Towards regulating crowdfunding in Tanzania, prospects for reshaping the funding landscape for Startups and SMEs.
The Tanzanian Startup Association (TSA) and the Capital Markets and Securities Authority (CMSA) are excited to present this article, shedding light on the transformative potential of crowdfunding as an innovative financing approach for startups and small and medium-sized enterprises (SMEs) in Tanzania.
This comes after the recent draft of the Capital Markets And Securities (Crowdfunding Guidelines), 2022. As we dive deeper into this topic, it becomes imperative to spotlight the critical provisions outlined within this guideline and emphasize their vital significance within the startup ecosystem, as they signify a crucial milestone in driving transformative change.
Access to finance remains a significant challenge for startups and small and medium-sized enterprises (SMEs). Data shows that 70% of SMEs do not use formal financial services, while 38% closed their businesses due to a lack of working capital. Despite the country’s growing entrepreneurial spirit and vibrant business environment, many businesses face considerable difficulties obtaining the necessary funding to launch or expand their ventures.
Crowdfunding is a relatively novel concept in Africa, and it continues to gain traction despite the prevailing mistrust among people, particularly concerning online platforms and financial transactions. Crowdfunding manifests in various forms, such as rewards-based crowdfunding, equity-based crowdfunding, and donation-based crowdfunding.
In Tanzania, alternative financing methods have gained popularity over the past decade, fueled by the increasing internet and mobile technology penetration. By March 2023, over 33 million people in Tanzania had access to the internet.
TCRA data shows that, among internet users, 74 per cent of the population is covered by a 3G mobile broadband network signal, while 58 per cent have access to 4G or higher. It offers a democratized approach to capital raising, allowing entrepreneurs to access funding from a vast network of individuals who believe in their business potential.
Even though many players operating in the global Equity Crowdfunding Services market, WeFunder, AngelList, Seedrs, MicroVentures, Fundable, EquityNet, SeedInvest, Crowdfunder, Netcapital, Mainvest, Equifund, among others. In Tanzania, crowdfunding platforms remain relatively small, famous being Wengi, Wezesha sasa, PhemaAgri, etc. Several African countries, including South Africa, Kenya, Egypt, Ghana, and Nigeria, have taken proactive steps to regulate crowdfunding, fostering an environment that allows businesses to tap into alternative funding sources while protecting investors’ interests.
It’s good to see Tanzania is moving towards this direction. Recently, TSA supported CMSA in organizing regional info-sessions across key cities such as Dodoma, Dar es Salaam, Arusha, Mbeya, Mwanza, and Zanzibar aimed at providing startups, entrepreneurs, and stakeholders with valuable insights into the Draft Guidelines for Crowdfunding, helping them understand the benefits of legally regulated crowdfunding.
Therefore, crowdfunding holds immense importance for startups and SMEs in Tanzania, playing a transformative role in catalyzing their growth and success. Below is a look at different aspects of the draft Crowdfunding Guidelines.
Key Takeaways From The Capital Markets and Securities (Crowdfunding Guidelines), 2023
Firstly, crowdfunding platforms offer a unique opportunity for SMEs and startups in Tanzania to access much-needed capital, unlike traditional financing avenues that often require collateral or well-established credit histories. The regulation provides that the investment limits:
- An issuer can raise the TZS equivalent of USD 150,000 within 12 months, irrespective of the number of projects an issuer may seek funding for during the 12 months.
- An issuer can utilize the Crowdfunding platform to raise a maximum amount of TZS equivalent of USD 300,000, excluding the issuer’s capital contribution or any funding obtained through private placement. This nurtures a conducive environment where startups and SMEs can thrive by accessing the necessary funding to operate and sustain their businesses.
The general obligations as provided by the guidelines for crowdfunding operators include carrying out a due diligence exercise on prospective issuers planning to use its platform, developing rules for carrying out the crowdfunding operations, ensuring compliance with the requirements of the reporting persons’ obligations stipulated under (Anti Money Laundering Act and Combating Financing of Terrorism) AMLA and (Anti Money Laundering and Proceeds of Crime Act for Tanzania Zanzibar) AMLPOCA.
These obligations are essential to investors as they provide a structured and regulated environment that reduces risks, enhances transparency, ensures legal compliance, builds confidence, and ultimately protects the investor’s interests when participating in crowdfunding activities.
Crowdfunding allows businesses to reach a diverse pool of potential investors or supporters. The guidelines provide that the eligible investors include
- High net worth or sophisticated investors.
- Venture capital companies.
- Professional investors.
- Institutional investors.
- Individual investors are subject to investment limits of a maximum of TZS equivalent to USD 500 per issuer with a total amount of not more than TZS equal to USD 5,000 within 12 months.
The eligibility criteria are critical as they promote diversification, grant access to unique opportunities, manage risk, foster financial inclusivity, and maintain market integrity. These provisions contribute to a balanced and secure crowdfunding environment that benefits businesses seeking capital and investors looking for attractive investment prospects.
Additionally, high priority is accorded to early-stage businesses within the crowdfunding platform. The regulation prohibits entities from raising funds through a crowdfunding platform, including:
- Commercially or financially complex structures. For example, investment fund companies or complex financial institutions.
- Public-listed companies and their subsidiaries.
- Companies: with no specific business plan or its business plan is to merge or acquire an unidentified entity, including a blind pool, other than a regulated micro-fund that proposes to use the funds raised to provide loans or make an investment in other entities, other than a micro-fund, with paid-up share capital exceeding TZS equivalent of USD 100,000; and any other type of entity that the Authority specifies.
An issuer (a) shall not be hosted concurrently on multiple crowdfunding platforms, and (b) may be permitted to list on a crowdfunding platform and peer-to-peer financing (P2P) platform at the same time, subject to disclosure requirements as may be specified by the platform operators and approved by the Authority. A crowdfunding operator shall issue standard risk warnings to investors to carefully consider risk factors stated in the offer document and acknowledge the same in writing before making an investment decision.
Those above are important takeaways for the entrepreneurship and innovation ecosystem. It is believed that well-regulated crowdfunding acts as a catalyst for informal businesses to formalize their operations. Currently, the Capital Markets and Securities (Crowdfunding Guidelines) are subject to Ministerial-level approval processes, anticipated to be finalized and operationalized by the end of this year, 2023.
This move positions Tanzania as an attractive investment destination, fostering its capital market development. It also signifies a remarkable step forward and paves the way for an inclusive, innovative, and thriving business landscape, creating opportunities for entrepreneurs and investors.