Crowdfunding receives boost in Middle East

Out-Law News | 07 Oct 2019 | 11:19 am | 1 min. read

Recent steps taken by Middle East regulators to provide a regulatory environment that allows crowdfunding platforms to innovate while delivering protections for consumers should be welcomed by financial technology companies operating in the region, an expert has said.

Financial services expert Marie Chowdhry of Pinsent Masons, the law firm behind Out-Law, was commenting after the Saudi Arabia's Capital Market Authority (CMA) and the Central Bank of the UAE both took action to support the development of new business models in the crowdfunding market.

Earlier this month the CMA granted a 'financial technology experiment permit' to three businesses – Afaq Capital, Emkan Arabia and Takaful Seeds Finance Company – to enable them to each test collective equity financing platforms in Saudi Arabia.

According to the regulator, the permits enable the businesses to "test the collective equity financing platform through which investors can participate in financing SMEs for a share in their shares".

Crowdfunding is a catch-all term used to describe different fundraising models that allow a group – 'crowd' – to pool funds and finance specific projects or businesses. Equity crowdfunding allows investors to buy shares in start-up and SME businesses.

Another form of crowdfunding is loan-based crowdfunding. Loan-based crowdfunding has grown in popularity since the global financial crisis of 2007-8 resulted in a squeeze on lending by traditional financial institutions. Through loan-based crowdfunding platforms, people and businesses can obtain access to finance from alternative lenders, including on a peer-to-peer basis.

Loan-based crowdfunding in the UAE is set to be subjected to stricter controls with the introduction of a new regime for the licensing and regulation of crowdfunding platforms. The Central Bank of the UAE has published a draft regulation on loan-based crowdfunding platforms and invited feedback on the proposals via a separate consultation paper.

Equity and loan-based crowdfunding is already regulated in some jurisdictions, including the UK. Final negotiations on new EU crowdfunding rules are also expected to reach conclusion in the coming months.

In the Middle East, equity crowdfunding platforms are already subject to regulation by the Dubai Financial Services Authority within the Dubai International Financial Centre (DIFC).

Marie Chowdhry of Pinsent Masons said the latest steps taken by the Saudi CMA and Central Bank of the UAE demonstrates how crowdfunding is taking off in the region, as well as the drive by regulators to monitor and facilitate developments. 

"The World Bank has predicted that global investment in crowdfunding will hit $93 billion by 2025," Chowdhry said. "The recent regulatory developments in Saudi Arabia and the UAE demonstrate just how seriously regulators in the region are taking this trend."

"Whilst crowdfunding is still relatively small across the Middle East, and therefore still needs the flexibility to develop and innovate, the degree of variation in operating model, even between crowdfunding platforms of the same type, has meant that regulation of this market is required to ensure reliability of the model as an area of growth is maintained and users are protected," she said.