Crowdfunding has emerged as a popular method for individuals and businesses to raise funds for various causes, projects, or ventures. Each type of crowdfunding caters to different needs, offering unique opportunities and obligations for fundraisers and investors alike. 

Some Common Types of Crowdfunding Include

Donation-based Crowdfunding

Donation-based crowdfunding is one of the simplest and most common types. It involves asking a large number of people to donate small amounts of money, typically to support a cause, charity, or personal project. Contributors do not expect any financial return or reward in exchange for their donations. It’s commonly used for fundraising campaigns for medical emergencies, educational expenses, or community projects.

Equity Crowdfunding

Equity crowdfunding, also known as crowd-investing or investment crowdfunding, allows investors to receive a share of ownership in the company in exchange for their investment. This model is typically used by small to medium-sized businesses seeking a substantial amount of capital to expand or start operations. Investors benefit from potential profits if the company succeeds, but they also assume the risks of the business failing. In South Africa, equity crowdfunding platforms must navigate strict regulatory requirements.

Debt Crowdfunding

Also referred to as peer-to-peer (P2P) lending or crowdlending, debt crowdfunding allows individuals or businesses to borrow money from a group of investors, who are repaid with interest over time. This model can provide borrowers with quick access to funds without traditional banking hurdles. Investors, on the other hand, receive regular repayments with interest but risk losing their money if the borrower defaults.

Real Estate Crowdfunding

Real estate crowdfunding is becoming increasingly popular for investors interested in property markets but who may not have the capital to purchase entire properties. This model allows multiple investors to pool their money to invest in real estate projects, earning returns based on the property’s performance. It offers an accessible way for people to participate in the real estate market without dealing with the responsibilities of full property ownership.

Regulatory Framework in South Africa

While crowdfunding presents exciting opportunities for entrepreneurs and investors, it also operates within a complex legal and regulatory environment. In South Africa, various laws govern different aspects of crowdfunding, particularly in relation to financial services, lending, and investment activities.

The  Financial Advisory and Intermediary Services Act 37 of 2002  (“FAIS”) governs the marketing and provision of financial services in South Africa. Any entity offering financial services must be licensed under FAIS as a financial services provider (FSP) or an authorised representative. The definition of "financial services" includes advisory or intermediary services concerning financial products such as shares, bonds, and participatory interests in investment schemes. 

Crowdlending or debt crowdfunding platforms must comply with the  National Credit Act 34 of 2005  (“NCA”) if their activities involve providing loans or credit. Under the NCA, lenders must register as credit providers with the  National Credit Regulator (NCR). However, there are certain exemptions for large credit agreements and juristic persons (business entities) with a net asset value or annual turnover above certain thresholds. The NCA imposes stringent requirements to protect borrowers from unfair lending practices, and its provisions apply to peer-to-peer lending platforms unless they qualify for an exemption.

The  Banks Act 31 of 1990  (the “Banks Act”) governs banking operations in South Africa, including the solicitation and acceptance of deposits. Crowdfunding platforms that involve financial transactions may need to comply with the Banks Act, especially when pooling funds for investments. Platforms must avoid conducting activities that resemble traditional banking without the necessary licenses.

If a crowdfunding model involves pooling investments, it may be classified as a collective investment scheme (“CIS”) under the  Collective Investment Schemes Control Act 45 of 2002  (“CISCA”). Soliciting investments for unapproved CISs is strictly prohibited, and crowdfunding platforms engaging in such activities must ensure they meet the approval and licensing requirements under CISCA. 

Conclusion

Crowdfunding offers diverse fundraising and investment opportunities, but it operates under a robust regulatory framework in South Africa. Entrepreneurs looking to launch crowdfunding campaigns must understand the applicable laws to ensure compliance and avoid legal pitfalls. Whether donation-based, reward-based, equity, or debt, each model has its place in the fundraising landscape, contributing to economic growth and innovation while offering investors and donors various ways to support causes and businesses. 

Written by Nicolene Schoeman-Louw, Commercial and Contract Law, SchoemanLaw