Crowdfunding—or the use of online platforms to raise money for business ventures from a large base of investors—has been steadily gaining traction in Africa over the past decade. Still, crowdfunding in Africa remains limited compared to other regions: In 2015, the African crowdfunding market amounted to about $70 million, accounting for less than one percent of the global crowdfunding market. However, a 2013 World Bank report estimated that by 2025, crowdfunding will be a $96 billion industry growing at a rate of 300% per year. While much has been made of crowdfunding’s potential to transform small business and entrepreneurship across the continent, there are important challenges and regulatory barriers that need to be better understood and addressed.
Current landscape of crowdfunding
Crowdfunding platforms are usually structured as follows: An entrepreneur will post a business pitch to a website such as Afrikstart, Thundafund or M-Changa. These pitches—or “campaigns” —include a fundraising target that the entrepreneur hopes to reach. There are also non-African platforms that allow African entrepreneurs to pitch their businesses and raise capital from funders abroad. However, certain international platforms may use payment systems that restrict contributions originating in lower-income countries. Frequently, funders are members of the entrepreneur’s social network, but in many cases funders may be the general public or institutional investors looking for small businesses to support. Much crowdfunding activity in Sub-Saharan is donation-based, but there has been some significant early activity around equity-based and debt-based platforms in South Africa, Kenya and Ghana.
There has been a steady growth in the number of crowdfunding platforms in Sub-Saharan Africa, a result of the high demand for capital, the surge in mobile penetration, and the growing African middle class. At the end of 2015, there were 57 crowdfunding platforms headquartered in Africa, of which 21 were based in South Africa. And, just a little under half of money raised through crowdfunding in 2015—and the significant majority of crowdfunding projects launched—took place in South Africa. Most of these platforms are designed to serve a local consumer base and tend to support projects that operate in their host country only. Five of these platforms, however, support businesses and attract investment from across the continent.
Crowdfunding offers three distinct opportunities for entrepreneurs on the African continent:
- First, crowdfunding creates more avenues for businesses to access capital. Traditionally, entrepreneurs—when they can—either borrow at fixed rates from banks or seek investment from established business communities. However, African entrepreneurs’ access to credit is often constrained: Banks are highly risk-averse, and would-be borrowers are often too small-scale, or lack the credit history and other data, to qualify for bank loans. Crowdfunding enables entrepreneurs to appeal directly to supporters or potential customers without onerous inquiries into their creditworthiness, business histories or incomes.
Second, as a purely digital mechanism, African crowdfunding can leverage the increased use of mobile networks to transact business. The rapid expansion of mobile technologies in Africa in the last decade is a well-known fact, and indeed, people across Africa are using phones for transactions ranging from common purchases to peer-to-peer microlending. Even though there is less familiarity (and in certain cases, trust) in Africa when it comes to online fundraising as a capital-raising tool, the prevalence of mobile phones could allow for rapid increases in crowdfunding activity in the context.
- Third and finally, crowdfunding platforms subsidize the costs of marketing and promotion by typically allowing entrepreneurs to use the platform for free. The platforms themselves have a built-in user base, and most of the platforms that are currently active in Africa have no subscription costs. Listing a venture on a crowdfunding platform not only increases exposure to investors, but it also enables entrepreneurs to benefit from the platform’s infrastructure (e.g., online presence) and brand recognition.
None of this is to suggest that crowdfunding platforms are purely advantageous for would-be entrepreneurs in Africa. One common criticism is that digital platforms in general tend to elevate wealthier, tech-savvy entrepreneurs at the expense of businesspeople who truly cannot access traditional financing. Crowdfunding in particular can deepen the urban-rural divide: because it relies on social connections, crowdfunding rewards individuals with larger, denser networks. Also, African entrepreneurs are often supported by remittances. The vast majority of crowdfunding platforms available across the continent today are locally-oriented and do not support the sort of international payment mechanisms necessary to turn some remittances into crowdfunded investments.
Investors and African entrepreneurs who use crowdfunding platforms are operating in an unregulated space, at least in most African countries This raises two issues. First, the absence of regulation means an absence of adequate investor protections. Without laws to protect privacy, mandate disclosures and ensure that contributors have opportunities for legal redress, investors may not sufficiently trust an entrepreneur to fund his or her venture. By contrast, in the United States, Title III of the JOBS Act regulates equity crowdfunding and permits companies to issue securities through crowdfunding platforms. U.S. law requires would-be crowdfunders to make substantive disclosures that provide investors with information. Similar disclosure rules in African nations would enable investors to make informed decisions and potentially improve investor confidence.
Second, the lack of clarity about the legal status of African crowdfunding organizations risks causing a chilling effect for international investors. In order to encourage more crowdfunding, governments need to mitigate concerns about money laundering and fraud. Moreover, most equity or debt crowdfunding organizations in Africa are not licensed as financial services companies. As a result, some investors are concerned that they are running afoul of laws when making contributions. Regardless of whether a given crowdfunding platform, company or investor is actually breaching any laws in a given country, there is widespread investor concern about either being defrauded or inadvertently breaking the law. Crowdfunding platforms can do relatively little on their own to dispel these concerns; African governments would benefit from enacting clear laws on crowdfunding so that investors can achieve clarity on how to make contributions legally.
Some countries are beginning to take steps. In South Africa, the Financial Services Board released a list of potentially-applicable existing regulations and encouraged crowdfunders to contact the Board to ensure the lawfulness of their campaigns. And there is reason to believe that as the crowdfunding industry grows in African markets, so too will the push for an adequate regulatory framework: For instance, in 2015, the African Crowdfunding Association was founded with the specific objective of lobbying for clear and simple crowdfunding legislation and harmonization of such legislation across countries. The organization has not succeeded in getting any laws passed, but counts among its members the largest African-based crowdfunding organizations (including Thundafund and M-Changa).
- Original article can be found here.