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What you need to know to crowdfund your project

What you need to know to crowdfund your project

Thanks to crowdfunding platforms, you can now approach the public to finance your project

The idea of matching people who need money with the people who have money to invest is not new; what is new is the way this concept of intermediation is facilitated (and made easier) by technology and recognised by law. While crowdfunding is not yet a household word in the region, it has generated a buzz amongst entrepreneurs, especially those in the tech space who see crowdfunding as a potential source of funding for their business.

Crowdfunding is particularly seen as a prospective funding tool for creative work such as blogging, journalism, independent film and music as well as for funding start-up companies.

Data collected by Cambridge Centre for Alternative Finance (CCAF) reveals that crowdfunding has raised $304.53bn worldwide in 2020, with the average funding per campaign in the crowdfunding segment amounting to $5,270. This development is even more significant for SMEs, who, according to the World Economic Forum, are poorly represented with just 7 per cent of total bank loans (lowest in the world), even though they constitute about 96 per cent of registered companies in the Middle East and North Africa region. Therefore, crowdfunding can help bridge this staggering credit gap as currently, more than half of the market share of crowdfunding is occupied by commercial businesses and entrepreneurs, with social causes, films and performing art coming in second.

Smart Crowd, a homegrown crowdfunding start-up has managed to draw a lot of attention, as it offers an opportunity to own a part of real estate for just a few thousand Dirhams. Smart Crowd has managed to crowdfund several real estate projects since its regulatory approval by Dubai Financial Services Authority (DFSA) in early 2018.

Another good example in this space is Beehive, an idea released in 2014 with an initial investment of $2.5m mostly from people close to the platform’s management. It now claims to have lent more than Dhs600m through its platform.

These start-ups are an indication that the crowdfunding space is slowly yet steadily gathering steam in the region.

So, what’s in store for entrepreneurs and small businesses seeking to raise funds through crowdfunding?

Autonomy of entrepreneurs
Crowdfunding platforms (CFP) provide entrepreneurs access to capital beyond what is accessible to them through traditional forms such as accredited banks, investors and venture capitalists. Depending on the type of crowdfunding, it can also allow companies to get funding without accumulating debt or giving away equity.

Economical method of raising finance
Crowdfunding provides entrepreneurs a faster and more economical form of raising finance and by using CFPs, businesses can circumvent some of the major issues they would face getting funding from traditional forms of finance. From an investor perspective, crowdfunding is a more cost-effective alternative in terms of lower fees and tax deductions.

Improved social engagement
A successful crowdfunding campaign shows investors and the market that the venture has sufficient market validation and gives the venture a proof of concept from the onset. It also allows a business venture to receive input from a wide range of players in the market that could help the business grow and develop. Investors can see how the venture is progressing and monitor the venture’s practices.

Economic benefits
Crowdfunding expands participation in the market by breaking down traditional institutional barriers, encouraging entrepreneurship and active participation from all the market players. Crowdfunding improves general access to financial resources for SMEs and individual entrepreneurs.

Robust regulatory mechanism
Both Dubai’s DIFC and Abu Dhabi’s ADGM have laid down the necessary rules and regulations of CFPs for licensing, organisation and protection of rights and obligations of interested parties. Both sets of laws include a focus on disclosure of risks, pre and post-funding due diligence of the entities raising funds, the creation of an optional exit facility to give investors the ability to sell their participations to other investors on the same platform, placing controls to ensure that this only permits trades between existing clients and does not become a trading platform or business in its own right.

There is a common notion that crowdfunding is predominantly equity-based. However, this is a misconception and may have acted as an impediment to the growth of the “alternate finance” market. Small businesses and entrepreneurs may choose from an assortment of avenues to suit their capital requirements. Various options have surfaced over the years that are now backed by regulations, further adding to the credibility of this new age finance solution.

Crowdfunding models
Reward-based crowdfunding allows investors to pledge funds towards a campaign in return for a non-financial and often pre-determined reward of intrinsic or emotional value. Zommal is a successful example of this type of sponsoring and reward-based crowdfunding in the Arab region.

Lending-based crowdfunding is a newer model of intermediation by connecting lenders and borrowers directly. This form of crowdfunding is often seen as an alternative to traditional banking. LendingClub, based in California, has been offering lending-based crowdfunding solutions since 2007 via peer-to-peer lending.

Donation-based crowdfunding serves to provide money towards helping a social cause. It is often used by individuals seeking donations to support charitable projects in return for symbolic rewards, i.e. public recognition. Yallagive is the first licensed online donation and CFP in the Middle East.

Real estate crowdfunding is a type of property investment whereby the funds of many investors are pooled together and used to buy a property or where funds are lent to developers as a loan to finance a property development. SmartCrowd is regulated by DFSA as a real estate CFP.

Equity-based crowdfunding is the most popular mode of crowdfunding. Here, investors put money into a business, with the return on such investment coming eventually in the form of dividends and appreciation in the value of shares. Eureeca is a platform facilitating equity-based crowdfunding and is registered and regulated in the UK, Netherlands and Malaysia.

Kokila Alagh and Barkha Doshi are founder and senior associate at KARM Legal Consultants respectively

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