Regulators are often playing the tragic comedy of “Love’s Labour’s Lost”. So the do with their regulations against blank cheques.
The European Private Equity and Venture Capital Association (EVCA) clearly states in its “Code of Conduct”: The EVCA members “will not accept subscribed investment capital in their funds from unspecified sources and will not represent major ‘blind’ pools of capital”. This is the industry code of conduct: blind pools are unfair and are not offered by reputable providers. But why do they exist then and motivate so many investors to dive into those blind pools?
The German Federal Government also acts in the spirit of EVCA. The Federal Ministry of Finance wants to ban blind pools completely. “In the absence of fixed investment objects, this makes it more difficult for investors to evaluate their assets. Investors do not receive a detailed picture of the business model and are therefore less able to estimate the probability of achieving the promised return. At this stage, there is also a lack of significant (preliminary) contracts, for example for the acquisition or manufacture of the investment properties, so that investors do not know the business partners of the issuer and are therefore unable to assess them. As a consequence, the importance of the sales prospectus both as a transparency and as liability document is reduced, since the prospectus information on the investment object is not very concrete in blind pool constructions and the depth of information is significantly lower than usual. Investments in the form of blind pool constructions should therefore no longer be publicly offered to private investors in the future.
Honestly, this anti-humor from governments and consumer protectors endangers investments in Germany and the EU. Recently, a Hamburg-based crypto-startup, the Fundament Group, came under criticism for its approach. The company wants to collect 500 million via crowdfunding – which is supposed to lead to a blind pool.
But it is not for nothing that blind pools are so popular in the industry. They give the investor the opportunity to invest flexibly in the most rewarding form of investment. They also give the opportunity to invest in f.ex. mergers that should not be subject to public visibility and control. The question of blind pools raises very basic requirements regarding the power of control that a state may and should exercise and the rights to confidentiality that private investors can claim for themselves. The difference between legal blind pools and grey areas or illegal activities such as money laundering in the real estate sector is vanishing. The tendency of the state to regulate and supervise more and more is very high in Europe and here especially in Germany.
But what will happen if the strict regulations are enforced? Well, money is liquid. It always flows in the direction of the least regulation and control. The world is far away from uniformly regulating or even banning blind pools or “blank cheques”, as they are also called. The world is just as full of idiots who invest their money in unclear structures just because the promise of returns is incredibly high. Greed knows no boundaries. So the German law enforcement and consumer protection agencies are not doing themselves any favours when they want to prevent blind pools. Those anonymous gamblers who invest in these instruments are gambling-addicted enough to constantly come up with new ways and means to satisfy this addiction. Love is blind. So does money.