Crowdfunding is a key source of revenue for expansion
- As businesses, small and medium enterprises explore various financing options, the securities industry offers a viable alternative using crowdfunding platforms.
- They present attractive and innovative asset classes to investors in addition to traditional debt and common equity products.
- Crowdfunding is the practice of raising funds from groups, through online mobile platforms or social media.
As businesses, small and medium enterprises explore various financing options, the securities industry offers a viable alternative using crowdfunding platforms. They present attractive and innovative asset classes to investors in addition to traditional debt and common equity products.
Crowdfunding is the practice of raising funds from groups, through online mobile platforms or social media. It offers an alternative way for small businesses to pool capital from a variety of investors, clients or lenders in a short period of time.
This form of fundraising is not only used to fund small and medium-sized businesses, it also supports social causes and creative projects, among others. Investment-based crowdfunding can be achieved through debt and / or equity or hybrid models.
The Capital Markets Authority supports market development, innovation and the adoption of emerging technologies in financing and analysis. Steps are also being taken to facilitate the proper disclosure of platforms such as crowdfunding so that participants understand the risks involved. Clearly, alternative funding platforms have the potential to fundamentally change the funding model of financial markets.
The global crowdfunding market has experienced strong growth with good prospects. According to Statista, the value of transactions in the segment is expected to reach $ 1 billion in 2021 globally.
Africa represents around 25% of flows with growth potential. In 2018, the region received $ 209 million, with Zambia, Kenya and South Africa recording the highest crowdfunding volumes of $ 40 million, $ 35 million and $ 27 million respectively.
Volumes are expected to increase as regulators lead efforts to design appropriate policies and regulations to ensure consumer / investor protection.
Globally, regulators recognize the importance of crowdfunding as an alternative source of capital that can benefit businesses, individuals and nonprofits, while ensuring that markets foster financial inclusion and economic development.
There are different types of crowdfunding. Equity crowdfunding allows investors to finance private start-ups and small businesses that are not publicly traded in exchange for equity. In doing so, investors receive shares of the company in exchange for cash, as in a typical initial public offering (IPO).
In contrast, in debt crowdfunding, investors have the choice of placing their money in the security of a company through debt instruments such as corporate bonds or medium-term notes, issued to finance. operations or expansion plans.
Companies can also take advantage of this avenue by issuing such instruments through a crowdfunding platform and signing a debt-based contract with interest-based returns with investors.
These debt-based crowdfunding models incorporate data analytics, Know Your Client (KYC), and credit scoring models for investors and issuers to determine their ability to honor interest and debt when they arrive. due.
Equity and debt based crowdfunding has the ability to transform access to finance for medium and small businesses in the capital market, not only by bringing competition to the corporate market, but also by expanding the pool. of capital available to fundraisers at a lower cost.
They also have the advantage of rapidly deploying capital, thereby creating efficiencies and competition that reduce online risk.
This ensures that the beneficiary SMEs are more profitable. In addition, crowdfunding provides direct market access and eliminates excessive costs for investors due to intermediation. It is also considered a scalable, flexible and efficient fundraising solution compared to conventional methods.
In October 2020, the Authority granted a “ no objection ” to Pezesha Africa Limited (Pezesha) to operate its debt-based crowdfunding platform in the Kenyan financial markets, after a successful testing period of ‘one year in the regulatory sandbox of the CMA.
The sandbox was launched in March 2019. A no objection requires companies or licensed entities to undertake periodic reporting and compliance requirements, including: effective risk management framework, transparency, capital adequacy, integrity , corporate governance, fair, orderly and efficient conduct of business, protection of investor interests and disclosure obligations.
In accordance with the CMA’s regulatory mandate, the emergence of these potentially disruptive technologies will need to be treated with caution due to associated risks such as prudential risks which may not be fully appreciated. It also presents a new field of market conduct risks that can discourage retail investors if not properly managed.
Viola Kilel, Senior Product Development Officer, Capital Markets Authority