For the longest time, there has not been any bespoke or specific crowdfunding regulation(s) in Kenya. Much of what could be deemed to have been crowdfunding regulation was found in disparate laws as detailed below: Section 23 and Part IV of the Capital Markets Act 1989 (Cap 485A) which provide that activities involving securities require a licence from the Capital Markets Authority (CMA).
This provision was interpreted (by some) to mean that any crowdfunding platform that raises money from the public could be deemed as a security exchange and the tradable instrument as ‘security’, thereby requiring licensing from CMA. In practice, the Capital Markets Authority (CMA) ordinarily has been granting or issuing a “No Objection” to a particular crowdfunding platform or product, upon being satisfied that the associated risks can be contained or mitigated.
This changed on 30th September 2022 upon the gazettement of the Capital Markets (Investment Based Crowdfunding) Regulations, 2022. The coming into force of the investment crowdfunding regulations will at once make investment-based crowdfunding, a regulated space.
But what is crowdfunding? Crowdfunding refers to collection of funds from the population (including ordinary people) usually through a technological platform. In this arrangement, there are usually three parties, namely: the issuer representing the fundraiser; the investor representing the donor of funds; and the platform that facilitates the interaction between the issuer and the investor. Issuers that raise money from the population through the crowdfunding process usually offer shares or debt security/instrument to the investor. Considered thus, crowdfunding therefore is an alternative means of raising capital to the traditional ways of raising capital such as: initial public offerings (IPOs); rights issue; debentures; angel investment; and bank overdrafts, among others.
A crowdfunding platform is defined in sub-regulation 2 of the Regulations to mean “a website, internet based portal or such other technological application, which facilitates interactions between investors and issuers and other related interactions.” Under clause 3 of the Capital Markets (Investment Based Crowdfunding) Regulations, 2022 (Regulations), the Regulations are only meant to apply to investment-based crowdfunding platform established, maintained or operated in Kenya. Investment-based crowdfunding means “crowdfunding in exchange for shares, debt securities or any other investment instruments approved by the Capital Markets Authority”. Accordingly, donation-based crowdfunding and reward-based crowdfunding are not covered by the Regulations.
The Regulations cover: investment based crowdfunding platforms established in Kenya; platforms located outside Kenya so long as they actively target Kenyan investors-that is if the operator, or the operator’s representative, promotes crowdfunding activities either directly or indirectly in Kenya; or where the key components of the platform when taken together are physically located in Kenya even if any of its component parts, in isolation, is located outside Kenya. A crowdfunding platform operator that is deemed to be actively targeting investors is required to obtain a license from the Capital Markets Authority.
Under sub-regulation 4 of the Capital Markets (Investment-Based Crowdfunding) Regulations 2022, a person operating a crowdfunding platform must obtain a licence from CMA as a crowdfunding platform operator. Applicants for a licence are only eligible if: they are a company li mited by shares; have a minimum paid up share capital of Kes 10 Million or 8 percent of their liabilities, whichever is higher; and minimum liquid capital of Kes 10 Million or 8 percent of their liabilities, whichever is higher.
Applicants for investment-based crowdfunding platforms or firms are required to pay an application fee of Kes 10, 000 (about USD 90), a licensing fee of Kes 100, 000 (about USD 900) and an annual regulatory fee of Kes 100, 000 (USD 900). There is also levied a transaction fee of 0.15% of the value of the amount raised in each crowdfunding round facilitated through the platform.
Application for a crowdfunding licence must be accompanied by: certified copy of certificate of incorporation, evidence of a firm’s financial soundness and capital adequacy, and a business continuity and disaster recovery plan, business plan that contains financial projections, evidence of adequate human resources, details of organization structure and profile of management, details of platform outsourcing arrangements (if any), detailed information of the website/platform including system capacity and security measures and evidence of its functionality, data protection policy, policy on prevention of terrorism financing and anti-money laundering, adequate risk management framework, record keeping procedures, and proposed standard offer document to be used.
Under sub-regulation 39, any entity operating as an investment-based crowd funder must obtain a licence in the manner set out under the Regulations within a period of twelve months i.e. by 30th September 2023. Under sub-regulation 16, crowdfunding platforms will only be allowed to collect money from sophisticated investors and not more than Kes 100,000 in case of individual retail (non-sophisticated) investors.
Further, a crowdfunding platform operator is bound to comply with the following laws: the Capital Markets (Conduct of Business)(Market Intermediaries) Regulations, 2011; (b) the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011; (c) the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets; and (d) any other existing capital market laws and Regulations to the extent applicable except where expressly exempted by the Authority.
In the event that an investors cancels their offer to purchase securities or instruments, issuers must refund the money within 48 hours. The issuer must also place a warning to investors that investing in the crowdfunding platform is risky and speculative and that such money may be lost. Issuers must also disclose the charges they levy, a monthly report detailing the investors and the amounts invested.
Disclaimer: This information is provided for the general public and must not be construed or relied upon as legal advice. In case of any clarifications or detailed legal advice or assistance with application for licensing, please contact Muriuki Muriungi at This email address is being protected from spambots. You need JavaScript enabled to view it.
