DIFC regulator tightens up property crowdfunding rules

The new rules, which include investment limits and property valuation requirements, came into force on 1 July 2019. Following their implementation, the DFSA was forced to issue a further feedback statement (5-page / 455KB PDF) clarifying the rationale behind the new rules, after finding that investors "did not appreciate what [the new rules were] trying to achieve".

"When we looked at the regime we had put in place for crowdfunding, we realised the PICPs [property investment crowdfunding platforms] presented different risks that our crowdfunding regime did not address," the DFSA said in its feedback statement. "This is because, when we established our regime for crowdfunding, the regime focused on the risks of lending to, or investing in, SME businesses, not the financing or real estate assets associated with property investment crowdfunding."

The DFSA is particularly concerned that a PICP operator's activities may "stray into other types of financial services activities", such as managing assets, providing portfolio management or providing advice. Operators of crowdfunding platforms of any type are prohibited from carrying out these activities, it said.

"We are not comfortable with an operator of a crowdfunding platform carrying out these activities, for example, providing advice, given the potential bias that might influence investors to take part in certain investments," it said.

"We do not believe that these restrictions cause detriment to investors or stop them from investing in many properties offered on a PICP (subject to investment limits), or indeed offered through other investment vehicles, such as real estate investment trusts (REITs) or property funds ... We remain of the view that if operators of PICPs find the regime too restrictive and wish to offer diversification, and/or manage portfolios, then they should establish a property fund," it said.

PICPs allow multiple investors to come together and purchase a property, usually by way of a special purpose vehicle that holds title to the property. This investment structure generally offers a rental return to investors, which provides a regular income, as well as the potential for capital appreciation depending on market movements.

Existing DFSA crowdfunding rules - which will continue to apply to PICPs - impose an annual investment limit of US$50,000 on retail investors, and limit the amount offered on a single crowdfunded investment to $5 million. In addition, a PICP operator must obtain a valuation report for every property listed on the platform, and disclose this to potential investors.

Fintech expert Marie Chowdhry of Pinsent Masons, the law firm behind Out-Law, said: "At its own admission, the DFSA has confirmed that a number of respondents to its December 2018 consultation paper did not fully grasp nor appreciate what the new PICP regime was trying to achieve. As a result, and to allay some of these concerns, it issued the feedback statement on the finalised regime in an effort to explain the rationale behind its position".

"Whilst providing further guidance in the form of the feedback statement is helpful for the market, it's unlikely that those already operating within this space or indeed looking to set up a PCIP in the DIFC in the near future will necessarily look favourably on the new conditions imposed as part of this new sub-set of the existing crowdfunding regime," she said.