The Capital Markets Authority recently gazetted new regulations, The Capital Markets Investment Based (Crowd Funding Regulations 2022) to allow for crowdfunding. Crowdfunding is part of the innovative ways a business can raise funds.
Crowdfunding is a type of funding where through the internet, a large number of people contribute a small amount of money towards a project, a cause, or even a business.
The gazettement of the regulations means that crowdfunding is now regulated. It is illegal to operate a crowdfunding platform without approval from the Capital Markets Authority.
The regulations have made it possible for businesses to raise as much as Sh100 million per annum as capital. Here is a snapshot of the crowdfunding sector.
Any entity wishing to provide a web-based platform through which businesses and investors can meet must first apply for a licence from the Capital Markets Authority. Before being allowed to run such a platform, one must meet a high technical and financial threshold. These include having adequate capital and capacity. Such entities are known as crowdfunding platform operators. The web-based platform is known as a crowdfunding platform.
It is on this platform that businesses seeking funds would be listed and investors make their pick in investments.
To be considered for possible listing on a platform, your business must have been in existence for at least two years and have good governance records.
Start-ups may also be considered in some select cases. Therefore, to be able to raise funding through this platform, you need to start practicing good governance. An expert can help you from the onset.
How do you get access to capital? Your operator will guide you through the onboarding and issuing process. This is where the technical issues will come in. There are certain documents and disclosures your operator will assist you in preparing to issue or make your call for funds.
There are various benefits you can offer investors in exchange for their investment. An example is offering them shares in exchange for investing in your business. This is what is known as investment-based crowdfunding.
What do the new regulations say about investors?
The regulations also regulate investors in so far as investment types and amounts are concerned.
The regulations provide the opportunity for new modes of business funding to take place.
I believe crowdfunding provides entrepreneurs with an alternative source of capital should they meet the threshold. Crowdfunding gives businesses access to a wider pool of investors from all walks of life. They could be large investors or simple retail investors.
Crowdfunding gives entrepreneurs a platform to follow their dreams. They can go public and ask for the funding they need. The regulations protect all parties involved. Borrowers are given the technical expertise required while investors are protected.
The benefit of crowdfunding for investors is that it enables them to diversify their investments. It is also an avenue through which investors can help promising entrepreneurs actualise their dreams. Philanthropists and angel investors can invest through crowdfunding.
Crowdfunding will be beneficial to society in the long run as promising ideas will not die due to lack of funding. It’s not so much the idea but the business that is eligible for crowdfunding.
Entrepreneurs, get ready!
The writer is the founder of C Mputhia Advocates
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