Columnists

Crowdfunding is a welcome SMEs capital raising avenue

crowd
rufusmwanyasi_img

Summary

  • Crowdfunding is emerging as a new capital-raising alternative for micro and small enterprises worldwide.
  • One industry report forecasts the sector to grow at a CAGR of 15 percent or by Sh19.6 trillion during the 2021-2025 period.

Crowdfunding is emerging as a new capital raising alternative for micro and small enterprises worldwide.

The sector, which involves funding of micro/small and medium enterprises (MSMEs) by raising small amounts of money from a large number of people, typically via the internet, is also growing steadily.

One industry report forecasts the sector to grow at a CAGR of 15 percent or by Sh19.6 trillion during the 2021-2025 period.

Locally, the need to broaden the funding landscape for small firms cannot be overstated enough. MSMEs account for 24 percent of the country’s gross domestic product (GDP), over 90 percent of private sector enterprises and 93 percent of the total labour force in the economy.

Unfortunately, Kenya's MSME finance gap is estimated at Sh1.9 trillion making it the largest in East Africa.

Thankfully, the proposed Capital Markets Authority (CMA) draft crowdfunding regulations (Investment Based Crowdfunding, Regulations, 2021), could offer some help.

Stand-out proposals in include that investors will not be entitled to claim from the Investor Compensation Fund (should their crowdfunding investments “burn”), retail investors are subjected to a maximum of Sh100,000 (unless one is a sophisticated investor) and no crowdfunding offering shall not remain open for more than 60 days.

Moreover, a crowdfunding platform operator must have a minimum paid-up capital of Sh10 million to be licensed, eligible MSMEs are also expected to have at least a minimum of two years’ operating track record with a good corporate governance record.

It says that no issuer is allowed within a 12 months period to raise a maximum amount of Sh100 million (though a crowdfunding platform operator may apply to the authority for a no-objection where an issuer seeks to raise more than the set maximum amount within the given duration).

That said, here are my two-and-a-half cents in. For confidence sake, there should be a category for an anchor investor who should enjoy special rights/protections codified in the regulations, given the access to raise upwards of Sh100 million, issuers should be mandated to file at least their annual audited financial reports and an orderly process for liquidation (most crowdfunding ventures go bust more often than not) should be articulated for investors comfort.

Moreover, being illiquid investments, the regulator should include an exit process, either transitioning the businesses to the listed markets or utilising the Unquoted Securities Platform (USP) markets.

This is an important point, as at the end of the day, investors want to generate a return and exit.

To put it all together, the initiative is indeed a laudable move. It should go a long way to bridge the MSME funding gap. But besides increasing access to capital, for retail investors, the move democratises venture capital.

Through equity crowdfunding, ordinary retail investors will play the role of venture capitalist, permitting people to invest directly into private companies whose deals were previously limited to wealthy or sophisticated investors.

Though crowdfunding is certainly not a cure-all for MSMEs looking for money, it is undoubtedly the right thing to do given the circumstances surrounding our local MSMEs.

Mr Mwanyasi is managing director at Canaan Capital