Prospectus Liability

Prospectus Liability - Prospectus liability refers to the civil liability of the initiators, issuers, and those responsible for an offering prospectus for inaccurate or incomplete information that has led investors to make an investment decision. In the real estate sector, it primarily concerns closed-end real estate funds, real estate development models, and crowdinvesting projects in which investors make investments based on a sales prospectus.

Legal and Case Law Foundations

Prospectus liability rests on two pillars: statutory prospectus liability under the German Investment Act (VermAnlG, Sections 20-22) and the German Securities Prospectus Act (WpPG), as well as case law-based prospectus liability (case law of the Federal Court of Justice). Statutory liability applies when a prospectus is required (for issue volumes of 100,000 euros or more) and presupposes that the prospectus contains materially incorrect or incomplete information. Case law-based prospectus liability also applies to offerings not subject to a prospectus requirement and encompasses all sales documents relevant to the investment decision. The statute of limitations for statutory liability is 3 years from the date of discovery, up to a maximum of 10 years from publication.

Typical Liability Cases Involving Real Estate Funds

Common prospectus errors in closed-end real estate funds include: exaggerated rental forecasts suggesting unrealistic returns, concealed risks (e.g., environmental contamination, expiring leases, planned road construction projects in the neighborhood), false statements regarding the property’s condition (need for renovation is concealed), non-transparent soft costs (commissions, distribution costs, premium), and lack of risk disclosures regarding total loss. Investors who have invested based on such prospectuses may claim damages-typically the rescission of the investment (repayment of the invested capital minus any distributions received).

Prospectus Liability and Digital Platforms

With the emergence of crowdinvesting platforms in the real estate sector, prospectus liability has taken on a new dimension. Many providers utilize exemptions (e.g., crowdfunding up to 8 million euros without a mandatory prospectus) to reduce regulatory burdens. In these cases, expanded information sheet requirements (Asset Investment Information Sheet, VIB) apply, but not a full BaFin-approved prospectus. The liability regime is less clear here, and the risk for investors is correspondingly higher. Anyone investing in such platforms should be aware that prospectus liability in the traditional sense may not apply.

Practical Tip for Property Owners in Nuremberg

We recommend that investors and property owners in the Nuremberg metropolitan region who wish to invest in closed-end real estate funds, developer models, or crowdinvesting projects carefully review the sales prospectus-or have it reviewed. Pay particular attention to the assumptions regarding rental growth, the condition of the properties, and the cost structure. In Nuremberg and the surrounding region, several funds with properties in B and C locations have been launched in the past that were unable to meet their promised returns. Before investing, seek an independent second opinion-ideally from a specialist attorney for banking and capital markets law or an independent financial advisor who is not involved in the sale of the product.

As a general rule: Direct real estate investments in condominiums or multi-family homes in the Nuremberg metropolitan region typically offer more transparency, control, and security than fund investments. As a direct investor, you are not subject to prospectus liability risks, and you have full control over your investment at all times.

Damages and Rescission

If there is an error in the prospectus, the aggrieved investor may claim damages in the form of rescission of the investment. This means that the initiator must refund the capital paid in, minus any distributions received. In addition, lost interest on the invested capital may be claimed (so-called alternative return). In practice, the enforcement of claims often fails due to the insolvency of the fund or the initiator-the right exists, but its economic enforceability is not guaranteed. It is therefore important to obtain an early legal assessment of the creditworthiness of the parties liable.

Distinction from Investment Advisor Liability

Prospectus liability must be distinguished from investment advisor liability. While prospectus liability relates to incorrect information in the document itself, investment advisor liability applies when an advisor-such as a bank or an independent financial advisor-has recommended an unsuitable or risky investment without adequately explaining the risks. Both claims can coexist: The investor can hold both the prospectus issuer and the advising financial service provider liable. The Federal Court of Justice (BGH) has clarified in a series of rulings that banks are obligated to fully inform investors about risks, costs, and conflicts of interest-even if the prospectus is formally correct.

Frequently Asked Questions

Who is liable for a defective prospectus?

The parties liable are: the prospectus issuer (usually the fund company or the initiator), the persons responsible for the prospectus (individuals named in the prospectus, e.g., managing directors), and, under certain circumstances, also advisors and distribution partners who used the defective prospectus as the basis for their advice. Banks that recommended fund investments are additionally liable under investment advisor liability if they failed to properly disclose risks.

How do I prove a prospectus error?

The investor must prove a specific prospectus error-that is, a material statement that is incorrect or incomplete. The following are helpful: comparing the prospectus information with actual performance, expert opinions on the property’s condition at the time of the prospectus, and expert reports on rental forecasts. The presumption of proper disclosure makes this easier: The Federal Court of Justice (BGH) assumes that the investor would not have invested had they been fully informed-the fund initiator must prove otherwise.

Is there a statute of limitations for prospectus liability claims?

Yes. Statutory prospectus liability claims are subject to a 3-year statute of limitations from the date of knowledge of the prospectus error (or grossly negligent ignorance), but no later than 10 years after the prospectus was published. Claims based on case law are subject to the general statute of limitations rules (Sections 195, 199 BGB): 3 years from the date of knowledge, up to a maximum of 10 years from the date the claim arose. Anyone who suspects a prospectus error should seek legal counsel promptly to avoid the statute of limitations.

What distinguishes prospectus liability from general tort law?

The distinctive feature of prospectus liability lies in the legal presumption of causation and the reduced burden of proof for investors. Under general tort law, the injured party must prove that the damage was directly caused by the erroneous information. In prospectus liability, this burden of proof is reversed: The issuer must prove that the investor would have invested even if fully informed-which is rarely successful in practice. This liability privilege in favor of investors is a deliberate legislative tool designed to protect the capital market.

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