Damages for Seedmatch Investors: What is a Subordination Clause?

Legal details often play a central role for companies, but they are not always given sufficient attention. An example of this is the current example is the crowdfunding platform Seedmatch. Because many of the company’s investment contracts are apparently void. The so-called subordination clause plays a decisive role here.

What is a subordination clause?

The subordination clause is of considerable importance in contracts. It states that certain liabilities and debts are, simply put, subordinate to other liabilities. This means that in the event of insolvency, for example, some creditors have priority over other creditors in terms of repayments.

This increases financial risk for so-called subordinated creditors, who may suffer significant, if not total, losses on their liability.

The subordination clause in the Seedmatch case

The Seedmatch case shows the crucial importance of clear and understandable contracts. Because the standardized contracts used for crowdfunding investments contain a subordination clause that applies to crowd investors.

Due to the agreed subordination, the crowd investors are subordinate to the claims of all other creditors. As described above, this increases the financial risk of these investors, up to and including total loss.

If insolvency occurs, there is a risk that they will get nothing, because their claims are treated subordinately, i.e. after the claims of other creditors, due to the subordination clause.

Invalidity in the event of a lack of transparency and unreasonable disadvantage

Due to this special risk, the Federal Court of Justice decided that such subordination clauses are ineffective if they are not transparent and consumers are unreasonably disadvantaged by this lack of transparency. According to a recent decision, this now also applies to the clause used by Seedmatch.

Subordination clause: How an invalid clause eliminates a contract

An investor who invested in the start-up Protonnet and lost his investment due to its insolvency sued Protonet because the subordination clause agreed in the investment contract was incomprehensible to private investors and therefore ineffective. The Hanseatic Higher Regional Court in Hamburg agreed with him in this respect.

Protonet informed Seedmatch of this court case. The plaintiff saw this as an indication that Seedmatch must also be liable as a platform operator. He therefore sued the company OneCrowd Loans, which operates the Seedmatch platform, before the LG Dresden.

And the subordination clause used in this process was also viewed critically, as it was opaque and incomprehensible for private investors and thus disadvantaged them. The clause is therefore ineffective.

As a result, not only is this clause not applied, but the entire investment contract becomes void. OneCrowd Loans was therefore ordered to pay damages of 5,000 euros to the plaintiff.

Consequences for a variety of contracts

But that is not the end of the case. The subordination clause, which is the issue in the case of Seedmatch and Protonet, was not only used in this one contract, but was used in hundreds, probably thousands, of investment contracts via the Seedmatch platform.

This means that all other contracts in which this clause is contained are also invalid and will therefore trigger claims for damages. This would truly be an extremely unfavorable situation for Seedmatch. For this reason, OwnCrowd Loans has also appealed against the verdict.

The importance of non-transparent clauses

The use of legal terminology or complicated clauses can not only lead to misunderstandings and the resulting possible legal disputes. In the worst case, a clause can be considered invalid, which can lead to the nullity of an entire contract.

For companies, especially start-ups, which do not always pay the necessary attention to legal specifics, it follows that they must ensure that their contracts are clear and easy to understand for all parties involved.

Because compliance with legal regulations is more than just a moral obligation. It is a fundamental prerequisite for the effectiveness of contracts, especially when general terms and conditions apply and consumers are contracting parties.

Proactivity is the order of the day for companies

The case of Seedmatch and Protonet shows the possible consequences that companies like start-ups can face. Especially in the case of bankruptcy or other form of “trouble” affecting one party, the concluded contracts are “likely” to be reviewed in order to gain any advantages through the use of invalid clauses.

Companies should therefore take proactive measures to mitigate this risk. This includes, for example, not simply using any templates or templates that are not adapted to the particular situation of the company in question. When in doubt, legal advice is worth its weight in gold.

The Subordination Clause and the Seedmatch Case

The story of Seedmatch and Protonet offers companies, especially young ones like start-ups, valuable insights into the importance of contractual clarity, use of clauses in general terms and conditions and legal compliance.

It stands as a sobering reminder of the potential pitfalls that await the unwary and illuminates the path to a legally secure contractual environment.

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