Risk Warning
Risk Disclosure of EPH Investment GmbH
If you intend to invest in a crowdfunding service (EU Regulation 2020/1503, Crowdfunding Regulation, or also known as a European Crowdfunding Service Provider (ECSP)) in the form of an ECSP loan, this risk disclosure applies:
Risk Disclosure
Investments in this crowdfunding project involve risks, including the risk of partial or total loss of invested funds. Your investment is not protected by the deposit guarantee schemes established under Directive 2014/49/EU of the European Parliament and of the Council. Your investment is also not protected by the investor compensation schemes established under Directive 97/9/EC of the European Parliament and of the Council.
You may not receive a return on your investment.
This is not a savings product, and we advise you not to invest more than 10% of your net assets in crowdfunding projects.
You may not be able to sell the investment instruments at any time. Even if you can, you may still incur losses.
If you intend to invest in a MiFID II investment (security token bond), this risk warning applies.
Risk warning
The purchase of these securities involves significant risks and can lead to the complete loss of the invested capital. Such risks also exist with investments.
The following additional risk warnings apply:
1. Introduction
2. General Risks
3. Specific Risks
4. Specific Risks of ECSP Loans
5. Risks of Bonds
6. Functionality and Risks of Real Estate-Based Investments
1. Introduction
Every capital investment carries certain risks, which is why it is essential to develop basic knowledge and a basic understanding of such risks. The following explanations are intended to provide a basic understanding of these risks.
1.1 Objective
The goal of an investment is always to increase or preserve assets. This can be achieved primarily by consciously taking risks to capitalize on return opportunities. However, this requires bearing the risks of the various investor classes and, above all, being aware of them.
1.2 Interaction of Return, Security, and Liquidity
The three pillars of an investment are return, security, and liquidity.
* Return is generally understood as the measure of the economic success of an investment. That is, the return that the invested capital generates over a certain period of time. This also includes dividends or interest payments.
* Security refers to the preservation of the invested assets. The security of an investment depends on the risks it is subject to.
* Liquidity describes the availability of the invested capital; that is, whether, when, and at what cost the invested capital can be sold again.
These three pillars of an investment are interrelated and influence each other. For example, an investment with high liquidity and high security generally has a low expected return. Conversely, this means that high profitability and high liquidity generally entail lower security. However, if high profitability and high security are present, the investment is illiquid. Investors must therefore balance their goals based on their individual preferences and personal circumstances.
1.3 Risk Diversification
When deciding on an investment, it is particularly important to be aware of the interplay of various risk factors. To reduce risk, investors should spread their capital across multiple investments. Diversification should therefore be implemented to achieve a reduction in risk.
By appropriately combining different investment instruments, portfolio risk can be reduced while simultaneously taking the desired return into account. This targeted diversification to reduce investor risk is referred to as "diversification." Diversification is based on the fundamental principle that one should not take on the full risk by investing capital in only one investment, as this approach entails unnecessarily high risk. Diversification can, in any case, reduce the overall risk, although the degree of reduction depends on how independently the individual prices of the portfolio components develop. This means that losses in one investment can be offset by potential gains in another.
2. General Risks
In addition to the specific risks always present in individual asset classes, instruments, and financial services, there are also general risks associated with investments. Some of these risks are described here. However, this list is not exhaustive.
2.1 Economic Risk
The economic development of a national economy generally follows waves and is characterized by so-called upswings, highs, downswings, and ultimately lows. These economic cycles, in turn, are shaped and dependent on the decisions of governments and central banks. Furthermore, individual cycles can last several years or even decades and thus have a significant impact on the performance of various asset classes. If the economy is in a weak phase, this can have a lasting negative impact on the value of the investment.
2.2 Inflation Risk
Currency depreciation can result in financial losses; this is known as inflation risk. If inflation is higher than the nominal interest rate on the investment, this leads to a loss of purchasing power equal to the difference. This is generally described as a negative real interest rate. The real interest rate can serve as a guideline for such a potential loss of purchasing power. For example, if the nominal interest rate on an investment is 6% and inflation during this period is 4%, the real interest rate per year would only be +2%. If inflation is even higher than the nominal interest rate, the real interest rate can also fall into negative territory.
