Buy or Build – Is the Acquisition of an Institute an Alternative to a BaFin Application?

Business ideas in the blockchain sector in Germany can often not be realized without the appropriate authorization of BaFin. The obligation to obtain a BaFin authorization as a consequence of the extensive regulation of crypto assets and blockchain tokens often comes as a showstopper for startups if they cannot find a cooperation partner that offers the required regulatory framework as a Whitelabel solution or as a service. The authorization requirement can pose a serious obstacle even for well-funded projects, especially because the application process can take anywhere from six to twelve months depending on the specifics of the project. Many entrepreneurs therefore feel that the acquisition of an already existing and authorized bank or financial institute might be an elegant alternative to the rather time-consuming application process. But is the acquisition of an already authorized institute really faster than the aforementioned application process?

Entrepreneurs should generally be aware of the fact that the specific business model and its realization and implementation as well as the ownership structure of the obligated company have a significant influence of the complexity of the authorization application. The authorization process for e.g. a GmbH with just one natural person as its shareholder intending to offer investment brokerage services related to cryptocurrencies will potentially be prepared and approved by BaFin and Bundesbank a lot faster than e.g. the application of a stock company which is part of an international group of companies intending to offer Market Making on an international crypto exchange, financial commission services for cryptocurrencies and financial portfolio management services for tokenized financial instruments. The preparation time for the application and the time required until authorization is granted is therefore much shorter for simpler, more focused business models than for more complex and versatile business models.

The acquisition of an existing institute is also subject to supervisory requirements. The purchaser of a bank or authorized financial institute must undergo a scrutinizing ownership control procedure, just as would be required in case of application for authorization directly. In this procedure, all of the intended owners that would hold substantial shares of the bank or institute to be acquired must provide information and documentation, such as e.g. certificates of good conduct and trade register excerpts. This might cause a similar workload as the preparation for an authorization process would, especially for purchasers that are part of an international group of companies. If additionally the business model of the to-be acquired institute must be changed or amended to suit the purchasers needs, a new and viable business plan must be submitted to BaFin as well. This business plan will be then be reviewed and checked in detail for economic and regulatory sustainability by BaFin and the German Central Bank. The internal processes also have to be adjusted, should the new business model trigger new compliance obligations for the institute. The creation of new documents such as report templates, ToS or customer contracts might also be necessary.

The acquisition of a bank or financial institute in order to realize a new business model is almost never worth it. The time-saving effect usually diminishes completely, because the acquisition of the institute can only become effective if the competent supervisory authorities approve the acquisition and they will only do so after a successful ownership control procedure. Furthermore, there is typically the risk that the acquirer also brings the institutes bad debts into his own books. For new crypto related business models, it is therefore usually preferable to directly apply for an own BaFin authorization.

Attorney Lutz Auffenberg, LL.M. (London)

 I.  https://fin-law.de

E. info@fin-law.de

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