The ACfA Label Framework: a pan-African regulatory framework for crowdfunding

The ACfA Label Framework has been conceived by market practitioners who have a strong focus on financing African small and medium-sized enterprises (SMEs) and who deeply understand the challenges of this “missing middle” segment of the economy. The ACfA Label Framework has thus been designed with a fundamentally pragmatic goal: to reduce the financial and non-financial barriers to investment in SMEs. Although ACfA views technology – and specifically the use of online crowdfunding platforms – as a potentially important enabler of this broader goal, it considers the SME finance ecosystem as a whole as the key beneficiary of the ACfA Label Framework.

Similarly, ACfA does not view crowdfunding as a “disruptive” force in the capital markets; rather, in the absence of effective early-stage finance intermediaries in most African markets, crowdfunding is a new form of intermediation that bridges the funding gap between microfinance and private equity. The formalisation of this critical stage of capital formation improves the pass-through rate of SMEs from the private to the public markets, thereby supporting existing capital markets infrastructure such as SME segments of the national stock exchange. The pan-African approach of ACfA is equally in line with current initiatives to create regional stock exchanges and aims to foster the future pool of SME listings for these exchanges.

With its origins in the financial and economic crisis of 2008, crowdfunding has proven successful as an alternative finance tool for SMEs in many developed and, later, emerging markets. Those experiences have provided useful best practices for the development of the ACfA Label Framework. However, the African context provides markedly different ecosystems and risk factors than in developed markets. These include:

• A lower average size of investment required by SMEs,
• A more fragmented early-stage investment ecosystem,
• More challenging business environments for SMEs,
• Less favourable taxation regimes for investors in SMEs,
• Lower levels of financial education amongst the general public,
• Weaker national laws on consumer data protection,
• Greater vulnerability to illicit financial flows, money laundering and terrorism financing.

In light of these conditions, it is important that the ACfA Label Framework is localised to be adopted by market practitioners and stakeholders. Key aspects of localisation include:

• A focus on “face-to-face” SME investment readiness for investor protection,
• The use of a risk-based KYC (“Know Your Customer”) approach,
• The use of two categories of the ACfA Label to include a diverse range of intermediaries,
• The use of crowdinvestment vehicles for angel networks and first-time fund managers,
• The acceptance of a wider range of SME financial instruments,
• A bigger role for ACfA in identifying and removing systemic weaknesses,
• A supportive role for ACfA in providing trainings and services to intermediaries and stakeholders of the wider crowdfunding ecosystem.