Equity Crowdfunding in SA explained
As an entrepreneur, finding the right funding for your specific start-up is hugely important.
With momentum around crowdfunding growing on a global scale, there is talk about equity crowdfunding becoming a viable option in South Africa. This is very good news indeed, as it has the potential to significantly boost economic growth.
Here’s a brief snapshot of what it is and how it could benefit your business.
Equity crowdfunding is a simple concept: members of the public (the crowd) are offered equity (shares) in a company (generally a startup) in exchange for funding. The company then uses that funding to kick start the business.
Donations-based crowdfunding and rewards-based crowdfunding have started to gain some traction, with local players such as Thundafund (rewards based) and Backabuddy (donations based) leading the charge; however South Africa is still lagging behind much of the rest of the world, mostly due to the lack of precise legislation around crowdfunding.
The Financial Services Board is yet to decide how they will regulate crowdfunding in South Africa, and so interested parties have been hesitant to engage with crowdfunding, with no-one attempting equity crowdfunding to date.
Another major hurdle is that private companies are not allowed to offer their shares to the public, and the difficulty of registering as a public company is simply too great for a startup to even bother with. The reason for such stringent requirements though, is to essentially stop fraudulent schemes. The last thing you would want to do is fund an extra round of piña coladas in Mauritius for the opportunistic con-man – the government is therefore right in trying to regulate this area.
There is, however, light at the end of the crowdfunding tunnel – a new start-up Uprise.Africa aims to launch towards the end of this year. Uprise.Africa will be the first of its kind in South Africa in that it will offer the man on the street the ability to invest in a startup of his choosing and receive equity (shares) in exchange for that investment. This is great news for startups, as the public will have a vested interest in the success of the business.
Take the example of a microbrewery wanting to launch their brand and get off the ground: instead of the public (crowd member) receiving a reward in the form of a case of beers for their contribution, they will receive shares.
They will (probably) order a case of beers from the microbrewery and tell thier friends to order beer from the microbrewery, as they will get a financial benefit if the microbrewery succeeds. The microbrewery, as a result, receives funding three times over instead of once – which is a powerful tool for growth. Essentially, the crowd will be a business partner with the startup, and in so doing, the first customers of the startup are already waiting in the wings.
The World Bank recently predicted that the market potential in Africa for crowdfunding will be up to $2.5 billion by 2025. Equity crowdfunding in South Africa will hopefully tap into that and unleash significant potential in the startups that are based here.
The hope is that the regulators, when they do eventually regulate crowdfunding, do it in such a way that it is not a death knell for the system that has the potential to significantly boost our economic growth.
This article was first published in Entrepreneur Magazine
Daniel Van Zuydam
Daniel joined Dommisse Attorneys in 2017 as an associate in the Transactional Team. His areas of focus are corporate finance, mergers and acquisitions, and corporate restructuring. Having come from a background in commercial litigation, he has learnt the ins and outs of trust and company interrelated structures and has a passion for structuring enterprises in dynamic ways to suit the needs of each client.