Introduction
In the digital age, everyone is more connected than ever before. This means that we all have access to an audience we have not previously been able to access. This is more so in the case of raising funds. Many Entrepreneurs have great ideas for businesses but require capital. Many now make use of Crowdfunding as a means to raise capital and finance their businesses.
Crowdfunding is defined as the practice of getting a large number of people to each give small amounts of money to provide the finance for a business project, typically using the internet[1]. Crowdfunding is not only for business ventures but can also be used for charitable and creative endeavours. They make use of a platform such as Kickstarter, GofundMe and Backabuddy to facilitate these transactions.
Forms of Crowdfunding
The most common type of Crowdfunding is Donation Crowdfunding. With Donation Crowdfunding, people donate money to either a business organisation or a person, to assist them with their project or business activity. There are no returns received by the person giving the money.
Another form of Crowdfunding is Loan-based Crowdfunding, this is where people lend money to individuals or businesses for financial returns in the form of interest payments and repayment of capital over time.
Rewards-based Crowdfunding is an often used form of Crowdfunding. In this instance, Entrepreneurs will request financial donations from the public in return for a product or service.
Once the funding targets have been reached, the Funders will receive their rewards. An excellent example of this is the funding of the digitising of the Labia Theatre in Cape Town where donors could be rewarded with a tour of the theatre, tickets to some of the shows or having their names displayed on the screen before a showing.
Another form of Crowdfunding that is popular with Small and Medium-sized Enterprises (SMEs) is Equity Crowdfunding. This is where Investors would fund an SME in return for equity (shares) in the business. The Enterprise then uses that funding to kick start its business. This form requires the most regulation as members of the public become owners of the business and have rights attached to their investment. This form of Crowdfunding has received the most attention of Regulators.
Regulation of Crowdfunding in South Africa
As it currently stands, Crowdfunding is not explicitly regulated in South Africa. The Financial Services Board (FSB) have advised as such, but some Crowdfunding activities may already be subject to existing legislation[2].
Such legislation includes the Banks Act 31 of 1990; the Companies Act 71 of 2008; Collective Investment Schemes Control Act 45 of 2002; Financial Advisory and Intermediary Services Act 37 of 2002; Financial Markets Act 19 of 2012 and National Credit Act 34 of 2005. The application of each piece of legislation will depend on the nature of the transaction. For example, the Companies Act 71 of 2008 would be applicable in Equity Crowdfunding transactions while the National Credit Act 34 of 2005 would apply to Loan-based Crowdfunding transactions.
It will also be dependent on the location of the Funder and business or individual requesting funding as different jurisdictions have different requirements for cross-border transactions. In the United States for an example, Congress passed a law called the Jumpstart Our Business Startups Act to loosen restrictions on capital raising for small businesses and embracing of crowdfunding.
Conclusion
It is essential for Regulators to understand all the different forms Crowdfunding can take and not address it under one umbrella. While Crowdfunding remains unregulated, some types of Crowdfunding will find themselves already regulated by already existing legislation.
It is therefore essential that the businesses requesting funding ensure they understand all the legislation the activity can potentially fall under and ensure compliance. Similarly, Funders must know the applicable laws to their transactions.
Should you require assistance with any Crowdfunding transaction or need advice, please contact SchoemanLaw Inc.
[1] https://dictionary.cambridge.org/dictionary/english/crowdfunding visited 12 March 2019
[2] https://www.fsca.co.za/News%20Documents/2016%20FSB%20Bulletin%20First%20Quarter.pdf visited on 13 March 2019
Recent Comments