2.3 Country Risk
A debtor residing abroad may not be able to repay their debt on time, despite being solvent. This can result from the influence of the respective country on the currency and its transferability. Such influence can be primarily due to political and social influences, a change of government, strikes, or even non-political conflicts. The investor can suffer financial loss as a result.
2.4 Currency Risk
If an investment is made in a currency other than the home currency, the return does not depend exclusively on the return on the investment in the foreign currency. The exchange rate can have a significant impact on this. A loss can certainly occur if the foreign currency in which the investment was made depreciates against the domestic currency. On the other hand, this can also lead to a financial advantage. The fundamental risk then exists with cash investments, as well as with investments in stocks, bonds, and other financial products denominated in a foreign currency.
2.5 Liquidity Risk
If an investment can be bought and sold at short notice and the buying and selling prices are almost identical, it is referred to as liquid. There are normally always enough buyers and sellers for such an investment, thus ensuring smooth and consistent trading. However, if there is insufficient liquidity at any time, a short-term sale of an investment can no longer be guaranteed. Furthermore, the investment may be sold at a lower price. This can lead to financial loss for the customer in the event of a price loss.
2.6 Cost Risk
Both open and hidden costs may apply, which the customer should always be aware of. For long-term investment success, the costs that may arise should not be neglected and, above all, should be considered with great care.
Costs that may arise with credit institutions and other financial service providers include transaction costs for the purchase and sale of securities, as well as commissions for the execution or brokerage of the order. However, follow-up costs may also arise with banks, fund providers, or other financial service providers in the form of custody fees, management fees, issue premiums, or other commissions that are not obvious to the client. These costs should be considered in an overall assessment of every decision. The higher the costs, the lower the actual returns that can be achieved.
2.7 Tax Risks
Investors are generally required to pay taxes on their income. Changes in the tax framework for capital gains can lead to a change in the tax burden. Furthermore, if the investment is made abroad, the so-called double taxation agreement must be observed. Taxes and duties can therefore reduce the actual return on an investment. Tax policy decisions can also have both a negative and a positive impact on the price performance of the capital markets.
2.8 Risk of credit financed investments
In order to increase the investment amount, investors can take out loans or other forms of collateral against their investments with the aim of further increasing the investment amount. If the investment loses value, this can result in the interest and repayment requirements of the loan no longer being met from the investment. In this case, the investor may be forced to sell their investment. Financing an investment with a loan therefore carries a very high risk and can result in significant losses for the investor.
2.9 Risk from Lack of Information
Correct information is the foundation of a successful investment. If this information is insufficient or even incorrect, it can lead to the customer making an incorrect decision.
2.10 Risks from the COVID-19 pandemic and force majeure
It cannot be ruled out that extraordinary risks such as epidemics, earthquakes, environmental disasters, armed conflicts, aircraft crashes, or other events of force majeure may occur and affect the property. Each of these events could significantly adversely affect the Issuer's assets, financial position, and results of operations and jeopardize investors' interest and repayment claims.
The COVID-19 pandemic (coronavirus) and the ongoing armed conflicts between Russia and Ukraine, as well as the associated, in some cases, considerable economic burdens on large parts of the economy and the population, could have a significant negative impact on the Issuer and the project property held by the project company, in particular on the renovation, planning, management, or sale of the property, as well as on the sale proceeds and long-term financing of the property. Beyond its immediate consequences, the COVID-19 pandemic could also have a long-term negative impact on the future development of the property and the real estate market. The sale of the property and the refinancing of the loan could become difficult or impossible. In addition, the pandemic, along with other market factors such as market developments, the economy, monetary and interest rate policy, may have a negative impact on the real estate development industry, rendering the companies involved in planning the property unable to complete the planning within the planned timeframe. Furthermore, investors may be less willing to subscribe, resulting in lower or even non-existent placement success for the investment. As of the date of the Offering Documents, the consequences of the COVID-19 pandemic cannot be estimated. This risk may jeopardize investors' interest and repayment claims.
