. This structure enables projects, but it entails an increased risk that should be consciously taken into account when making an investment decision.

6. What does this mean for investors?

A crowd investment is not a savings product. It is an entrepreneurial participation in the form of a structured financial instrument with clearly defined opportunities and risks.

A transparent representation of the legal structure helps:
• Realize expectations realistically
• consciously assess risk
• Being able to compare projects better

The decision to invest should always be based on a complete understanding of the contract structure.