Crowdfunding: A New Regime for SME Financing in Africa
Coming just two weeks after the launch of the operational phase of the African Continental Free Trade Agreement (AfCFTA), there could be no better timing for the launch of the ACfA Label Framework set for 22 July 2019. The ACfA Label is a framework of standards for securities-based crowdfunding platforms that aims at enabling tech-based platforms that reduce the barriers to investment in SMEs. Pan-African in scope, it sets out to harmonise regulations for cross-border crowdfunding in Africa. This is of particular interest given the importance of regional trade for the growth of job-creating small and medium enterprises and the impetus of the AfCFTA[1]. It is against this backdrop that the Label Framework is founded to allow for the self-regulation of crowdfunding platforms, to spur investment in SMEs, resulting in job creation and growth.
Crowdfunding
The African Crowdfunding Association (ACfA) draws inspiration from the success crowdfunding has had in the developed world. The African context, however, is a different ecosystem with distinct risk factors ranging from challenging business environments for SMEs and investors alike, to the menace of illicit financial flows and money laundering. With an appropriate framework to mitigate these risks, crowdfunding offers an opportunity for SME financing in Africa; it is a new funding model adapted to the size of investment required by most African SMEs thus effectively filling the funding gap between microfinance and private equity, or as development finance practitioners call it, “the missing middle segment”. Securities-based crowdfunding is relatively new in Africa, and therefore a grey area from a regulatory point of view. It is largely unregulated in most African countries or outright illegal in a few. This lack of legislation means no guarantee for investors that they will have a degree of security in their venture. The ACfA Label Framework seeks to address these with a risk based “know-your-customer” approach. Further, the ACfA Label Framework allows crowdfunding intermediaries to categorise individual investors by their investable income, level of financial education, expectation on returns and the overall suitability of the securities offering to their portfolio, departing from the common practice in securities markets where offerings of securities to the public is prohibited. This not only formalises a fundraising method that has for a long time been practised in Africa where SMEs sought capital from chamas/tontines[2] but also incentivises angel investors, thereby creating a formal, safe and cost-effective fundraising method. In a nutshell, the framework creates an exemption for SMEs to classic securities laws that prohibit securities offerings, creating a new fundraising regime for investors and small businesses. It has been localised appropriately to address region-specific challenges; this, coupled with a longstanding relationship with different regulatory authorities places ACfA in a lead to supervise crowdfunding on the continent.
Implementation
Success of the framework lies in coordination of key actors: ACfA, regulators and crowdfunding intermediaries. More specifically, regulators are encouraged to recognise ACfA as the competent authority to regulate securities-based crowdfunding, allowing it to approve crowdfunding intermediaries, supervise their daily operations, audit them and enforce the framework. For this to happen, crowdfunding intermediaries will have to be ‘labelled’ as compliant with the ACfA Label Framework; this can only be granted by ACfA.
There is reason to be optimistic. ACfA has positively engaged 14 regulators so far: some such as Kenya’s Capital Markets Authority contributed to the development of the ACfA Label while Mauritius Africa FinTech Hub will host the launch. These regulators have placed themselves as the vanguard of crowdfunding in Africa and we hope that their pragmatism will culminate in adoption of the ACfA Label Framework as an innovative tool for capital markets that serve SMEs.
–Dennis Kabutha, M.A International Development Candidate at Sciences Po Paris & Intern at ACfA.
[1] ACfA Label Framework
[2] Refers to informal savings and credit societies mainly comprising of friends, family, community members or generally a group of people with a common interest.