2.11 Risks from General Legislation and Market Conditions
The Issuer and the Project Company cannot rule out future changes to the laws, regulations, and guidelines applicable as of the date of the Offering Documents, as well as their interpretation. For example, the so-called rent control measure (Mietpreisbremse) was passed in Berlin, and its introduction is also being discussed in other cities. In this respect, there is a fundamental possibility that legislative, judicial or regulatory measures and/or a change in market conditions could have a negative impact on the liquidity of the Issuer and the Project Company, jeopardising the repayment of the loan and thus also the interest and repayment claims of the investors.
3. Specific Risks
3.1 Risks Associated with the Investment
3.1.1 Placement Risk
There is no placement guarantee for the placement of the investments. Therefore, the investment is subject to placement risk, which may result in the Issuer having insufficient capital available for the intended investments. In the event of insufficient placement success, the Issuer will repay the loan to the investors at the nominal amount. Since the Issuer will not have generated any interest income in this case, interest on the loan will not be paid.
3.1.2 Inability to Sell the Property
Although an early sale of the investment is generally possible, the saleability of the investment is severely limited. The investment can only be sold outside of the stock exchange, which may make it impossible to sell. It also cannot be ruled out that an investor may only be able to sell the investment held at a price significantly below the nominal value.
3.1.3 Subordination of Investor Claims
If subordination of the loan claim has been agreed, the following is noted: In insolvency proceedings concerning the Issuer's assets and in the event of the Issuer's liquidation, the investors' payment claims under the loan (interest payments and repayment of the loan principal) are subordinated to all non-subordinated claims. This may lead to a partial or total loss of the investment.
3.1.4 Risk of Early Repayment of the Investment
In certain cases, the Issuer is entitled to terminate the loan early and repay it to the investors. In this case, the investor bears the risk that the early repayment of their investment may result in a lower total return than expected. Furthermore, it is possible that the investor may only be able to reinvest the repaid capital under less favorable conditions.
4. Specific Risks of ECSP Loans
4.1 Risks from the Loan
The Issuer's economic success and its ability to meet its interest and repayment obligations depend exclusively on the interest income from the Loan and on the repayment of the Loan by the Project Company. The Loan will be serviced only subordinated to the loan agreement (the "Loan") concluded by the Project Company with a German credit institution (the "Senior Credit Institution"), to the extent that subordination has been agreed upon. Therefore, there is a risk that the liquidity situation of the Project Company and the Issuer may not allow the payment of interest and/or repayment of the Loan if the Sale does not occur or the proceeds from the Sale are insufficient. The Loan will be serviced only subordinated to the Loan.
This means that the mezzanine loan is often structured as a subordinated liability, which can result in senior liabilities, such as bank loans, being paid first in the event of insolvency.
4.2 Risks from the Senior Loan
The loan can be terminated by the senior credit institution at any time if there are good cause. If there are good cause for termination, there is a risk that the senior credit institution will demand immediate repayment of the loan in full and threaten to liquidate the collateral. The project company will most likely only be able to repay the loan early after selling the property. Therefore, there is a risk that the achievable proceeds from the sale of the property will be insufficient to fully satisfy the senior credit institution's claims. This risk could jeopardize investors' interest and repayment claims.
4.3 Risks from Loss of Value
There can be no guarantee that a specific return or income target will be achieved. Past returns or forecasts are no guarantee of future success. Portfolio investments are not subject to market valuation by the secondary market and may be affected – even by extraordinary – value adjustments. Liquidation of the portfolio or individual investments can, in exceptional cases, result in significant losses in value.
4.4 Risks due to time limitations
The provision of mezzanine debt may, in certain circumstances, be time-limited, which can pose a risk to refinancing.
4.5 Risks due to higher transaction costs
Investors must consider that transaction costs are higher when providing mezzanine capital. Interest costs are higher than with other financing options because mezzanine capital carries a higher risk.
4.6 Risks due to limited say
The investors have only limited say regarding the operational business. This primarily relates to the right to information and control options.
