Treasury issues draft rules for crowdfunding to curb fraud

The Treasury has published draft rules to guide the raising of capital from anyone through online investment portals or crowdfunding to curb the loss of investor cash through unregulated investment products.

The new rules propose strict conditions for collecting small amounts of capital from a large number of individuals to finance a business venture including setting a minimum capital of Sh10 million.

Any crowdfunding platform established in Kenya or outside the country but targeting local investors must be licensed by the authority to operate.

Treasury released the rules as Capital Markets Authority (CMA) revealed it is currently handling about 500 cases where investors have complained of losing up to Sh1 billion through online forex frauds, illegally pooled funds, cryptocurrency, real-estate and Ponzi schemes.

“A person who operates or intends to operate a crowdfunding platform shall obtain approval from the authority to operate the crowdfunding platform,” Treasury Cabinet secretary Ukur Yatani said in the capital markets investment-based crowdfunding regulations.

Investment-based crowdfunding has been a growing alternative instrument as Kenyans find other avenues to grow their wealth. It involves raising cash from individuals or groups online or on a mobile platform to fund start-ups or small businesses in form of debt or equity.

The regulator has, however, raised concerns that some of the money is collected and the promoters vanish with investor cash.

The CMA cited cases where it has intervened including Women Investing in Entrepreneurship, Winnas Sacco and Choice Microfinance, which were raising capital from the public by issuing shares without the regulator’s nod.

Under the new rules raising money by crowdfunding platforms will require regulatory approval. The rules set licensing application fee at Sh10,000 and an annual regulatory charge of Sh200,000.

The application for a licence shall also include a certificate of incorporation, evidence of a firm’s financial soundness and capital adequacy and a business continuity plan.

Crowdfunding plans will only be allowed to collect money from sophisticated investors and less than Sh100,000 from individual retail investors.

Investors will be refunded their money after 48 hours if they cancel their offer to purchase securities or investment instruments.

Where a business is unable to meet the minimum threshold for the targeted amount, the offer shall be withdrawn and the crowdfunding platform operator shall refund monies to the investors within 48 hours.

The regulator also said the platform will have to warn the investors that investing through the platform is speculative and risky, that they may lose their entire investment and that the money will be put in a growing venture.

The platform will also have to disclose the fees and charges, issue a monthly report on the details of the issuers, investors and the amount invested.