Crowdfunding in South Africa: The legal position, risks and benefits

Author: Marco Schepers

Service: Corporate, Mergers & Acquisitions, and Regulatory Compliance

Crowdfunding has emerged as a popular method of raising funds for various projects and initiatives across the globe. In South Africa, this innovative financing model has gained traction in recent years.

Crowdfunding is not specifically regulated in South Africa. However, crowdfunding activities may be subject to existing regulation under South Africa’s general financial services regulatory frameworks and legislation. Such legislation includes the Banks Act 31 of 1990; the Companies Act 71 of 2008; Collective Investment Schemes Control Act 45 of 2002; Financial Advisory and Intermediary Services Act 37 of 2002; Financial Markets Act 19 of 2012 and National Credit Act 34 of 2005. The ambit of each piece of legislation will depend on the nature of the transaction.

Risks of Crowdfunding

  • Lack of Regulation: Although South Africa has taken steps to regulate crowdfunding, there is still a need for comprehensive legislation to address potential risks. The absence of clear guidelines exposes both project creators and investors to legal uncertainties and potential fraud.
  • Investor Vulnerability: Crowdfunding platforms typically attract a diverse range of projects, some of which may not be financially viable or well-managed. Investors may face the risk of losing their investments if a project fails or experiences setbacks.
  • Limited Disclosure: Compared to traditional investment avenues, crowdfunding projects often have limited financial information available to potential investors. This lack of transparency may make it challenging for investors to make informed decisions and assess the viability of the project.

Benefits of Crowdfunding

  • Access to Capital: Crowdfunding provides a unique opportunity for entrepreneurs and small businesses to access capital that may not be available through traditional funding channels. It allows them to showcase their ideas, products, or services to a wider audience, potentially attracting investors who are willing to support their ventures.
  • Diversification: For investors, crowdfunding offers a chance to diversify their investment portfolio. By supporting multiple projects with smaller amounts, investors can spread their risk across various industries, potentially increasing their chances of a favourable return on investment.
  • Community Engagement: Crowdfunding platforms facilitate direct engagement between project creators and their potential backers. This fosters a sense of community, enabling creators to gather feedback, build a loyal customer base, and establish a network of supporters who can help promote their projects.
  • Promoting Innovation: Crowdfunding encourages innovation by providing an alternative funding avenue for unconventional and creative ideas. It allows individuals and organisations to pursue projects that may have difficulty securing funding through traditional means. This promotes a dynamic and diverse entrepreneurial ecosystem.

Crowdfunding in South Africa presents both risks and benefits. While the legal position of crowdfunding has been recognised to some extent, there is still a need for further legislation to address potential risks and provide greater protection for investors. By carefully considering the risks and benefits, stakeholders can harness the potential of crowdfunding while minimising its associated risks, contributing to the growth of South Africa's entrepreneurial landscape.

At Andersen in South Africa, we can assist both entrepreneurs and investors understand the regulatory and commercial issues surrounding any crowdfunding endeavour.

Speak to Marco for assistance with business law requirements