Crowdfunding as you know has been the talk of the town! While you may be struggling to gather some details about it, we at StartUp Bahrain prepared you a guide that tackles everything you wanted to know about crowdfunding regulations in the Kingdom, which may come in handy for you!
First things first, what is crowdfunding?
It is an alternative way for SMEs and startups in the StartUp Bahrain community to raise funds from global investors and lenders (the crowd) via an online platform like Kickstarter, Indiegogo, and GoFundMe, which are popular crowdfunding platforms that many of us are familiar with! So, to sum it up, the key players include the entrepreneur, the crowd investors, and the operating platform which we are all familiar with crowdfunding platforms such as
And why do we need regulations, you ask?
Well, the new crowdfunding regulations are issued by the Central Bank of Bahrain (CBB) to create a legal framework for loan crowdfunding to conventional and Shari’ah compliant markets, while providing governance for FinTech businesses and protection to their customers. These regulations will also help SMEs and startups get access to alternative forms of funding when the traditional funding options are not available.
Broadly, there are three main reasons why Bahrain had introduced crowdfunding:
- Bridge the funding gap.
- Offer bespoke opportunities for investors and lenders.
- Grow innovative solutions.
The most important things that can be achieved through crowdfunding:
- Empower SMEs and startups.
- Support the FinTech ecosystem.
- Pioneer in Islamic finance offerings.
And remember, the three types of crowdfunding that are allowed in Bahrain are:
- Equity based: invest to gain shares.
- Financing based: lend money to gain interests.
- Shari’ah compliant (equity/finance based): Lending and investing in accordance with Shari’ah rulings. Make sure you read CBB’s regulations in order to learn more about Shari’ah compliance requirements for a crowdfunding platform operator in the Kingdom.
Are you wondering who is eligible to invest in a crowdfunding platform? To simplify it, we’ve divided into two types, accredited investors and expert investors. Here are the differences between them:
- Accredited investors:
- Individuals with a minimum net worth of USD 1,000,000 excluding that person’s principal place of residence.
- Companies, partnerships, trusts or other commercial undertakings :Financial assets available for investment of no less than USD 1,000,000
- Others: Governments, supranational organizations, central banks or other national monetary authorities and state organizations whose main activity is to invest in financial instruments (such as state pension funds)
- Equity crowdfunding investment limit: No restriction on investment amount
- Loan-based crowdfunding investment limit: No more than 10% of their net assets to any single borrower.
- Expert investors (same as Accredited investors except):
- Others: Governments, supranational organizations, central banks or other national monetary authorities, local authorities and state organizations.
- Equity crowdfunding investment limit: A maximum of BD 5000 per crowdfunding and an overall investment limit, during a 12-month period not exceeding not exceeding BD 20,000.
By now you know what you can achieve through crowdfunding as an entrepreneur, you know who is eligible to invest, now moving on to the third key, what is a platform? And how does the operating platform work?
The platform’s role is to arrange deals and bring together borrowers and lenders. It may lend money to borrowers subject to appropriate CBB licenses and disclosures.
Also, the platform can raise funds for borrowers based in Bahrain and abroad! The money raised must be deposited at a licensed retail bank in Bahrain. An escrow account must be designated as an aggregate account for all borrowers.
It’s important to note that the platform must become a member of the Bahrain Credit Reference Bureau. In addition to that, it must adhere to KYC, FATCA reporting, AML and Consumer Protection regulations amongst others. The platform must secure cyber-security and IT security penetration testing and the minimum capital requirement is BD 50,000 (to be maintained on an ongoing basis).
So, who is eligible to raise funds? Are YOU?
Closed private family companies; entities engaged in real estate development projects, startups and SMEs. Where SMEs with paid-up capital up to BD 250,000 can raise money through crowdfunding platforms and as mentioned above, these SMEs can be based either in Bahrain or abroad.
And how much can be raised?
- Equity based:
An equity crowdfunding issuer can raise up to BD 250,000 within a 12-month period.
A real-estate development project can raise up to BD 500,000 within a 12-month period.
- Finance based:
Borrowers can raise up BD 100,000in aggregate form per borrower within a 12-month period.
Tenor of loans must not exceed 5 years.
Make sure you visit CBB to learn more about crowdfunding and clear any doubts you may have. Also, don’t forget to visit StartUp Bahrain’s website as we always bring you simple guides on how to grow your startup bigger!