DFSA Crowdfunding Regime
Call for evidence – a relook at the DFSA Crowdfunding regime
The DFSA Crowdfunding Regime was implemented in 2017, and six years down the line, the regulator calls for views from the market, to consider potential changes in the pathbreaking regulation.
Accordingly, here a few points that are being discussed.
1. Retail Limits
The DFSA limits the amount invested by a retail client as follows:
1. For Loan Crowdfunding, a Retail Client must not lend more than USD 5,000 to any single borrower and USD 50,000 in total in any calendar year; and
2. For Investment Crowdfunding and Property Crowdfunding, a Retail Client must not invest more than USD 50,000 in total in any calendar year.
The regulator has called for views from the market concerning the above limits, if they are still appropriate. If not, the DFSA has asked to provide evidence to support such views.
2. Rewards and incentives
Rewards and incentives can take many forms, including monetary or non-monetary rewards provided to existing clients for referring a new user to the platform, or a new user may receive a bonus for opening an account. The DFSA is concerned that these schemes may unduly influence consumers to participate in a crowdfunding platform without properly considering the risks involved, or where they may not otherwise choose to do so, and hence seek views on appropriate controls and measures in this regard.
The current Rules do not allow officers, staff and family members to invest or lend on the platform. The Rules also currently allow the Crowdfunding operator to lend or invest via the platform, provided they seek additional authorisations for the financial services of Providing Credit or Dealing in Investments as Principal. Accordingly, the DFSA seeks views on how to address their concerns around privileged access to confidential information where staff and their family members are permitted to participate in proposals on a crowdfunding platform.
4. Financial Promotions
The DFSA has previously made their position on financial promotions clear - that operators should not be advertising any active or current proposals outside the platform. This is due to their view that crowdfunding platforms are designed to be a ‘private club’. That is, the offers should be available only to those clients who have fully signed up as ‘members of the club’.
The DFSA now seeks views on the type of information on current proposals (on a platform) that would be reasonable to make available to the public, probably via a prospectus, similar to a public offer of securities.
5. Transfer facilities
Crowdfunding platform operators have stressed the need to have a secondary market, to provide liquidity to investors. The DFSA seeks views from the market on the utility and necessity for a secondary trading mechanism to facilitate subsequent buying and selling of shares (investment or property) and loan participations.
Given the large number of enquiries and requests for tokenised investments in a crowdfunding context, the regulator would like views on the subject.
The DFSA has also called for discussions on market growth for investment-based crowdfunding and Islamic offerings for loan-based crowdfunding platforms.
But the biggest discussion in our opinion, will be around property crowdfunding platforms – should commercial real estate be now permitted, and if so, should it be restricted to Professional Clients?
The DFSA has rightly taken the call of not including off-plan properties in the discussion, given the risky nature of the asset.
Another discussion is on allowing refurbishment and short-term ownership properties on the crowdfunding platforms, and the issues surrounding such activities.
Finally, the DFSA has addressed the potential regulatory arbitrage where crowdfunding operators vest voting powers and key decision making concerning the SPV and the underlying properties with themselves, which seem closer to the activity of managing a collective investment fund rather than the activity of crowdfunding. Accordingly, the DFSA has called for views on this matter.
We have been consulting multiple firms on potentially establishing crowdfunding platforms in the DIFC, and most of the issues above have been key areas that the market has been seeking to address. Commercial real estate and secondary trading are the top two must-haves from the perspective of a property crowdfunding operator, and the Call for Evidence seems to be the first, but important step, in addressing these market demands. Having said that, it is still early days and a DFSA consultation paper will have to follow sometime in the fall, to then be considered for legislation possibly in early 2024.
In the meanwhile, do get in touch should you wish to discuss and explore setting up a crowdfunding platform in the DIFC!
Click here to know more about DIFC Investment-based Crowdfunding Platforms.
Click here to know more about DIFC Loan-based Crowdfunding Platforms.
Click here to know more about the DIFC Property-based Crowdfunding Platforms.