The recent publication of the Draft Capital Markets (Investment Based Crowdfunding) Regulations 2021 (the “Regulations”) by the Cabinet Secretary for the National Treasury is a welcome response to the long awaited need for the regulation of the fintech market in Kenya.

Crowd funding refers to the act of raising small amounts of money from a large number of individuals or entities to either finance or re-finance a project or business through a crowdfunding platform and is used as a form of digital and mobile financing.

Crowd funding is considered an alternative financing initiative and a method of raising funds through digital means that favours small and medium sized enterprises who are not able to often meet the borrowing provisions required by the traditional banking and financial systems and also as an alternative to companies which are not able to raise funds in the securities market.

However, this being a new and untested system in Kenya, various issues have arisen that have affected the investors’ and the public’s confidence in this alternative financial system which include unclear regulation, relatively low levels of internet access, and societies characterized by low social trust.

The formulation of the draft Regulations therefore forms part of the Capital Market Authority (CMA)’s core objective and mandate to protect investors using such financing platforms through which the investors would be vulnerable to fraud.

The draft Regulations provide that an operator of a crowdfunding platform must be licensed by the CMA and goes on to list the criteria for obtaining a license, which include, among others:

• financial soundness and capital adequacy,
• detailed explanation of the crowdfunding system to be used,
• evidence of adequate human resources with adequate knowledge and competence on crowdfunding business;
• adequate security measures, systems capacity, business continuity plan and procedures, data integrity and confidentiality, record keeping and audit trail for daily operations and to meet emergencies; and
• an adequate risk management framework with details of its fraud detection and prevention measures;

The draft Regulations further provide that the crowdfunding platform operator’s rules shall provide for:

• Criteria for on boarding its users including procedure for on boarding issuers and investors and requirements of their onboarding including fees applicable.
• Transfer of proceeds for each funding round and procedures for monitoring of the proceeds.
• Code of conduct and ethics for its users including misconduct and proposed penalties.
• General obligations and liability of its platform users.
• Cyber security, backup systems and disaster recovery mechanisms for the platform;
• Protection of investors and public interest.

The Regulations further provide that entities eligible to participate in Crowdfunding initiatives include micro and small enterprises of at least 2 years operating record and Start-up entities with a good operating track record and a good corporate governance record, with the aggregate amount of investment instruments that can be offered by an eligible issuer within a twelve months period being a maximum amount of:

(a) Kenya shillings one hundred million for medium enterprises;

(b) Kenya Shillings fifty million for small enterprises; and

(c) Kenya Shillings twenty five million for micro enterprises.

The Regulations also provide that public listed companies and their subsidiaries, entities with a poor governance record, entities that propose to use the funds raised to provide loans, or invest in other entities shall be prohibited from raising funds through Crowdfunding.

The Regulations also place various requirements for issuers and investors participating in Crowdfunding transactions and stipulate the requirements for the Crowdfunding offering document to be developed by the Crowd funding operator.

The Regulations further provide the requirements for a Crowd funding transaction and indicate the duties of a Crowdfunding Platform Operator, including:

• a general obligation to display on its platform any relevant information relating to the platform;
• obligations on risk disclosure;
• the requirement to carry out due diligence;
• appointment of a custodian to establish and maintain a trust account;
• data protection and privacy and
• the obligation for continuous reporting to the Authority.

The Regulations also place a requirement for the Crowdfunding Platform Operator to comply with the applicable capital markets laws and regulations to the extent applicable and provide that anyone found operating a platform without a license shall be held liable and fined general damages where applicable for any loss occasioned to the other party.

The Regulations provide for the applicable license registration forms with an application fee of Kshs. 10,000/- and a licensing and annual regulatory fees of Kshs. 200,000/-.

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