The Regulation of Crowdfunding

April 1, 2024 | 15 min read
Crowdfunding is the practice of funding a project by raising money from a large number of people through licensed online platforms. Examples of crowdfunding platforms in the UAE are Beehive and Eureeca. Dubai Government launched DubaiNext, a digital crowdfunding platform to support small and medium-sized enterprises (“SME”s). In March 2022, the UAE cabinet approved crowdfunding activity for both the public and private sectors. In the UAE, fundraising activities for charities and social causes are regulated and done through state-based registered channels. However, fundraising for loans and investments, or debt-based funding is a new concept which is currently applied on a narrow basis and yet to be regulated and introduced at a wider level. In the UAE, the following entities regulate financial services or activities:
  • Central Bank of the UAE;
  • The Securities and Commodities Authority;
  • In Abu Dhabi, Financial Services Regulatory Authority (“FSRA”) in Abu Dhabi Global Market (“ADGM”);
  • In Dubai, Dubai Financial Services Authority (“DFSA”) in Dubai International Financial Center
In 2018, ADGM launched a public consultation on regulations for private financing platforms, showcasing its proactive stance in adapting to emerging financial landscapes and fostering innovation in a conducive regulatory environment. The FSRA issued their ‘Regulatory Framework for Private Financing Platforms’ in September 2018. On 14 October, 2020 the UAE Central Bank issued the ‘Loan – Based Crowdfunding Activities Regulation’ which was published in the official gazette on 28 October, 2020. These regulatory frameworks are designed to address the financing needs and support for startups and SMEs in the MENA region. The DFSA introduced a system in 2018 to accommodate SMEs accessing finance through lending and investment crowdfunding platforms. Like many financial services, crowdfunding has evolved and, as well as providing financing to SMEs, it has also been used to finance the purchase of other assets such as real estate, and in 2019 the DFSA proposed additional requirements to crowdfunding for real estate investments. Recently, the DFSA published the ‘Consultation Paper 156’ on ‘Updates on the Regulation of Crowdfunding’ dated 5 March 2024 (“Regulation of Crowdfunding”). It includes recent developments regarding crowdfunding. The Regulation of Crowdfunding paper for comments proposes revisions in five aspects:
  1. advertising restrictions,
  2. revision of retail limits,
  3. fundraising limits,
  4. clarification on property criteria,
  5. independent valuation reports and transparency.
  1. Advertising Restrictions:
In terms of advertising restrictions, crowdfunding operators are not allowed to promote specific lending or investment proposals offered on their platform, unless the advertisement is produced on the platform and is accessible only to existing customers. This requirement means that users of the platform must not publicly advertise, promote or communicate any specific proposals available on their platform to persons who are not yet been onboarded as customers. However, crowdfunding operators are allowed to publicly display previous lending or investment proposals that have been listed on the crowdfunding Platform and/or give an indication of the type of proposals available provided no specific details are given. In connection with the above restriction, there is an exclusion from the definition of an ‘Offer of Securities to the Public’ for offers made through a crowdfunding platform. If the offer meets a number of conditions, it is considered to be an Exempt Offer and as a result, there is no obligation to issue a ‘Prospectus’. The conditions are that:
  1. the offer is only made through an investment crowdfunding platform, or a property investment crowdfunding platform, operated by a crowdfunding operator;
  2. the offer is made to and directed at only investors who are clients of the crowdfunding operator; and
  3. the total aggregate consideration of the offer of securities is not more than USD 5 million, or an equivalent amount in another currency, calculated over a period of 12 months.
The consultation draft suggests the following details can be advertised on the platforms:
  1. Property Investment Crowdfunding Platform - the general location and value of the property (referring to the selling price rather than the construction cost); and
  2. Investment & Loan Crowdfunding Platforms - the industry category or service category of the fundraising project (e.g., ‘running a bakery’ or ‘operating a taxi service’), the purpose of raising funds and the total amount of funds being sought.
  1. Revision of Retail Limits
The proposed changes in limits are as follows:
  1. increase the retail client annual investment and lending limits for investment, property investment and loan crowdfunding platforms from USD 50,000 to USD 100,000;
  2. increase the retail client per loan limit for loan crowdfunding platforms from USD 5,000 to USD 10,000; and
  3. introduce a new retail client per investment limit for investment and property investment crowdfunding platforms of USD 50,000.
  1. Fundraising Limits
The proposed change in fundraising limit is from USD 5 million to USD 10 million in order to increase opportunities for crowdfunding and to support the strategic objectives in the UAE of accelerating economic growth.
  1. Clarification on Property Criteria
‘Property Investment Crowdfunding Platforms’ are typically structured so that they allow multiple investors to come together and collectively purchase a property which results in investors owning an apartment or house via a special purpose vehicle that holds title to the property. This investment generally offers the investors a rental return, which provides a regular income, as well as the potential for capital appreciation, which is determined by market forces. On the property clarification standard, given the potential complexity of control over the property and the risk that the property may be partially subject to financial commitments, it is proposed to add a new provision that the operator must ensure that the special purpose vehicle does not jointly own the property with any other person. The effect of this proposal is that an operator cannot list for sale a partial interest in an individual apartment, house or building.
  1. Independent Valuation Reports and Transparency
In order to ensure transparency a ‘Property Investment Crowdfunding Operator’ must obtain an independent valuation report for each property listed on their platform along with the specific minimum information that must be included in the report. Additionally,  ‘Property Investment Crowdfunding Platform Operators’ must apply principles such as transparency, objectivity, and independence throughout the valuation process. Operators may consider using industry standards for property valuation, such as the ‘Emirates Book Valuation Standards’ to promote consistency, reliability, and ethical conduct in the valuation process. Regarding the requirements and transparency of the independent valuation report, it is recommended that the last transaction price of the listed property and its transaction date be disclosed in the independent valuation report. This would provide retail investors with useful information to understand recent price movements of the property and to help make an informed decision about the value of the property before they decide to invest via the platform. The above are some updates to the crowdfunding rules. Overall, these revisions and proposals aim to improve the transparency, flexibility and user experience of crowdfunding platforms and promote the development of Dubai’s financial market. MBG Expertise MBG Legal is prepared to assume a pivotal role in providing guidance regarding the recently updated ‘Regulation of Crowdfunding’. Our firm is well-positioned to assist clients in navigating the intricacies of this revised legal framework, offering comprehensive support tailored to their needs. Drawing upon our extensive experience within the fintech industry, we specialize in facilitating the formation of fintech entities and providing expert guidance on compliance with crowdfunding regulations. Our dedicated team is committed to delivering tailored solutions to ensure our clients' compliance and success within this evolving regulatory landscape.
Open chat
Hello 👋
How can we help you today?