5. Risks of Bonds
5.1 General
The term "bond" generally refers to interest-bearing securities, also known as fixed-income securities. So-called index bonds, mortgage bonds, and structured bonds also fall under this umbrella term. However, the basic functionality is the same for all types. Both private companies and public government institutions can issue bonds. It should always be noted that they do not grant the holder any equity rights. Rather, the issuer raises debt capital by issuing a bond. Bonds are tradable securities with a nominal amount (the amount of debt), an interest rate, and a fixed term.
The issuer undertakes to pay investors an interest rate, which is due either at regular intervals or cumulatively at the end of the term. However, the amount of the interest depends on various factors. Important factors are the creditworthiness of the issuer, the term of the bond and the underlying currency, as well as the general market level. At the end of the term, the investor receives the nominal amount back. A higher interest rate generally also means a higher credit risk for the issuer. The interest rate on the nominal amount determines the investor's return. However, the difference between the purchase and sale price also contributes to the return. Bonds, like stocks, can be traded on stock exchanges or over-the-counter.
5.2 Specific Risks of Bonds
5.2.1 Issuer/Credit Risk
One of the greatest risks associated with investing in bonds is the issuer's default risk. If the issuer fails to meet its obligations to investors, there is a risk of total loss. However, in the event of the issuer's insolvency, any investor claims can be met from the insolvency estate, since the invested capital is debt. An issuer's solvency can be measured regularly by rating agencies. This classifies an issuer into a risk category accordingly. If an issuer has a relatively low credit rating, this is usually compensated with a higher interest rate. In the case of a covered bond, the credit rating also depends on the extent and quality of the collateral.
5.2.2 Inflation Risk
Currency devaluation can result in financial loss; this is known as inflation risk. For a bond, this means that inflation may rise during the term of the bond to such an extent that it exceeds the bond's interest rate, resulting in a negative real interest rate for the investor.
5.2.3 Interest Rate Risk and Price Risk
The key interest rate level, which is set by the central banks, influences the value of a bond. If a bond has a fixed interest rate, for example, this type of bond becomes less attractive when interest rates rise, and the price of the bond falls. Even if the issuer does not pay the interest rate and the nominal amount until the end of the term, this can lead to a loss for the bondholder if he sells his bond at a time when the bond is below the issue or purchase price.
5.3 Token-based Bonds
5.3.1 General
A token-based bond is a bond that can be transferred using a token. The bond is subordinated and subject to a pre-insolvency enforcement lock. The token-based bonds establish interest and repayment obligations of the issuer to the investors, contain exclusively subordinated, contractual claims of the investors against the issuer, and do not grant participation, participation, or voting rights in the issuer's general meeting. The pre-insolvency enforcement lock means that an investor cannot enforce claims for interest and repayment in the event of the issuer's crisis if these claims would trigger the issuer's insolvency.
The rights arising from the token-based bonds are not documented in a certificate. Therefore, no certificate is deposited with a custodian bank. For each bond, the issuer issues a token to investors, representing the rights associated with the token-based bonds.
5.3.2 Specific Risks of Token-Based Bonds
* Saleability: While an early sale of the token-based bonds is generally possible, the saleability of the token-based bonds is severely limited. It cannot be ruled out that an investor may only be able to sell the token-based bonds they hold at a price significantly below their nominal value.
* Risk due to the pre-insolvency enforcement stay: All claims arising from the token-based bonds, in particular claims for payment of interest and repayment of the bond capital, cannot be asserted as long as and to the extent that partial or full fulfillment of these claims would lead to the issuer's insolvency (pre-insolvency enforcement stay). The pre-insolvency enforcement stay therefore already applies to the period prior to the opening of insolvency proceedings. The investor cannot therefore demand fulfillment of their claims arising from the token-based bonds if the issuer is threatened with insolvency at the time the investor requests performance. The pre-insolvency enforcement stay can lead to a permanent, unlimited non-fulfillment of the bondholder's claims.
* Risk of loss of the private key: The tokens are allocated to the investors' respective wallets upon issuance. The tokens are only accessible to investors via their personal access (so-called private key) to their wallet. If the private key falls into the hands of third parties, these third parties can misuse an investor's wallet and conduct unauthorized asset transactions. The loss of the private key, even if it was simply "forgotten," leads to an irretrievable loss of the tokens. The issuer does not know an investor's private key; it cannot retrieve the private key, nor restore or enable access to the wallets in any other way. The investor should therefore keep their private key safe.
