Crowdfunding is a way of raising finance from many individuals through an online platform. Crowdfunding business models generally involve a platform that acts as a meeting point through which fund seekers advertise their projects to potential fund contributors. There are three main types of platforms. These are equity-based, loan-based and donation-based platforms. In a wider sense, equity and loan based crowdfunding provide entrepreneurs with capital they need to transform an innovative idea into a revenue generating entity and in so doing, stimulate small businesses growth at a macro level. The rise of crowdfunding in the UK is reflective of not only technological advances but is partly due to the 2008 financial crisis after which banks reduced their lending to start-ups and SMEs making crowdfunding increasingly popular as a source of funding.
In Africa crowdfunding was initially donation based. However there has been a shift to equity-based crowdfunding in sub-Saharan Africa and the number of crowdfunding platforms have been steadily increasing. This is due to the rise in the number of start-ups in sub-Saharan Africa resorting to crowdfunding, the growth of the middle class population and the use of mobile technology. In areas where there is poor or no internet connectivity, crowdfunding platforms have enabled their users to promote their ventures through the use of SMS messages by which they are able to reach over 400 million African mobile phone subscribers.
In Kenya the concept of crowdfunding draws on the existing culture of giving called “harambee”, a Swahili word for “all pull together”. Through a “harambee” a fundraiser receives donations for personal charitable causes from his friends and family. Individuals are able to transfer money by ‘Mpesa’, a tech driven system which enables its users to transmit money instantly through their mobile phones to the fundraiser. Crowdfunding differs from the concept of ‘harambee’ as the platforms enable start-ups companies and entrepreneurs to reach a wider spectrum of lenders or investors. A new crowdfunding platform for mobile phones called M-Changa has recently been launched in Kenya which enables social enterprise companies to raise funds and also facilitates personal fundraising.
In the UK the Financial Conduct Authority regulates both loan based and equity based crowdfunding. Donation based crowdfunding falls outside the remit of the UK Securities regulations as investing parties do not receive any form of financial return. Crowdfunding still remains unregulated in Africa. As the number of equity-based crowdfunding platforms grow and as they tend to attract large numbers of small investors many of whom are unsophisticated (as in the UK) there is a need for standardised broad-based regulatory protection. How to achieve a balance between facilitating the industry’s growth and affording sufficient protection to crowdfunding investment participants will be a significant issue for policy makers.
If you are a start-up company and need advice on your commercial agreements, please do not hesitate to contact our commercial team on: [email protected]
Recent Posts