New CMA rules leave online investors exposed to risks

Investors who lose funds through online investment portals or crowdfunding will not be entitled to claim damages from the state-run compensation fund in new regulations released by Treasury.

The new Capital Markets rules will require investors to sign a risk disclaimer absolving authorities of the risk carried under crowdfunding- the use of small amounts of capital from a large number of individuals to finance a business venture.

They will acknowledge they are investing in high risk businesses without adequate disclosures and surrender their ability to access the Investor Compensation Fund run by the Capital Markets Authority (CMA) which covers losses as a result of a closed investment bank or broker.

Treasury released the rules as investors and legislators question the role of the markets regulator for failing to police the unlicensed products exposing guidable investors to losses running into billions.

“A crowdfunding platform operator shall ensure every investor affirms to a risk acknowledgement form prior to acceptance of the offer in which the investor confirms that they will not be entitled to claim from the Investor Compensation Fund,” Treasury CS Ukur Yatani said in the Capital Markets investment based crowdfunding regulations.

“Their understanding that the proposed investment is a risky investment and they are able to economically absorb and sustain the complete loss of the investment they intend to make,” the CS said.

Investors can only have recourse to regulatory support from CMA if they have invested in regulated products offered through licensed entities.

CMA says it only intervenes in cases which come to their attention through market intelligence where entities are engaging in regulated activities in the capital markets without obtaining a license or approval of the products offered. The regulator told the National Assembly Committee it managed to force County Capital which was operating fund management services without a license to refund Sh4 million to Esther Njeri after she reported the matter.

Claimants who lose their money in such schemes have always found it difficult to recover their money resorting to courts of law or public shaming.

But even courts have refused to intervene in some matters since they fall under private treaties with terms subject to arbitration and can only come in when there if proof of willful fraud.

High court dismissed the case of more than 39,000 victims of a pyramid schemes who lost about Sh8 billion 15 years ago on grounds they had a contractual relationship between themselves and the owners of the schemes but were seeking unsubstantiated claims against the government.

Mr Kenneth Kasinga whose suit against Cytonn was thrown out was told the Court does not rule out arbitration merely on the allegation of fraud but he has to demonstrate that fraud actually occurred.

The regulator has had trouble explaining how investors have lost billions in online schemes where Kenyans are lured into collecting money in exchange shares in companies but sponsors vanish without a trace.

CMA said that one such scam involved Women Investing in Entrepreneurship (WIIE) which was raising capital and Issuing shares to the public without a license.

The Authority said it froze the firms’ accounts warned the public and instituted criminal investigations.