* Risks from blockchain technology: Blockchain technology and all associated technological components are still in an early stage of technical development. The token is created when the issuer generates the number of subscribed tokens on the respective blockchain and then transfers them to the investors' wallet addresses by assigning the tokens to the respective investors' addresses. Blockchain technology may contain errors that could have future, unforeseeable consequences. Blockchain technology may also be subject to technical difficulties that impair its functionality. A partial or complete collapse of the blockchain may disrupt or render the tradability of the tokens impossible.
* Risk of hacker attacks: The blockchain technology, the smart contract, and/or investors' wallets may be subject to attacks by unauthorized third parties, i.e., hacked.
6. Functionality and risks of real estate-based investments
6.1 Risks related to the property
6.1.1 Risks arising from the planning of the property
The quality of the planning of the property is crucial with regard to its marketability, value development, and price. There is a risk that the planning may contain deficiencies. Unresolved or irresolvable planning deficiencies can have a negative impact on the overall value development of the property as well as on the sale proceeds achievable for the property.
There is a risk that delays may occur during the planning of the property, e.g., due to building regulations, delayed or non-issuance of required permits, such as planning delays, planning errors, legacy issues, increased project costs, failure or poor performance of project partners, non-existence or uncollectability of warranty claims, (subsequent) regulatory requirements, strikes or other force majeure, changes in the general economic situation, the micro- or macro-location, or the legal or tax framework. Furthermore, there is a risk that the costs of planning the property may exceed the planned total investment costs and that the project company may have to raise additional debt to cover these increased costs. Unforeseeable events such as faulty project planning or incorrect cost calculations can lead to additional costs that render the property uneconomical. In the worst case, the property may not be completed. Each of these factors could negatively impact the Issuer's future income. The realization of these risks may lead to a delay or a partial or complete failure of the repayment of the investment.
6.1.2 Risks from inadequate implementation of the property construction
There is a risk that delays may occur during the construction of the property, e.g., due to building regulations, delayed or non-issuance of required permits, such as for the shell construction and/or final acceptance, planning or material errors, legacy issues, construction delays or interruptions, increased project costs, failure or poor performance of project partners, non-existence or uncollectability of warranty claims, (subsequent) regulatory requirements, strikes or other force majeure, changes in the general economic situation, the micro- or macro-location, or the legal or tax framework.
Furthermore, there is a risk that the costs of constructing and renovating the properties may exceed the financing planned for the project, and the project company may have to raise additional debt to cover these increased costs.
Unforeseeable events such as faulty project planning or incorrect cost calculations can lead to additional costs that make the property uneconomical. In the worst case, the property may not be completed. Each of these factors could negatively impact the Issuer's future income.
The realization of these risks could lead to a delay or a partial or complete default in the repayment of the loan.
6.1.3 Risks of the Property's Inability to Sell or the Failure of Long-Term Follow-Up Financing
The project company's ability to ensure repayment of the loan through the proceeds achievable from the sale of the property or through the conclusion of long-term follow-up financing for the property depends on many factors, e.g., the quality of the location, investor demand, market- and property-specific developments (particularly in the real estate and interest rate markets), as well as macroeconomic or industry-specific circumstances. The loan must be serviced with priority. If the sale proceeds are insufficient to fully repay the loan and the loan plus interest claims, the issuer would not receive sufficient proceeds from its loan claim to meet the investors' claims. There is a risk that sufficient sales proceeds will not be achieved and that long-term follow-up financing cannot be arranged on acceptable terms, that the loan will not be serviced or will only be serviced in part, and that the issuer will become insolvent and suffer a total loss of the investor's invested capital.
