Investment-Based Crowdfunding Regulations, 2022

Oct 31, 2022 | Capital Markets Authority, Law, Our Highlights


Crowdfunding is raising funds to fund a project or a business through a website, internet-based portal, or technological application (crowdfunding platform) that allows interaction between investors and issuers. One will require authorization from Capital Markets Authority (CMA) to operate a crowdfunding platform.

Investment-based Crowdfunding campaigns: the process of crowdfunding in exchange for shares, debt securities, or any investment instrument approved by the CMA. “Investment instruments” refers to securities indicated under s 2 of the Capital Markets Act.

The Crowdfunding Operator

The IBC Regulations apply to any crowdfunding established in Kenya or outside Kenya and directly or indirectly has its activities in Kenya or targets investors in Kenya. Therefore, subject to the applicable conditions, such a crowdfunding entity will require licensing from CMA.

It is a requirement that an applicant should be a company limited by shares with a paid-up share capital of KES. 5 million (there are tax implications and the need to have a Certified Secretary) and a minimum liquid capital of KES. 10 million or 8% of its liabilities (whichever is higher).

The IBC Regulations are silent on how long CMA will assess the application (the application fee is KES. 10,000). However, once approved, the applicant will pay KES. 100,000 as the licensing fee. Other applicable fees besides annual regulatory fees will be 0.15% of the amount raised in each crowdfunding.

If CMA declines to grant a license, the applicant has 15 days from the date of receipt of communication on denial to appeal the decision to the Capital Markets Tribunal. Also, a Crowdfunding Operator can have its license subjected to suspension, restriction, or revocation, and, for purposes of cessation, the Operator is required to issue a thirty-day notice to CMA – CMA reserves the right to place pre-conditions for purposes of orderly cessation.

An Operator must establish a Custodian Account with a financial institution licensed under the Banking Act (simply regulated by the Central Bank of Kenya – CBK). The Custodian Bank will hold the crowdfunding funds in trust and have a separate account for each raising event.

An Operator is restricted from raising its own funds through its platform, offering investment advice, handling investor funds, promising a guaranteed return to investors, and promising a guaranteed outcome of the offer to the issuer.

The Crowdfunding websites are required to comply with the Data Protection Act and its subsidiary regulations – which extends to securing a Data Protection Certificate from the Office of the Data Protection Commissioner (ODPC).

side note:

there seems to be a grammatical error in the provision providing restrictions on crowdfunding platform operators, which may render the limits ineffective – using a conjunction instead of a disjunction.

The Issuer

IBC Regulations restrict the type of person that can raise funds through a Crowdfunding Operator. It is limited to a Kenyan incorporated entity with an operating track record of at least two years and exceptional corporate governance – this includes start-ups with good operational track records and a good cooperate governance record. Further, there is a limit to raising a maximum of KES. 100 million within 12 months; however, one may seek a no-objection letter to raise more than KES. 100 million within 12 months.

CMA will restrict any entity from engaging in crowdfunding should it establish that the entity is a publicly listed company or a subsidiary of a publicly listed company, has a poor governance record, that intends to use the funds to issue loans or invest in other entities, and as specified by CMA.

If the Issuer cannot raise the minimum required funds, the offer will be withdrawn, and the Crowdfunding Operator of the platform is obligated to refund the Investors within forty-eight hours – the Issuer will bear all costs concerning the refunds.

The Issuer cannot host an offer concurrently on multiple platforms.

side note:

there seems to be a grammatical error in the provision providing the prohibition, which may render the limits ineffective – using a conjunction instead of a disjunction.

The Investors

There are two recognized investors: (a) sophisticated and (b) retail investors. The former is defined under s 2 of the Capital Markets Act, while the latter refers to anyone who is not a sophisticated investor. A retail investor cannot invest more than KES. 100,000.