Legal issues to consider when crowdfunding

Crowdfunding is one of the latest ways of raising money for innovators and entrepreneurs. Apps like M-changa, allow fund raising for a wide variety of purposes for example, innovators who seek to commercialise their ideas. Others use the platform for charitable purposes.

Crowdfunding, in essence, involves raising money from a large number of people, typically through the Internet. It has been successfully used in such social media platforms as Facebook. According to one report, the Massolutions Crowd Funding Report, crowdfunding is likely to raise $300 billion in the foreseeable future.

In Kenya it is a relatively new concept though it has traditionally existed through harambees. Harambees have been used mostly as a community self-help event to raise money for events such as weddings and funding education.

In layman’s understanding, I would view crowdfunding as a form of “online harambee” with a few differences when compared to the traditional harambee. Firstly, I believe that unlike a harambee where participants are known and invited, crowdfunding exists in the wider public forum.

From my reading these are some of the advantages. One, it gives the concept owner a larger access to funds unlike the traditional harambee. The fact that it is online means factors such as geographical limits are minimised as the platform is accessible worldwide.

I believe it is also easier to access finance in this way as there is no need for collateral such as security or other rigorous steps required by other lenders. It accords one free marketing due to the fact that the concept is publicly available. Despite the advantages, it’s still not clear how much has been raised using this platform.

There are a lot of risks when using this form of fund raising depending on the role of the party involved. In this article I have separated the risks attendant to the concept holder, the crowdfunding app owners and the public.

A potential lender faces the risk of legalities about the investment. For example is the concept holder genuine and is the venture legal? A proper due diligence should be undertaken by potential investors before lending through crowdfunding.

READ: ‘Clean’ techpreneurs to benefit from crowdfunding support

The concept holder holds the risk of loss of potential intellectual property rights as he has to disclose the concept to attract funding. To mitigate this, I would advise the him or her to first register intellectual property rights before listing their concepts.

There is also reputational risk and integrity issues that come with this method of fund raising. The concept holder should therefore ensure that the concept is developed well.

The app owner, who is the provider of the crowd funding app faces legal risk. That is, is the concept legal? The law criminalises obtaining money by false pretences therefore the app provider must establish that the purpose for which funds are being raised, are factually correct.

There is also the issue of getting licences and approvals from the Capital Markets Authority (CMA). I believe the CMA approval may be required for crowdfunding as it covers part of the CMA mandate and that is, scrutinising offers to the public for monetary subscriptions.

For the app owner, these risks can be resolved by getting regulatory approvals before hosting the app and also signing agreements with the concept holders who seek financing.

These agreements should contain proper clauses on indemnities for any illegalities, dispute resolution and when it comes with interfacing with the public, the developer should draft disclaimers encouraging lenders to do their independent due diligence.