6.1.4 Risks due to the inability to sell the property
The project company's ability to ensure repayment of the loan through the proceeds from the sale of the property depends on many factors, e.g., the quality of the location, investor demand, market- and property-specific developments (particularly in the real estate and interest rate markets), and macroeconomic or industry-specific circumstances. The loan must be serviced first. Therefore, if the sale proceeds are insufficient to repay the loan, the issuer would not receive sufficient proceeds from the loan to fully meet the investors' claims.
There is a risk that insufficient sale proceeds will be achieved, the loan will not be serviced or will only be serviced partially, and the issuer will become insolvent and suffer a total loss of the investor's invested capital.
6.1.5 Risks from Construction Defects on the Property
The construction quality of the property is of key importance with regard to its value development and its saleability, as well as its long-term leasing potential. There is a risk that poor performance by contractors involved in the construction (e.g., general contractors, architects, engineers, tradespeople, and fitters) may or may not have occurred during the construction of the property, or that other undetected defects or contaminated sites (e.g., soil contamination) may exist on the project site. This could result in additional costs for the project, ultimately rendering the project uneconomical. Even if the project company would generally be entitled to claims for rectification and damages against the construction companies due to poor performance in the event of construction defects, these claims may be unenforceable for legal or factual reasons, meaning that the project company itself must bear the costs of rectifying the defects. Furthermore, poor performance can result in follow-up costs (legal costs, expert fees), which would further increase costs. The project company must therefore finance the costs of rectifying undetected construction defects from available liquidity and/or by raising additional debt. Unrepaired or irreparable construction defects can negatively impact long-term rental/lease income and thus the overall value development of the property, as well as the sale proceeds achievable for the property. Each of these factors can negatively impact the issuer's future income.
The realization of these risks can lead to a delay or a partial or complete default in the repayment of the loan.
6.1.6 Risks from the Development of the Property's Location
6.1.6.1 General
Residential properties (such as apartments and townhouses) and commercial properties (such as office buildings and retail space) in which issuers invest or are managed belong to the real estate investment asset class.
6.1.6.2 General Risks
* Income risk: Purchasing a property requires a large initial investment, which only pays off over time through potential cash flows such as rental income. However, an initial investment can be limited in its usability, both in terms of time and in terms of the assets. This can mean repaying the debts of the initial investment over a longer period than planned.
* Valuation risk: Location, surroundings, usable area, year of construction, etc., play a crucial role in the valuation of a property. Another problem is the existence of various and geographically separated submarkets. This means that a valuation depends on a multitude of criteria and forecasts are difficult to make.
* Liquidity risk: Due to the various submarkets and the individual nature of the properties, real estate is often classified as illiquid. This can impact the valuation, sale, and transfer process, prolonging it. A quick realization of the property's value is therefore generally difficult.
* Transaction risk: Valuation, sale, and transfer of direct real estate investments can incur relatively high costs.
6.1.6.3 Specific risks
* Risks related to the condition of the property: Construction quality is particularly important here, as it influences the long-term rental and value development of the property. There is a risk that undetected structural defects may occur. Costs for remediation or similar measures may arise. Even irreparable structural defects can lead to a rent reduction and thus adversely impact future rental income. These risks can therefore jeopardize investors' interest and repayment claims.
* Risks related to the rescission of the real estate purchase agreement: Many properties are purchased under the law of contract, but ownership has not yet been transferred in rem. If the purchase price is not paid when due, the business model described in the respective prospectus cannot be implemented, as the purchase agreement may be rescinded. In this case, the bonds are repaid to the investor at their nominal value, but no interest is paid.
* Risks from property renovation: The renovation costs of a property may be higher than planned. Unplanned events, such as faulty project planning or persistently adverse weather conditions, can significantly increase costs. Construction delays can also increase completion costs. This can ultimately lead to the Issuer no longer being able to pay interest and repay the loan. This then poses a risk of insolvency for the Issuer.
* Risks from construction defects in the property: There is a risk that the construction or renovation of a property will be defective. Even if the Issuer generally has claims for damages and repairs, these claims may not be enforceable. Therefore, costs may arise for the rectification of defects, as well as for follow-up costs. Irremediable construction defects can also lead to rent reductions and thus adversely impact future rental income. These risks can therefore jeopardise the interest and repayment claims of the bondholders under the bond.