In a bid to regulate a largely unregulated sphere, the Capital Markets Authority (CMA/Authority) of Kenya gazetted new regulations on crowdfunding, Capital Markets (Investment Based Crowdfunding) Regulations (hereinafter “the Regulations”) that came into effect on 30th September 2022. The regulations are aimed at allowing Kenyan registered micro, small, and medium enterprises (MSME) with a two-years’ operating track record and sound corporate governance record to raise funds from investors through licensed crowdfunding platforms operating in the country while at the same time ensuring protection of investors and promotion of transparency in their operations of crowdfunding platforms.
Simply defined, crowdfunding refers to the act of raising money from many individuals or entities to either finance a project or business through a crowdfunding platform. Typically, crowdfunding has three critical players: the issuer who is the person fundraising, the investor and the technological platform which facilitates interaction between investors and issuers and other related interactions. The Regulations apply where: the platform is established in Kenya; or majority of the key components of the platform when taken together are physically located in Kenya; or the platform is located outside Kenya but actively targets Kenyan investors.
Regulation 4 provides that all persons or entities operating, maintaining an investment based crowdfunding platform to be licensed by the Authority and makes it an offense to operate such a platform without first obtaining a license from the Authority. The regulations further provide for the licensing requirements and documentation, eligibility criteria, and rules for the operation of investment crowdfunding platform. A crowdfunding platform license application must include the following documents: a certified copy of the certificate of incorporation, evidence of a firm's financial soundness and capital adequacy, and a business continuity and disaster recovery plan, a business plan with financial projections, evidence of adequate human resources, details of the organization structure and management profile, details of platform outsourcing arrangements (if any), and detailed information about the platform. Under sub-regulation 39, an entity operating an investment-based crowd fund is required obtain a license from the Authority within a period of twelve months i.e. by 30th September 2023.
Regulation 14 limits the maximum amount of funds that can be raised from a crowdfunding platform by a given micro, small and medium enterprises or startup to kshs. 100 million for a 12-month period and prohibits the following entities from raising money through crowdfunding platforms: public listed companies and their subsidiaries; entities with a poor governance record; entities that intend to use the funds raised to provide loans or invest in other entities; and any other entity as may be specified by the Authority.
To limit the risk exposure of unsophisticated investors, the regulations limit the investment by unsophisticated investors to the investment limits prescribed by the crowdfunding platform operator but up to a maximum of Kenya shillings one hundred thousand. There is no investment limit for sophisticated investors. Further, the regulations require the operators of crowdfunding platforms to come up with rules that provides for inter alia: criteria for onboarding users; code of conduct and ethics; communication policy; rules and procedure for their trading facility; cyber security; dispute resolution among other requirements.
Other key items introduced by the regulations include: the requirement of issuers to have an offering documents that complies with the disclosures set forth under schedule four of the regulations; the actions to be taken and timelines thereof upon failure to meet the targeted amount of issue; investors’ right of withdrawal; restriction imposed on the platform against raising own funds through its platform, offering investment advice, handling investors, guaranteeing returns and promising a guaranteed outcome.
In addition to this regulations, a Crowdfunding platform operator is required to comply with: the Capital Markets (Conduct of Business)(Market Intermediaries) Regulations, 2011; the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011; the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets; and any other existing capital market laws and Regulations to the extent applicable except where expressly exempted by the Authority.
The Capital Markets (Investment-Based Crowdfunding) Regulations, 2022 will play a crucial role in promoting the growth of investments in the country through innovative products. The crowdfunding regulations of Kenya 2022 are also an important step towards promoting transparency and protecting investors in the crowdfunding space. The regulations will help to build a more trustworthy and reliable crowdfunding industry and provide a safe and secure environment for investors and entrepreneurs to participate in crowdfunding campaigns. Further, investors’ personal details will be subjected to the Data Protection Act, 2019, which will ensure confidentiality and realization of their right to privacy.
Article by James Karuga and Fridah Gatwiri
Published on February 22, 2023